Moody's changes Berau Coal's outlook to negative; affirms rating

(September 06, 2013) -- Moody's Investors Service has affirmed the B1 corporate family rating of PT Berau Coal Energy Tbk (BCE) as well as the senior secured ratings of bonds issued by BCE and Berau Capital Resources Pte Ltd, and which is guaranteed by BCE.

At the same time, Moody's has changed the outlook for the ratings to negative from stable.

"The change in outlook reflects our expectation that BCE's credit metrics will come under additional pressure, because of weak thermal coal prices. Prices are unlikely to recover significantly over the next 12 to18 months," says Simon Wong, a Moody's Vice President and Senior Credit Officer.

Seaborne thermal coal prices have fallen by more than 15% since the start of the year, as low cost producers increased production volumes to maximize cash flows from operations while lowering production levels per unit.

Consequently, Moody's has revised downwards its forecast for the Newcastle benchmark thermal coal price in 2013, to $80-$85 per tonne from $90-95 per tonne.

In addition, Moody's expects that supply will continue to outstrip demand into 2014, which in turn will suppress the price of thermal coal.

"BCE's credit metrics are expected to deteriorate due to margin compression. We therefore expect its full year results to be weak for its B1 rating," says Wong, who is also the Lead Analyst for BCE.

"Nonetheless, BCE's strong liquidity, as reflected by its cash holding of $512 million in June, will provide the company with headroom against weak market conditions," adds Wong.

BCE has successfully implemented various cost reduction measures, which have lowered production cash costs (including royalties) by 16.6% to $42.8 per tonne in 1H 2013 from $51.3 per tonne in 1H 2012. However, the cost savings have been smaller than the 18.9% fall in its average selling price, to $61.4 per tonne from $76.6 per tonne.

Moody's expects BCE to generate EBITDA of approximately $9.5-$10.0 per tonne for 2013.

The company's liquidity position remains strong, with no debt maturing until 2015. Indeed, BCE's strong liquidity represents a major support factor for the B1 rating, which would otherwise face more immediate downward pressure.

However, its cash balance will be reduced by its ongoing capex for maintenance, the capital requirements it will need to improve operational efficiencies, its expansion of the Binungan mine, and regular dividends.

"Ratings do not assume any material cash leakage from BCE and indeed any signs of BCE's current cash balance being depleted more rapidly and for reasons not related to the operations of the business would lead to a ratings downgrade," says Wong.

Moody's also remains concerned by the potential for a material change to financial policies as a result of ongoing shareholder uncertainty at Bumi PLC (unrated), BCE's ultimate parent. On 11 July, PT Borneo Lumbung Energi & Metal Tbk (Borneo, unrated ) announced that its affiliate, Ravenwood Pte Ltd, had entered into an agreement to acquire the Bakrie Group's (unrated) 23.8% interest in Bumi PLC. The transaction is conditional upon the sale of Bumi PLC's 29.2% interest in Bumi Resources to the Bakrie Group, and on the waiver of the requirement under Rule 9 of the UK City Code on Takeovers and Mergers, for Borneo or any of its affiliates to make a general offer to Bumi shareholders. If the transaction is successful, Borneo will be Bumi PLC's largest single shareholder, with a 47.6% ownership.

Upward rating pressure is limited given the negative outlook. Nonetheless, the outlook may be changed to stable, if BCE's adjusted total debt/EBITDA falls below 3.5x and EBIT/interest exceeds 3.5x.

On the other hand, downward rating pressure could emerge if: (1) industry fundamentals deteriorate further, leading to a decline in free cash flow, thereby constraining BCE's ability to make its debt repayments; and/or there is a material decline in BCE's cash balance.

Indicators that Moody's would consider as triggers for a downgrade include adjusted consolidated debt/EBITDA exceeding 3.75x or adjusted consolidated EBIT/interest expense falling below 2.5x.

Other negative rating triggers include: (1) any adverse decisions regarding the off-setting of payments for VAT; or (2) any change in laws and regulations, particularly in relation to mining concessions that would adversely affect BCE's business.

The principal methodology used in this rating was the Global Mining Industry published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

BCE is Indonesia's fifth-largest producer and exporter of thermal coal. It operates three active mines (Lati, Sambarata and Binungan) at a single site in East Kalimantan. As at end-2011, it had estimated resources of 2.2 billion tons, and probable and proven reserves estimated at 509 million tons.

BCE is 84.7% owned and controlled by Bumi PLC. (ends)