Moody's changes Berau Coal's outlook to stable from positive

(Singapore, August 17, 2012) -- Moody's Investors Service has changed to stable from positive the outlook for Berau Coal Energy's (BCE) B1 corporate family and senior notes ratings.

"Moody's notes that BCE's EBITDA margin and credit metrics are experiencing stronger-than-expected downward pressure, which is likely to continue over the short and medium term," says Simon Wong, a Moody's Vice President and Senior Analyst.

"Such margin pressure stems from rising production costs, and exposure to weakened seaborne coal sale prices as a result of its revenue concentrated in China and the relatively high proportion of uncontracted and unpriced coal for the remainder of 2012 ," adds Wong, who is also Moody's lead analyst for BCE.

"BCE's production costs have continued to rise, albeit at a slower rate compared to 2011. The company is likely to focus on cost controls to reduce the impact of declining coal prices," says Wong. "But its ability to materially reduce production costs is limited in the near-term because of its plans to ramp up capacity. Moreover, a significant reduction in stripping ratios may compromise future mining plans," adds Wong.

Although Indonesian coal miners remain some of the lowest-cost miners in the world, their production costs have escalated in recent years due to a combination of higher oil prices, rising costs in Indonesia, and increased stripping ratios to facilitate growth. BCE's production cost (excluding royalties) increased 16.9% during H1 2012 compared to the same period in 2011, while full year 2011 saw an increase of 20% compared to 2010.

Moody's expects the benchmark Newcastle thermal coal price to average between USD90 and USD95 per ton in 2012, well below the USD120 per ton posted in 2011. Furthermore, coal prices are unlikely to materially rebound in 2013, unless there is a significant improvement in the balance between demand and supply. We also expect coal import demand from China to slow in the second half of 2012 due to high inventory levels and as price arbitrage opportunities between seaborne and domestic (China) coal have been effectively shut since late July.

"Despite its weak projected margins and limited flexibility to reduce debt and interest expense, BCE's outlook is stable in view of its strong liquidity position and Moody's expectation that it will defer some capex plans to preserve its capital and liquidity," says Wong.

Previously, BCE's planned capex for 2012-2014 was USD691 million, the majority of which was prefunded by a USD500 million bond issued in March.

The company had cash reserves of USD645 million as of 31 March. Its debt structure comprises two long-term bonds maturing in 2015 and 2017.

The B1 corporate family and senior secured ratings also reflect: 1) BCE's majority ownership of Berau Coal, one of the world's lowest-cost producers and exporters of coal, with a long concession life (up to 2025) and the possibility of two ten-year extensions; 2) the quality and stability of the company's customer base of large utilities with excellent payment records; and 3) Berau Coal's well-established operations, with a history of consistent production growth.

The ratings also take into consideration BCE's: 1) lack of diversification, given its single concession and single product; 2) its exposure to commodity cycles; 3) the uncertainty evident in the regulatory environment; and 4) the high level of concentration risk, given that its top ten customers account for approximately 75% of its revenue.

Upward rating pressure is limited, but may emerge if the company expands its production capacity as planned, and if adjusted total/EBITDA remains below 2.25x and EBIT/interest stays above 3.5x.

Downward pressure on the ratings could emerge if industry fundamentals deteriorate, leading to a decline in free cash flow that could constrain BCE's ability to make its debt payments.

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 would include: (1) a material change in Bumi PLC's (BCE's ultimate shareholder) financial policy, resulting in a deterioration in BCE's capital structure; (2) any adverse decision regarding the off-setting of VAT payments; or (3) any change in laws and regulations, particularly with regard to mining concessions, that would adversely affect the business.

The principal methodology used in rating BCE was the Global Mining Industry Methodology 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 June 2011, it had estimated resources of 1.9 billion tons, and probable and proven reserves estimated at 467 million tons.

BCE is 84.7% owned and controlled by Bumi PLC.

Bakrie & Brothers sold half of its 54.6% stake in Bumi PLC to Borneo Lumbung Energi & Metal -- a major coking coal producer in Indonesia -- in early 2012. (ends)