Moody's downgrades Bumi Resources to B1, outlook stable
Monday, August 20 2012 - 01:19 AM WIB
"The downgrade reflects the expected deterioration of Bumi's credit metrics and liquidity as a result of Bumi's (1) weakening operating margins, (2) large capex plans, as well as (3) debt and interest servicing burdens," says Simon Wong, a Moody's Vice President and Senior Analyst.
"The company's plans to prepay part of the China Investment Corporation (CIC) debt of up to USD600million by end-2012 are insufficient for Bumi to maintain a financial profile in line with its previous ratings," says Wong, who is also Moody's lead analyst for Bumi.
"Furthermore, it has to rely on the sale and settlement of Bumi's other financial assets, rather than operating cash flow, and the timing of which remains uncertain," adds Wong. "Moody's is also concerned with scheduled debt maturities of over USD300m in 2013, which will increase Bumi's liquidity pressure."
"Bumi's EBITDA margin is expected to decline to around 22-24% for 2012, from 32.9% in 2011, owing to the continued rise in the company's production costs and lower average selling prices," adds Wong. The margin pressure and slower-than-expected production ramp-up have limited its operational cash flow generation.
Although Indonesian miners are one of the lowest-cost coal producers in the world, their production costs have escalated in recent years due to a combination of higher oil prices, rising labor and contractor costs and increased stripping ratios to facilitate their growth. Bumi's production costs, excluding royalties, increased 26% in FY2011 compared to FY2010. Moody's expects production cost increases to moderate in 2012 to low double-digits due to Bumi's cost control strategy.
Moody's expects the benchmark Newcastle thermal coal price to average between USD90 and USD95 per ton in 2012, which is well below the USD120 per ton posted in 2011. Furthermore, coal prices are unlikely to materially rebound in 2013, unless the demand and supply balance of coal significantly improves.
Moody's also expects coal demand from China to slow in 2H 2012 due to high inventory levels and as the price arbitrage window with respect to seaborne and domestic (China) coal has closed since late July.
"Despite the weakened operating environment, Bumi appears to be continuing its capacity expansion plan to 110 million tons by 2014. Its budgeted capex of USD350 million this year is expected to increase in 2013 and 2014, adding further pressure on its credit profile, should coal prices remain weak," says Wong.
The B1 corporate family and senior secured ratings also reflect Bumi's (1) majority shareholdings in PT Kaltim Prima Coal and PT Arutmin Indonesia, two of the world's lowest-cost producers and exporters of coal; (2) Bumi's long-life coal reserves based on current and anticipated production levels; (3) customer base quality, which includes the large utilities that have excellent payment records; 4) well-established operations, with a track record of consistent production growth.
The rating takes into consideration key challenges such as (1) Bumi's geographic concentration and single-commodity focus in terms of current revenue generation; as well as (2) regulatory issues arising from operating in Indonesia (Baa3/Stable).
Moody's also has concerns about Bumi's substantial expansion over the past few years into metal ores, oil and gas, and other non-investment grade jurisdictions that confers potential execution, political, and expropriation risks.
Another concern of Moody's is Bumi's high debt levels and liquidity risk at the holding company level, given the structural separation from the underlying coal assets, which drive the group's cash flow. This will give rise to ongoing refinancing risk at the Bumi level, notwithstanding the protections that exist in the cash distribution account.
Upward rating pressure is limited in the near term. It could evolve if the company reduces its debt level on a sustained basis, such that adjusted consolidated debt/EBITDA remains below 3.0x or adjusted consolidated EBIT/interest expense stays above 2.5-3x.
Downward pressure could emerge, if Bumi continues with its capacity expansion plans while industry fundamentals remain weak, or if it was unable to reduce its holding company leverage. Downward pressure could also emerge, if Bumi does not develop timely and concrete plans to refinance the scheduled maturities due in Q3 2013.
Indicators Moody's would consider include adjusted consolidated debt/EBITDA rising above 4.5x or adjusted consolidated EBIT/interest expense staying below 1.5x-2x.
Other negative rating triggers include: (1) a material change in Bumi PLC's financial policy, resulting in deterioration in Bumi's capital structure; (2) any adverse decision regarding off-setting of value-added tax 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 Bumi was Moody's Global Mining Industry, published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
PT Bumi Resources Tbk is Indonesia's largest thermal coal producers, and one of the top three largest thermal coal exporters globally. Through its principal assets (65% stake in PT Kaltim Prima Coal and 70% stake in PT Arutmin), Bumi produced 66 million tons of coal in 2011, which accounted for approximately 19% of Indonesia's 2011 total coal production. Its non-coal resource holding company, Bumi Resource Mineral was listed on the Indonesian Stock Exchange on December 9, 2010. Bumi currently owns 87.09% of Bumi Resource Mineral.
Bumi PLC, previously known as Vallar PLC, completed the acquisition of a 25% stake in Bumi in March 2011, through a share swap with the Bakrie Group. In early 2012, Bakrie & Brothers sold half of its 54.6% stake in Bumi PLC to Borneo Lumbung Energi & Metal, a major coking coal producer in Indonesia, because of loan problems. (ends)