Moody's Ratings affirms Adaro Indonesia's Ba1 ratings; outlook remains stable

(Singapore, April 25, 2024) -- Moody's Ratings (Moody's) has affirmed Adaro Indonesia (P.T.) (AI)'s Ba1 corporate family rating (CFR) and the Ba1 rating on its backed senior unsecured notes. The notes are guaranteed by AI's parent Adaro Energy Indonesia Tbk (P.T.) (Adaro Energy).

Moody's has also maintained the stable outlook.

AI's Ba1 CFR reflects the credit quality of its parent, Adaro Energy, given the strong operational links between the two companies. These include (1) Adaro Energy holding the largest stake in AI at 88%, (2) AI benefiting from Adaro Energy's vertically integrated operations across the coal supply chain, and (3) Adaro Energy guaranteeing all of AI's debt.

"The affirmation of AI's Ba1 CFR reflects our expectation that Adaro Energy will maintain its strong balance sheet with low leverage and very good liquidity over the next 12-18 months despite large investments associated with business diversification," says Maisam Hasnain, a Moody's Vice President and Senior Analyst.

RATINGS RATIONALE

Adaro Energy's credit metrics will remain very strong over the next two years. Moody's expects the company's leverage – as measured by adjusted debt/EBITDA – to remain below 2.0x despite the rating agency's estimate of Adaro Energy investing around $1.5 billion on new projects during 2024-25 using a combination of internal cash and external debt.

Adaro Energy's credit quality is supported by its adherence to strong governance practices (G-2 IPS) including conservative financial policies. The company's long-term average gross leverage over the past 10 years has only been around 1.5x, with leverage maintained below 1.0x over the past three years.

Adaro Energy's low leverage remains underpinned by strong earnings at its key subsidiary AI, which is one of the largest single-location coal producers in the southern hemisphere, with large coal reserves, low operating costs, and a long operating track record since the early 1990s.

In addition, Adaro Energy has grown its Indonesian metallurgical coal production substantially to 5.1 million metric tons (MT) in 2023, up from only 1 MT in 2019, and intends to grow production further to 6 MT by 2024. Metallurgical coal sales, which generated 17% of group revenue in 2023, have supported Adaro Energy's diversification strategy as the company targets to generate 50% of revenue from non-thermal coal sales by 2030. In 2023, thermal coal sales accounted for 83% of Adaro Energy's consolidated revenue.

A cornerstone investment that will drive Adaro Energy toward achieving this revenue target is its planned aluminum smelter, which together with its associated power plant, in North Kalimantan will cost approximately $1.8 billion. Moody's estimates that, once operational, the smelter will boost Adaro Energy's non-thermal coal revenue to around 35% in 2026.

Adaro Energy is partnering with Singapore-incorporated Aumay Mining Pte. Ltd. and Indonesian bauxite mining firm PT Cita Mineral Investindo Tbk on the aluminum smelter, which will have an initial 500,000 MT per annum aluminum production capacity, and is scheduled to commence operations by end-2025.

While this investment represents Adaro Energy's first foray into aluminum, the partnership with other shareholders will help reduce Adaro Energy's funding requirements and execution risk associated with the smelter. Aumay and CITA each owns a 22.5% and 12.5% stake respectively of the smelter, with Adaro Energy, through its subsidiary PT Adaro Minerals  Indonesia Tbk, owning the remaining 65%.

Moody's expects Adaro Energy to maintain very good liquidity over the next 18 months with sufficient cash to meet its needs until 30 June 2025. The rating agency also expects Adaro Energy to continue to proactively repay or refinance debt ahead of scheduled maturities. The company has enough cash to repay the $750 million notes due in October 2024 with internal cash and still maintain very good liquidity.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

Thermal coal companies face a very high credit exposure to carbon transition risks associated with the uncertain pace and magnitude of a secular decline in coal demand. As decarbonization efforts progress around the world, thermal coal companies will need to demonstrate resilience to key risks such as lower earnings amid declining coal demand and prices, and reduced access to funding.

Adaro Energy is responding to these risks by adhering to conservative balance sheet management, and investing in non-thermal coal related businesses. This will help the company to be more resilient to a secular decline in thermal coal demand and affords it greater financial flexibility to implement longer term plans for business transition.

OUTLOOK

The outlook is stable, reflecting Moody's expectation that Adaro Energy will effectively execute its growth strategy while adhering to conservative financial policies.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade the ratings if Adaro Energy continues to improve its business profile through commodity diversification while adhering to conservative financial policies, maintaining very good liquidity and demonstrating a prudent approach toward further investments and shareholder distributions.

Specific indicators Moody's would consider for an upgrade include adjusted debt/EBITDA below 2.0x and adjusted EBIT/interest above 5.0x, both on a sustained basis.

Moody's could downgrade the ratings if Adaro Energy experiences operational disruptions, or industry fundamentals weaken such that its earnings and cash flow decline; or Adaro Energy engages in aggressive shareholder distributions or capital investments, which would indicate a deviation from its stated prudent financial policies.

Specific indicators Moody's would consider for a downgrade include adjusted debt/EBITDA above 3.0x or adjusted EBIT/interest below 4.0x.

The principal methodology used in these ratings was Mining published in October 2021 and available at https://ratings.moodys.com/rmc-documents/76085. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Adaro Indonesia (P.T.) (AI) is one of the largest single-site coal producers in the southern hemisphere, and one of the world's largest sub-bituminous coal companies. AI is 88% owned by Adaro Energy Indonesia Tbk (P.T.), an integrated energy group listed on the Indonesia Stock Exchange with a market capitalization of around IDR86 trillion ($5.3 billion) as of 24 April 2024. (ends)