PT Vale Indonesia Tbk 'BB' ratings affirmed; Outlook stable
Thursday, September 29 2016 - 02:39 PM WIB
The ratings on PTVI reflect our view that it will continue to post strong financial metrics and sound liquidity over the next several years. The slightly weaker credit metrics in recent quarters mainly resulted from low nickel prices, which have recovered over the past few months, and we expect them to strengthen further in the next 12 months. This, combined with lower capital expenditures (capex) in 2016 and dividend flexibility, will result in strong financial metrics for the year, despite sluggish figures in the first half of 2016. Over the coming years, we expect the higher nickel prices help improve financial metrics.
PTVI continues to ramp-up operations of its coal conversion project, which we expect to be operating close to full capacity for one kiln by 2017, reducing the company's fuel purchases. This will lower cash costs, which we expect to reach $5,800 per ton in 2016 (about 5% lower than in 2015), improving slightly toward 2017 and beyond. Nonetheless, we expect nickel prices to remain volatile through 2016 and 2017, which will continue to hinder the company's profitability, although we still expect PTVI to generate cash in that period. Furthermore, we expect the company to remain conservative in its growth strategy, likely increasing production capacity by 25% in the short to medium term with balanced capex requirements. We expect PTVI to continue operating close to full capacity, producing about 80,000 tons per year of matte nickel.
Volatility in nickel prices at the end of 2015 and first half of 2016, together with a maintenance stop in early 2016, have hurt performance and credit metrics in the 12 months ended June 30, 2016. We expect figures for the remainder of 2016 to improve considerably because of higher prices and the company's low cost production. Our base-case scenario assumes that the company will maintain a prudent financial strategy, with a conservative investment plan and dividend distribution policy. In that sense, we expect PTVI to meet its financial obligations and capex needs over the next few years mainly with its cash position and cash generation, without additional external funding needs, resulting in debt to EBITDA of about 1.6x in 2016 and FFO to debt of about 60%. Our base-case scenario also includes the following assumptions:
? Inflation in Indonesia at 4.4% and 5.0% for 2016 and 2017, respectively;
? Average nickel prices at $10,000 per ton for the rest of 2016, $10,500 in 2017, and $12,000 in 2018;
? Brent oil prices of $40 for the remainder of 2016, $45 in 2017, and $50 in 2018;
? Coal prices at $88 per ton in 2016, $115 in 2017, and $110 in 2018;
? Nickel production of about 80,000 tons in 2016 and 2017;
? Capex of about $70 million in 2016 and $100 million per year afterwards; and
? No dividend distribution in 2016 and 50% of free operating cash flow (FOCF) starting in 2017.
As a result of these assumptions, we reach the following financial metrics:
? Revenue of about $580 million in 2016 and $650 million in 2017;
? EBITDA of $89 million in 2016 and $120 million in 2017;
? Funds from operations (FFO) of $83 million in 2016 and $120 million in 2017;
? Debt to EBITDA of 1.6x in 2016 and 0.8x in 2017; and
? FFO to debt of 60% in 2016 and 120% in 2017.
We also continue to view PTVI's exposure to the volatile regulatory conditions in Indonesia, asset concentration, and fairly small scale of operations as rating constraints. The combination of these factors could heighten volatility in cash flows and financial metrics than we would consider as appropriate for similarly rated entities.
Although we continue to consider PTVI as an important asset for Vale, we don't add notches of support to the ratings. We believe that the regulatory requirements for Vale to divest a portion of PTVI to reduce incentives to financially assist PTVI in case of need. Therefore, we don't expect further financial support, apart from the existing guarantees on PTVI's bank loan.
The stable outlook on PTVI reflects our expectations that despite lower nickel prices at the beginning of 2016, we expect them to recover, allowing the company to meet its short-term debt amortization and capex needs with internal cash generation and without the need for new debt. As a result, we expect the company to continue posting strong financial metrics, such as debt to EBITDA of about 1.6x and FFO to debt of 60%.
We could downgrade PTVI if nickel prices drop further or adverse regulation pressures the company's cash generation and ability to fund its cash flow needs with internal resources in the next 12 months, resulting in debt to EBITDA persistently above 2.0x and FFO to debt below 45%.
An upgrade is unlikely in the short term because the company's limited scale and diversification, as well as its exposure to the regulatory framework in Indonesia, constrain its business risk profile and the potential for a higher rating. (ends)