Release: Fitch Affirms Berau Coal at 'B+'; Outlook Stable
Friday, February 27 2009 - 06:33 AM WIB
The ratings reflect Berau's strong revenue growth with revenue in the first nine months to end-September 2008 (9M08) increasing by 71% yoy driven primarily by the significant increase in the average selling price of coal. This allowed Berau to achieve a much improved net debt/EBITDA ratio of 1.5x on an annualised basis at end-September 2008, compared to 3.5x during the same period last year. The ratings continue to factor in the stability of Berau's revenues supported by established long-term relationships with long-term contracts in place, and the natural hedge on its USD borrowings arising out of around 80% revenues being denominated in or linked to USD.
Moreover, the ratings reflect Berau's strategy of contracting out its entire coal mining activities, which allows it to minimise capex and working capital. Hence, the agency foresees operating cash flow to remain steady, while free cash flow is expected to remain positive.
However, Fitch notes that Berau's free on board cash cost increased significantly to USD32.2/ton in 9M08 against USD21.8/t in 2007 primarily due to higher rates demanded by contractors, coupled with higher handling/demurrage expenses incurred. With lower coal prices, margins are expected to fall from the exceptional high levels recorded in 2008, despite fuel expenses being the major variable component in production costs. Hence, the ability to control costs is very crucial in sustaining its overall financial performance.
Berau's ratings continue to be constrained by its exposure to commoditised coal price, reliance on contractors (in particular on one of its major contractors, PT Bukit Makmur Mandiri Utama) as well as by high concentration risk; its top 10 customers contributing more than 85% to the revenues in 9M08.
Fitch also notes that earlier this year, the Indonesian President signed a new mining law which created uncertainty on whether existing concessions will continue to be honoured for the remaining term, or if they will have to be aligned with the new law within a year. The government will be issuing several supporting regulations in connection to this law, and the agency will closely monitor developments.
The Stable Outlook reflects Fitch's expectation that the de-leveraging will proceed as planned, aided by medium term price and order visibility. If Berau's leverage as measured by net debt/EBITDA ratio remains above 3.0x, a negative rating action may be taken. Any negative implication from the new mining law may also result in a negative rating action. Conversely, a sustained net debt/EBITDA ratio below 2.5x may result in a positive rating action.
Berau is Indonesia's fifth-largest coal producer and operates under a 30-year Coal Contract of Work. It reported revenues and EBITDA of USD450.1m and USD99.5m, respectively, for 9M08. (end of release)