Release: Fitch assigns 'B+' rating to Indonesia's Berau Coal; Outlook stable
Friday, November 24 2006 - 03:48 AM WIB
Berau's ratings are constrained by its aggressive financial profile, exposure to commoditised coal prices and concentration risks arising out of its dependence on a single contractor and a small number of customers. Taking the notes issue into account, Berau has projected a total debt/EBITDA of 5.2x and cash from operations/total debt of 11% for the year ended December 2006. Fitch expects the company to enjoy only moderate liquidity until 2009, due to high interest outflows, higher tax payouts and planned debt amortisation. Liquidity support comes from its projected cash balance for end-2006, which is equivalent to principal repayments for more than two years, and a restriction on dividend payouts, which should conserve cash for debt servicing. Fitch views that the company's leverage is particularly high in light of the commoditised nature of coal. Berau's average selling price increased nearly 40% between 2003 and 2006, and any correction in prices will negatively affect its debt protection measures. Berau also faces a high degree of contractor concentration risk as nearly 80% of its production volume is contributed by PT Bukit Makmur Mandiri Utama, a privately held mining contractor. The company's top 10 customers accounted for 96% of Berau's sales in 2005, though the customer concentration risk is partly mitigated by the company's focus on selling to long-term buyers. Power generating companies, which contributed 81% of Berau's sales in 2005, generally prefer to maintain a stable source of supply as coal is used in their core operations.
Berau's ratings draw support from its competitive coal mining costs, strategy of contracting out its entire production, near-term debt reduction plans to take advantage of demand and price visibility, and its natural hedge on USD borrowings arising out of nearly 80% of revenues being denominated in USD. Berau's 2005 FOB (free on board) cash cost of USD18.8 per tonne, arising from open pit mining that requires low overburden removal and operations that are close to dispatch ports, makes it one of the lowest cost coal producers in the world. Low mining costs are complemented by geographical proximity to key North Asian and Southeast Asian markets that accounted for nearly half of global coal imports in 2005. Historically, Berau has had healthy cash flows (free cash flow of USD46.9m and USD31.6m in 2005 and 2004, respectively) due to low funding requirements for capital expenditure and working capital. In the period 2002 to 2005, capital expenditure constituted only 12.5% of the cash from operations. Most of the capital expenditure and a substantial part of the working capital requirements are borne by the mining contractors. The agency, however, notes that Berau maintains coal stocks and any sharp increase in stock will be a drain on its cash levels.
The USD325m notes issue is proposed to be in two parts - one will carry a bullet repayment in 2011 and the other will be amortised over five years. Fitch draws comfort from the amortisation plan being supported by medium-term (two to three year) coal demand and price visibility. Based on existing contracts, the company has pre-sold about 53% (31% contracted and priced), 32% and 22% of its targeted production in 2007, 2008 and 2009, respectively, with average contract price for 2007 being marginally higher than the 2006 average. Berau plans to use proceeds of the issue to advance a loan of approximately USD250m to shareholders, repay all existing debt and retain the balance for capital expenditure and general corporate purposes.
Berau operates under a Coal Contract of Work ("CCOW"), which is structured as a contract between Berau and the Indonesian Central Government, ratified by the Indonesian Parliament. The CCOW has a "lex specialis" status, which means that it will prevail above general Indonesian Law in the event of any conflict. The CCOW also provides for an international arbitration in the event of a dispute. Fitch notes that such a framework has been in existence for nearly 25 years, even during times of considerable political and economic turmoil in Indonesia. However, certain tax and regulatory issues do keep arising from time to time; Berau has adjusted VAT claims to the extent of USD63m against royalty payments, the adjustment of which is yet to be confirmed by the government and Indonesia is in the middle of power devolution to regions leading to uncertainties on sharing of regulatory and taxation powers. While not expected, any material adverse change in the concession structure could affect the rating.
The Stable Outlook reflects Fitch's expectation that Berau will reduce debt as planned, supported by medium-term price and order visibility. Debt reduction by about USD100m and continued strength in coal prices could lead to a positive rating action. Conversely, a negative rating action could be triggered by a sustained fall in coal prices, significant underperformance in projected coal production or any material adverse changes to the terms of the proposed notes issue.
Berau is Indonesia's fifth-largest coal producer, producing 9.2 million tonnes of coal in 2005 (estimated production of 10.9 million tonnes in 2006). Berau has continuously increased production since commencement of operations in 1995 and has projected production to increase further to 16.2 million tonnes by 2011. Berau has thus far explored only about 40% of the total concession area of 118,400 hectares. Based on current production plan, Berau's proven and probable reserves are likely to last for more than 10 years. For the year ended December 2005, Berau had revenues of USD249.6m, EBITDA of USD51.6m and net income of USD19.4m. (end of release)