Release: Fitch: Indonesia's new mining decree has no rating implications
Friday, October 23 2009 - 06:25 AM WIB
The new regulation, issued on 30 September 2009 by the Ministry of Energy and Mineral Resources of Indonesia, is one of the many regulatory changes that follow the introduction of a new mining law in January 2009. Mining companies are allowed a period of up to three years until 30 September 2012 to align their existing arrangements with contractors in accordance with the new law.
The latest regulation applies to holders of mining business licenses (IUPs and IUPKs) issued under the new mining law. However, it is unclear whether holders of coal contracts of work (CCoW) issued under the old regime are required to migrate to the new licensing framework.
Fitch expects the impact on mining companies in the agency's rated universe to be very limited, despite differences in strip ratios at which coal is produced and the level of outsourcing in mining activities. "The capex required and operating costs associated with the restricted activities are small compared to the overall coal production costs," said Jessie Wahab, associate director at Fitch's Asia-Pacific Corporates rating team.
PT Adaro Indonesia ('BB+'/Stable) outsources its entire mining activities. Its affiliate, PT Saptaindra Sejati (SIS) mined around a quarter of Adaro's H109 production. Fitch notes that Adaro has allocated nearly USD100m from its recent USD800m bond proceeds for heavy equipment capex over the next few years. Although its intention is for SIS to operate and maintain the equipment, Adaro has the flexibility to carry out coal digging by itself in compliance with the new regulation.
Adaro can allocate a larger share of funds allocated for mining equipment capex to coal digging equipment and outsource overburden removal works to third-parties without having to increase its future capex. Similarly, PT Kideco Jaya Agung, which is 46% owned by Indika Energy Tbk (Indika; 'B+'/Stable), has also allocated higher capex for mining equipment since 2009, in order to reduce its high reliance on external mining contractors, to some extent, as it ramps up production.
PT Berau Coal (Berau; 'B+'/Stable) also fully outsources its mining activities to independent contractors. Therefore, Berau may have to incur some capex to comply with the new regulation, though such capex is not expected to be significant enough to dent Berau's credit profile. "If coal digging equipment rental is permitted, it is unlikely that Berau will see any material changes to its capex or operating costs," added Ms. Wahab.
"It appears that the new decree is aimed at discouraging investors of mining companies from trading in concessions - however, this is expected to have a limited negative impact on independent mining contractors," said Buddhika Piyasena, Director of Fitch's Asia-Pacific corporates rating team. PT Bukit Makmur Mandiri Utama (BUMA, 'BB-'/Stable), Indonesia's second largest independent coal mining contractor, currently generates only around 3% of its revenues - by management estimates - from coal digging. More importantly, under the new law, mining contractors can continue to provide overburden removal and coal transportation, which account for the bulk of BUMA's total revenues.
The loss of revenues from coal digging can be somewhat compensated by leasing out related equipment to coal mining companies - something the new law does not seem to prohibit - substantially limiting the net impact on BUMA's overall cash generation. (end of release)