RELEASE: S&P Affirms 'B' Rating On PT Berau Coal

SINGAPORE (Standard & Poor's) May 6, 2008--Standard & Poor's Ratings Services said today it affirmed its 'B' long-term corporate credit rating on PT Berau Coal. The outlook is stable. At the same time, we affirmed our 'B' issue rating on the five-year US$325 million senior secured notes due 2011 issued by Empire Capital Resources Pte. Ltd., a wholly owned subsidiary of Berau. Gross proceeds from the notes were onlent and guaranteed by Berau.

"The rating on Berau factors in the company's highly leveraged financial profile, inherent industry risks, and the uncertain regulatory environment for the mining industry in Indonesia," said Standard & Poor's credit analyst Joey Chew. "Mitigating some of these concerns are our expectations of strong demand growth in the medium term, as reflected in the recent upsurge in coal prices, the company's low cost profile, and secure supply contracts, which add to the stability of cash flows."

For the nine months ended Sept. 30, 2007, Berau's operating margins of about 21.5% remained at the past three years' level. However, operating margins are now likely to be under pressure due to higher fuel and freight costs; the extent to which the company can pass on this cost increase to end buyers is subject to prices negotiated under its committed sales contracts. Given that the majority of Berau's 2007 sales were committed in 2006, the company may have locked in the selling prices prior to the spot price surge. Nevertheless, we expect Berau's open-pit coal mines and proximity to key demand markets to continue to provide cost advantages, thus alleviating some of the pressure on operating margins.

"The rating could be adversely affected if Berau pursues growth initiatives such as capital expansion or acquisition plans at the expense of its debt reduction strategy. Conversely, a raising of the rating would hinge on Berau's ability to maintain a favorable cost profile, a steady increase in production from existing or new pits and offtake volume, a sustainable improvement of cash flow measures, and a ratio of funds from operations to debt consistently above 20%," noted Ms. Chew.(end of release)