Release: Standard&Poor?s: PT Kaltim Prima Coal assigned 'B+'; proposed notes Get 'B+'
Tuesday, April 27 2004 - 07:59 AM WIB
The proposed notes will be issued in two tranches ? a floating rate tranche that matures in 2007, and a fixed-rate tranche that matures in 2009. Proceeds from the issuance will be primarily used to refinance KPC's existing debt, and to repay debts incurred by parent PT Bumi Resources Tbk. (Bumi) to finance the acquisition of KPC's shares. The remainder of the proceeds will be used for working capital.
KPC is the second-largest coal mining company in Indonesia, with net sales of US$415 million and total assets of US$855 million in 2003. The company produced 16.2 million tonnes of steaming coal during the year.
"The rating on KPC is linked to the credit profile of Bumi, given the latter's 100% ownership of KPC and the sharing of senior management. Bumi's credit profile, however, is weakened by its relationship to the Bakrie Group, an Indonesian conglomerate," said Standard & Poor's credit analyst Erly Witoyo, of the Corporate and Infrastructure Ratings Group. "While the Bakrie group has recently completed a group-wide debt restructuring, Standard & Poor's is concerned that the group could potentially adopt an aggressive financial policy as demonstrated in the past. Such action could have a negative impact on Bumi's financial profile. The group's structure and financial policy also lack transparency." Bumi is controlled by Long Haul Ltd., a company controlled by members of the Bakrie family.
The credit profile of KPC is also constrained by high regulatory risk, such as the weak enforcement of contracts by the Indonesian government and the recent implementation of the Regional Autonomy Law. The rating also reflects the difficulties of operating in Indonesia, the inherent volatility associated with selling a commodity, and the company's aggressive expansion plans.
Nevertheless, the company's credit profile is supported by its low-cost operations. "KPC's open pit mining and the proximity of its mines to a shipping dock make KPC one of the lowest cost producer of steaming coal. At a historical cash cost of US$16 per tonne over the past three years, the company should be able to remain profitable, even in an industry downturn," said Mr. Witoyo. KPC's cost profile should improve as the company will mine new pits, which have lower stripping ratios compared with existing operations.
The company's rating is also supported by an adequate reserve life, which should sustain mining operations of 21 years (based on projected annual coal production of 25 million tonnes in 2004), a low exposure to currency risk, and minimal reliance on the weak Indonesian banking system.
KPC's liquidity position was weak as at March 31, 2004, with cash balances of US$34 million, compared with short-term debt obligations of US$78 million. However, operating cash flow is expected to amount to US$25 million per quarter, and this should contribute to the repayment of these obligations. The successful refinancing of existing debt, with proceeds from the proposed notes issuance, should ease future liquidity pressures and extend the company's debt maturity profile.
The rating outlook reflects Standard & Poor's expectation that proceeds from the proposed notes will be used primarily to refinance KPC's existing debt, resulting in an improved liability structure. Over the medium term, the company's credit profile will be supported by the continued strong demand for coal, the company's low-cost operations, and increased production from existing and new coal pits.
Analyst:
Erly Witoyo, Singapore (65) 6239-6321; Greg Pau, Singapore (65) 6239-6303; Craig Parker, Melbourne (61) 3-9631-2073