S&P: ANTAM downgraded to 'B-' on risk of continuing export ban, reducing cash flows

(March 21, 2014) -- Standard & Poor's Ratings Services said today that it had lowered its long-term corporate credit rating on Indonesia-based diversified mining company PT ANTAM (Persero) Tbk. (ANTAM) to 'B-' from 'B+'. The outlook is developing. At the same time, we lowered our long-term ASEAN regional scale rating on the company to 'axB' from 'axBB-'. We removed all the ratings from CreditWatch, where they were placed with negative implications on Jan. 14, 2014.

"We lowered the rating on ANTAM because we believe the company's operating efficiency, cash flows, and liquidity will reduce over the next 12 months. This is because we believe the ban on exports of unprocessed mineral ores in Indonesia is likely to persist beyond July 2014," said Standard & Poor's credit analyst Xavier Jean.

The ban means that ANTAM is unable to export nickel ore, which we estimate accounted for close to 70% of the company's gross profit in 2013. A lasting ban also increases ANTAM's reliance on operations with higher costs, crystalizes its single-asset concentration risk, reduces its product diversity, and would require the company to invest significantly on ore-processing infrastructure to monetize its nickel-ore reserves. We have lowered our assessment of ANTAM's business risk profile to "vulnerable" from "weak."

We see little prospects for exports of unprocessed mineral ore to resume in the next three to six months at least. We believe the administration will not take a short-term decision on this front, given that the parliamentary and presidential elections will take place in April and July 2014, respectively. The new administration is likely to take some time to decide on the implementation of the ban, including providing any potential short-term relief.

We project ANTAM's ratio of debt-to-EBITDA will increase to 8.0x-10.0x by 2015 if the export ban stays in 2014 and 2015. This level exceeds our downgrade trigger of 5x and compares with about 5.7x at the end of 2013. We also forecast the company's EBITDA coverage to be slightly above 1.0x over the period. These levels are consistent with a "highly leveraged" financial risk profile.

"We estimate that each quarter of the ban will reduce the company's EBITDA by Indonesian rupiah (IDR) 200 billion-IDR300 billion," said Mr. Jean. "We note that ANTAM's 2014 and 2015 EBITDA will benefit from the ramp-up of its chemical grade alumina plant, higher gold sales, and increased nickel prices in 2015 and 2014 in our base-case assumptions. However, these incremental accruals are unlikely to offset the lack of cash flows from nickel ore exports."

We assess ANTAM's stand-alone credit profile as 'b-'. We consider the company to be a government-related entity because the government owns 65% of the company. However, we do not factor explicit government support in our rating because we believe ANTAM does not provide essential infrastructure, goods, or services, or play a central role in meeting the government's key economic, social, or political objectives. The company also has a record of operating independently of the government.

ANTAM has "less-than-adequate" liquidity, as our criteria define the term. We expect the company's sources of liquidity to barely cover its uses over the next 12 months, even if exports of nickel ore resume. Barring a renegotiation of bank-loan covenants or a lift of the ban by the end of 2014, we believe the buffer under a debt servicing covenant in a guarantee agreement at ANTAM's 80%-owned subsidiary PT Indonesia Chemical Alumina will diminish.

"The developing outlook reflects the potential for a downgrade or an upgrade of ANTAM over the next 12 months depending on the status of the export ban," said Mr. Jean. "ANTAM's cash flows and liquidity will deteriorate further if the ban persists through 2014. Conversely, we believe the company's cash flow adequacy will deteriorate less rapidly and liquidity pressures will ease if the ban is lifted in the second half of 2014, and depending on any potential conditions linked to the resumption of ore exports."

We could lower the rating if the government is unlikely to allow exports of unprocessed mineral ore by the end of 2014, or if it places overly stringent conditions on the lifting of the ban, leading to a further deterioration of ANTAM's liquidity. Downgrade triggers include: (1) ANTAM's cash balance falls below IDR500 billion over the next 12 months without the implementation of cash preservation measures; or (2) the company breaches the covenants under its bank loans, leading to an acceleration of the bank loans.

We could also lower the rating if ANTAM's financial risk profile weakens further, such that its EBITDA interest coverage falls below 1.0x for more than 12 months. We believe this could materialize if: (1) the ban on exports persists for more than three quarters; or (2) nickel prices fall below US$6 per pound for more than 12 months and the company fails to adjust its capital spending or preserve cash.

We could raise the rating if ANTAM's ratio of debt to EBITDA improves below 5.0x, its EBITDA coverage stays sustainably above 2.0x, and its liquidity stabilizes because of higher cash flows, reduced short-term debt, lower capital spending, or a combination of the three. We believe this would happen if the ban on exports is lifted in the next three to six months, nickel prices average more than US$8 per pound on a sustainable basis, ANTAM's reduces capital spending, or a combination of these elements. We could also raise the rating if we assess that the likelihood of the extraordinary government support to the company has increased. (ends)