S&P:Antam placed on CreditWatch negative following Indonesia's ban on unprocessed mineral ore export
Tuesday, January 14 2014 - 11:30 AM WIB
"We placed the ratings on CreditWatch because we believe ANTAM's profitability and cash flows could reduce materially following the Indonesian government's announcement of a ban on the exports of unprocessed mineral ores mined in the country," said Standard & Poor's credit analyst Xavier Jean.
On Jan. 11, 2014, the government announced the ban to stimulate the development of a domestic processing sector, under a mining law enacted in 2009. The implementation guidelines have not yet been released. Mineral ores affected by the ban include nickel and bauxite. The government could allow the exports of mineral concentrate until 2017.
ANTAM may breach our downgrade trigger of a debt-to-EBITDA ratio of more than 5.0x if the government implements a blanket ban that lasts the full year. We forecast ANTAM's ratio of debt to EBITDA to deteriorate to more than 10x and its EBITDA interest coverage to decline to 1.0x-1.5x in 2014 in such a scenario. These ratios are more consistent with a "highly leveraged" financial risk profile, as our criteria define the term.
We expect ANTAM's EBITDA to more than halve in 2014 if the ban lasts for the full year because we anticipate that nickel ore operations will account for a large proportion of the company's overall EBITDA and cash flows. We estimate that the company's quarterly EBITDA could be Indonesian rupiah (IDR) 200 billion-IDR300 billion lower than we expected, assuming average selling price of about US$40 per wet metric ton of nickel ore and quarterly exports of about 2 million tons.
ANTAM's modestly profitable gold operations and incremental cash flows from its chemical-grade alumina project in Tayan are not likely to make up for the lower cash flows resulting from a potential absence of nickel ore exports within the next 12 months, in our opinion. We also expect ANTAM's ferronickel operations to make marginal losses, based on our price deck of US$6.75 per pound for nickel in 2014, exacerbating the effect of a lasting ban. Lower internal cash flows are also likely to weaken the company's liquidity to "less-than-adequate" from "adequate," as our criteria define the terms.
We are still awaiting clarity on how the government will implement the ban and the ban's likely duration.
"We will particularly consider how the likely economic implications of the ban on unemployment, lost foreign currency receipts, and the forthcoming parliamentary and presidential elections could influence the government's decision-making," said Mr. Jean. "It also remains unclear whether the current or future government could exempt certain companies or some minerals from the ban at a later stage and what would be the conditions for such exceptions."
We aim to resolve the CreditWatch within the next three months once we have greater clarity on the implementation guidelines and the cash-preservation measures that ANTAM could take to mitigate the effect of lower cash flows.
We will likely lower the rating if we believe the ban will continue for more than two quarters, with little prospects for: any exemptions; or the implementation by ANTAM of sufficient liquidity-preservation measures. We could also lower the rating, notwithstanding resumption in ore exports, if ANTAM firmly commits to higher capital spending as a condition for resuming exports.
We believe downward rating pressure could ease if we see signs that the ban is likely to be temporary. A rating affirmation would hinge on greater clarity on ANTAM's capital spending plans, particularly at its ferronickel project in Halmahera, in the context of still-subdued nickel prices. (ends)