S&P: Bayan Resources Upgraded to 'BB-' On Elevated Coal Prices and Bolstered Resilience, Outlook Stable

(SINGAPORE (S&P Global Ratings) April 14, 2022)--S&P Global Ratings today took the rating actions listed above.

An elevated pricing environment for thermal coal will result in Bayan generating substantial free cash flow greater than US$1 billion annually in 2022 and 2023. In our view, this strengthens an already healthy financial profile, given that Bayan managed to reduce its debt entirely in 2021 after the company fully redeemed its US$400 million bond with surplus cash. We believe Bayan's sizable cash position will provide greater financial resilience to withstand unforeseen operational disruptions, which could arise from weather-related risks, or volatility in coal prices.

Supply disruptions have driven Newcastle 6,300 kcal/kg prices above US$150 per metric ton (MT) since July 2021, reaching a peak of over US$400 per MT in March 2022, compared with about US$100 per MT a year ago. Pricing momentum has increased because of mounting concerns over global energy supplies due to the Russia-Ukraine conflict and the escalating sanctions imposed on Russia. This comes amid already tight supply conditions stemming from factors including inclement weather patterns and Indonesia's month-long export ban earlier this year. These macroeconomic trends have led us to lift our 2022 thermal coal price forecast to US$180 per MT from US$120 per MT.

We believe Bayan will continue to manage its surplus cash prudently. We project a step-up in capital spending for the construction of its haul road and supporting facilities of about US$250 million in 2022, compared to US$177 million in 2021. We also anticipate the company will distribute approximately US$700 million to US$800 million in dividends, in line with its existing policy of 60% of the prior year's net profit after tax. The company might use the remaining cash for any midsize acquisition to enhance its reserve base or diversify into other commodities.

By our estimates, Bayan's current cash position should be adequate to finance its investments, or otherwise, require minimal incremental debt. However, in our view, the current strength in coal prices would render any near-term acquisitions unlikely and the company could preserve its cash and reinvest into the business.

Greater visibility on haul road and supporting infrastructure facilities with completion expected by mid-2023 will expand Bayan's scale and operations. As of Dec. 31, 2021, Bayan's haul road was 52% completed while that of the supporting facilities were at 34%. Even though the company is facing delays on construction due to current heavy rains at Kalimantan, we view execution risks to have diminished. This is because the company has obtained the relevant land permits necessary for the construction process, and the overarching improvement in Bayan's financial profile will likely outweigh residual project risks such as delays or cost overruns.

Since 2019, the company has been constructing the 100-kilometer (km) haul road to connect the Tabang mine to the Mahakam River. This route will reduce Bayan's reliance on seasonal rivers served by the Senyiur and Gunung Sari jetties, where weather often disrupts coal-barging. In our view, this will also improve Bayan's working capital, which tends to deteriorate during the dry season when inventory is being built up.

Once Bayan completes the road and new barge loading facility, we anticipate production capacity will expand to 55 million metric tons (MMT)-60 MMT over the next three years, from about 35 MMT-40 MMT currently.

Regulatory risks on Indonesia's mining sector are captured under Bayan's business risks.Recurring coal export bans have underscored inherent uncertainties and weaknesses in Indonesia's coal-procurement mechanism. As a result of the ban in January 2022, Bayan's sales volumes reduced 30% that month, and the company lost about US$260 million in revenue. While this risk will continue to weigh on the industry, we believe Bayan's healthy cash and zero debt position will minimize significant impact.

The government is working on revising the framework to a market-based pricing mechanism, whereby the price gap between market and domestic cap would be bridged by government cash levies. However, we believe any changes will take time to implement and have a low likelihood of hindering Bayan in the near term.

Meanwhile, Bayan is conducting a lawsuit against the Indonesian ministry of energy and mineral resources to regain part of an area of more than 2,000 hectares on which five of its coal concessions overlap with PT Senyiur Sukses Pratama. Nonetheless, we do not expect this to have any material impact on Bayan's operations as the concessions only carry 1 MMT of resources.

We expect demand for Bayan's low-average-calorific thermal coal to hold steady over the next five to 10 years. While 2030 represents the coal phase-out date for many OECD countries, it is a peak demand date for many nations within Asia as the shift in thermal coal demand from advanced economies to Asia accelerates. Efficiency and price competitiveness in coal-fired generation and planned construction of new plants in the region are expected to keep thermal coal demand firm.

New plants should remain in operation for at least 40 years, ensuring that coal remains a significant part of the energy mix in Asia. China, for instance, which represents about half of global coal demand, has 92.3 gigawatts (GW) of coal-fired generation under construction, according to the Global Energy Monitor. Indonesia and India, both with large domestic coal-mining sectors, are also building 15.4 GW and 31.3 GW of capacity, respectively. Low ash and sulfur levels in Bayan's coal make it suitable for thermal power plants across Asia and we believe that the company's relatively diversified geographical coverage will continue to ensure stable sales. As of Dec. 30, 2021, the company had commitments to sell 274 MMT of coal through 2054.

The stable outlook reflects our expectation that Bayan will continue to preserve its strong debt-servicing capability and balance sheet as it progresses toward the completion of its haul road in 2023. It also reflects our expectation that there will be no material adverse change in Indonesia's coal mining regulations.

We could lower the rating if Bayan departs from its policy of maintaining low leverage, its business prospects were to deteriorate or if liquidity weakens materially. Rating pressure could arise if Bayan's adjusted debt-to-EBITDA ratio stays above 2.5x. This could occur because of:

• Significant operational performance issues such as a severe disruption at the Tabang mine, material project delays and cost overruns;

• Persistent weak thermal coal prices, or

• Capital deployment that is more aggressive than we forecast such as higher capital expenditure (capex), large dividend distributions, or meaningful debt-funded acquisitions.

We consider an upgrade to be unlikely over the next 12 months. Still, further rating upside could occur if Bayan is able to diversify its operations as well as expand its scale significantly, while maintaining the current financial profile and liquidity position. A higher rating would also depend on our assurance that the Indonesian regulatory mining risks have not increased.

ESG credit indicators: E-4, S-3, G-3. (ends)