S&P: Berau's Outlook revised to Negative, 'BB-' rating affirmed

(Singapore, Sept. 26, 2012) -- Standard & Poor's Ratings Services today revised its rating outlook on Indonesia-based coal mining company PT Berau Coal Energy Tbk. (Berau Energy) to negative from positive. At the same time, we affirmed our 'BB-' long-term corporate credit rating on the company and our 'BB-' issue ratings on all the company's outstanding senior notes.

"We revised the outlook to negative as we believe Berau Energy's financial performance will be weaker over the next 12 months than we previously anticipated. We believe the company's significant financial risk profile could weaken to aggressive, reversing a recent improvement," said Standard & Poor's credit analyst Xavier Jean.

We expect Berau Energy's gross profit per ton and sales volume growth to be weaker than we earlier expected for 2013. These factors will likely weaken the company's debt-to-EBITDA ratio to about 4x in 2013, compared with our expectation of less than 2x when we revised the rating outlook on the company to positive in February 2012. We base our financial forecasts on the following assumptions:

? A gross profit per ton of coal sold, before depreciation and
? amortization, of about US$15 in 2013. This is weaker than the US$22-US$25
? we had previously anticipated. Sales contracts for the majority of 2013
? coal production will likely be based on the current subdued prices, while
? production costs should remain elevated over the period.
? Sales volumes of about 23 million tons in 2013. These are lower than our
? original expectation of about 27 million tons because we expect subdued
? market demand for coal to persist in 2013.

We believe incremental supply from the seaborne thermal coal market in Asia at a time of softer demand growth will likely limit a rapid, substantial, and sustainable price recovery over the next six months at least. Yet, the currently lower price environment--with Newcastle benchmark prices hovering around US$90 per ton--is starting to test the higher-cost producers in Australia and marginal producers in Indonesia. This could provide some support from further material price falls.

Berau Energy's limited short-term refinancing needs mitigate, in our view, the potentially negative effect of an investigation by Berau Energy's majority owner, Bumi PLC (not rated), into unconfirmed, alleged financial irregularities at Berau Energy. The company has about US$37.8 million in accrued interest and about US$1.8 million in short-term debt due as of June 30, 2012.

The affirmed rating on Berau Energy is a combination of the company's current "weak" business risk profile and "significant" financial risk profile. The rating reflects the Indonesian coal producer's mineral, customer and single-mine concentration risks, regulatory uncertainty, and its aggressive capital structure. Berau Energy's good record of production growth and low, albeit increasing, production costs partially offset these weaknesses.

"The negative outlook reflects our expectation that sluggish coal prices and lower sales volumes will likely weaken the company's cash flows over the next 12 months, interrupting the recent trend of improvement in the financial risk profile," said Mr. Jean.

We could revise the outlook to stable if Berau's debt-to-EBITDA ratio stabilizes between 2.5x and 3.5x. We believe this could materialize if the company's gross profit per ton exceeds US$20 with sales volumes exceeding 25 million tons for more than 12 months. (ends)