S&P: Indonesia's ANTAM upgraded to 'BB+' on improved business prospects, revised group and government support; Outlook stable

SINGAPORE (S&P Global Ratings) Sept. 22, 2023--S&P Global Ratings today took the rating actions listed above.

ANTAM remains a strategically important subsidiary of MIND ID, and will benefit from improving credit quality across the group.We believe ANTAM's strategic fit within MIND ID and its role in fulfilling the government's aspiration to develop a domestic electric vehicle battery ecosystem will translate into extraordinary support from its parent and the government of Indonesia (BBB/Stable/A-2). Consequently, we now include a two-notch uplift to ANTAM's SACP, which benefits from the revised group credit profile of 'bbb-' for MIND ID.

ANTAM's participation with strategic partners covering the entire value chain for manufacturing electric vehicle batteries fulfils MIND ID's mandate to develop the group's nickel downstream operations, because these projects will extend beyond nickel processing into battery materials and electric vehicle battery manufacturing. At the same time, the participation highlights ANTAM's strategic fit with the government's goal of strengthening Indonesia's position within the global electric vehicle value chain.

Together with Indonesia Battery Corp. (IBC), ANTAM will be partnering with Hong Kong CBL Ltd. (HKCBL), a step-down subsidiary of Contemporary Amperex Technology Co. Ltd. (BBB+/Positive/--), and a consortium led by LG Energy Solution Ltd. (LG EnSol; BBB+/Stable/--) separately. The projects outlined under these two partnerships have been designated as national strategic projects by the government in July 2022.

In our view, ANTAM's track record of mining operations and its long nickel reserve life are also important considerations for the foreign joint venture partners investing in Indonesia's electric vehicle battery value chain projects. We estimate ANTAM's holds 7%-9% of Indonesia's nickel reserves, based on the Ministry of Energy and Mineral Resources' geological report outlining reserves as of Dec. 31, 2022.

Beyond the policy imperative to support ANTAM, the presence of well-defined cross-default clauses between ANTAM and MIND ID strongly encourage the parent group to divert timely credit support to its subsidiaries in times of need, in our view. This goes beyond a likely increase in earnings and dividend contributions from ANTAM as it executes its downstream projects. Besides nickel, ANTAM also has a joint venture with sister company Indonesia Asahan Aluminium PT (Inalum) to develop a smelter-grade alumina refinery, which will convert ANTAM's bauxite ore into alumina. The project is scheduled to commence operations in 2025.

We believe the most likely means by which the government would extend extraordinary support to ANTAM would be indirectly via MIND ID.This stems from the government's stated aim to control and consolidate strategic mining assets, and therefore it would preserve MIND ID's control of and interest in strategic mineral reserves. The government is also building a track record of using MIND ID as a vehicle to manage its interests in the domestic mining industry, especially as the country pursues its policy of resource nationalism.

For example, the Indonesian government is negotiating a deal to acquire additional stakes in Vale Indonesia Tbk. PT (PTVI; BB/Stable/--) that would allow it to consolidate PTVI, which is above the 11% threshold required to fulfill the mining law. This follows a 20% stake acquisition in PTVI in 2020 and a 51% stake acquisition in Freeport Indonesia PT (PTFI) in 2018.

In our view, MIND ID's new organizational structure allows it to be a conduit for allocating capital within the group and to provide timely support from the government to its subsidiaries, if needed. Since coming under the umbrella of MIND ID, ANTAM and Timah Tbk. PT's reported leverage (debt-to-EBITDA ratio) has steadily declined to less than 1.5x in 2022, from 4.1x and 15.8x, respectively, in 2019.

The new structure also accentuates MIND ID's identity as the strategic holding state-owned entity (SOE) for Indonesia's mining industry, facilitating its role in strategizing and supervising the downstream development of minerals.

Through a restructuring exercise enabled by government regulations, MIND ID was formally established in 2023 to hold substantially all the assets and liabilities (with the exception of the aluminum business) previously held by Inalum. Under its current structure, MIND ID has no operations as a stand-alone entity, but assumes more than 90% of the group's debt. It therefore is now wholly dependent on dividend receipts from its subsidiaries and equity investments to service its debt obligations.

MIND ID's larger claims on PTFI's cash flow in 2023 will further strengthen its credit quality.Our base case projects MIND ID's annual adjusted EBITDA (including PTFI's dividends) at Indonesian rupiah (IDR) 36 trillion-IDR40 trillion in 2023 and 2024. Coupled with the company's sizable cash balance of about IDR25 trillion and our projections of broadly stable reported debt levels of IDR82 trillion-IDR86 trillion through 2024, we forecast the group's FFO-to-debt ratio at 40%-46% over the same period. The ratio was 31.8% in 2022. Consequently, we have revised our assessment of MIND ID's group credit profile to 'bbb-' to reflect the likely improvement in leverage.

In our base case, we forecast MIND ID will generate cumulative positive discretionary cash flows of IDR10 trillion-IDR12 trillion over 2023 and 2024 after both a step-up in dividends to the government and the proposed acquisition of a 14% stake in PTVI. In our view, MIND ID has some flexibility in dividend payments to the government of Indonesia, especially because it faces high capital needs to invest in various downstream development projects across the group. This would give MIND ID flexibility to divert resources across the group and pace its capital outlay.

In our assessment, MIND ID's diversity and scale of cash flows have improved now that it has a majority claim on dividends from PTFI, based on MIND ID's 51.2% effective stake in PTFI since January 2023. We estimate annual dividend receipts of about IDR15 trillion (about US$1 billion) under our latest metal price assumptions. This compares with the IDR8.6 trillion in dividends received from PTFI in 2022, and will mitigate the weaker earnings we expect from Bukit Asam Tbk. PT (PTBA) due to declining thermal coal prices.

Higher dividends from PTFI will also reduce MIND ID's reliance on dividends from PTBA for debt servicing. We view this as credit positive. However, a dependence on dividends from operating entities for debt servicing means that a sharp decline in commodity prices could result in a disproportionate hit to the cash receipts by MIND ID as a holding company. This would be more pronounced if there is sizable leverage in the operating entities such as PTFI.

We have also revised ANTAM's SACP upward to 'bb-', reflecting our view of the company's improved business position.We believe ANTAM's business position and earnings prospects have strengthened despite the ban on nickel ore exports since 2020. We expect nickel mining to contribute 40%-50% of the company's earnings despite our assumption of higher nickel ore sales and higher nickel prices, compared with 60%-80% contributions from nickel mining prior to the first nickel ore export ban in 2014. Deepening vertical integration into ferronickel production and expanded gold refining capacity have improved diversity in the company's earnings over the past 10 years.

In our assessment, ANTAM will maintain nickel ore production at 12 million wet metric tons (wmt)-14 million wmt through 2025, compared with the 11.5 million wmt reported in 2013. The company expects its ferronickel capacity to reach 40,000 tons of nickel metal by the end of 2023, while gold refining volumes have increased by about five times to 33,854 kilograms (kg) in 2022.

We believe the domestic nickel industry will continue to grow, which would favor mining operators with low cost and long-life nickel reserves like ANTAM. The company had a proven reserve life of 23 years for nickel as of Dec. 31, 2022. The increasing adoption of high-pressure acid leaching technology in Indonesia will also improve the salability of ANTAM's limonite resources, which have not been a material driver of the company's nickel ore sales.

We expect ANTAM to remain prudent in its nickel downstream aspirations. Our 'bb-' SACP assessment for ANTAM anticipates a step-up in ANTAM's downstream aspirations, while maintaining dividend payments to MIND ID. We believe ANTAM can reduce its dividends to MIND ID if needed to preserve its balance sheet if commodity prices soften, because the company is currently not a material contributor of dividends to the parent. Together with IBC, the company has entered into two separate partnerships with HKCBL and an LG EnSol-led consortium. As part of the partnership, ANTAM, IBC, and the strategic partners will form various joint ventures spanning across nickel mining and processing projects. ANTAM will meet capital calls from these joint ventures, which will likely undertake project financing for the nickel downstream developments.

Our base case incorporates capital spending (capital expenditure and investments) of IDR14 trillion-IDR16 trillion over 2023-2025, which would translate into cumulative negative discretionary cash flows of about IDR9 trillion over the same period. ANTAM intends to raise cash proceeds from asset sales to partially fund its nickel downstream investment. Due to the limited visibility over the HKCBL project ramp-up, we currently do not incorporate any earnings accretion from these projects .

ANTAM has yet to take a final investment decision on one of its two nickel downstream projects. Consequently, financing plans for the second partnership have not been finalized. Given that these projects will likely have long lead times of two to three years before earnings accretion, our assessment of the company's financial risk profile reflects the prospects for investment outlay to pick up beyond our base case, such that the company's ratio of debt to EBITDA could trend toward 3x during the investment phase.

The stable rating outlook on ANTAM reflects our outlook on its parent MIND ID, and our expectation that ANTAM will remain strategically important to the group. Our outlook on MIND ID in turn reflects our expectation that dividend receipts from PTFI would boost MIND ID's cash flow mix and sustain its FFO-to-debt ratio above 30%, and above 40% if we proportionately consolidated PTFI.

We could lower our ratings on ANTAM if we lowered the group credit profile of MIND ID by one notch to 'bb+' from 'bbb-'. This could materialize if MIND ID's FFO-to-debt ratio were to fall below 30% sustainably. This scenario could occur if PTFI or any of its material operating subsidiaries were to experience a material outage, thereby reducing cash dividends to MIND ID, or if MIND ID pursues larger growth investments than we expect, with no commensurate increase in cash flow.

ANTAM's SACP would need to fall by two notches before it would impact our rating on the company. We may lower our assessment of ANTAM's SACP to 'b+' from 'bb-' if the company is aggressive in debt-financed investments such that its debt-to-EBITDA ratio weakens to above 3x. This could also materialize if nickel and gold prices fall well below our expectations as ANTAM's investment spending picks up.

We could upgrade ANTAM if we revised the group credit profile of MIND ID upward to 'bbb ' from 'bbb-'. We consider this scenario to be remote as it would require an upgrade of Indonesia to 'BBB+' as well as an upward revision in our assessment of MIND ID's SACP by one notch.

Although it would not impact the final rating, we may revise our assessment of ANTAM's SACP upward if the company is able to execute its investments in bauxite and nickel downstream projects while maintaining a debt-to-EBITDA ratio below 2x through a pricing cycle. This could materialize from greater visibility over the full scale of investments that the company plans to make in its downstream projects, or if the company demonstrates a track record of more conservative financial policies while pursuing investments as well as during lower commodity price cycles. (ends)