S&P: Vale Indonesia Outlook Revised to Positive on Increasing Group and Government Support; 'BB' Rating Affirmed

SINGAPORE (S&P Global Ratings) Nov. 30, 2023--S&P Global Ratings today took the rating actions listed above.

PTVI could benefit from a higher likelihood of group and government support amid increasing control and ownership by the Indonesian government via MIND ID, in our view.On Nov. 17, 2023, PTVI and its three largest shareholders, MIND ID, Vale Canada Ltd. (VCL, BBB-/Stable), and Sumitomo Metal Mining Co. Ltd. (SMM) signed a heads of agreement for an ownership transfer, upon which MIND ID will be the largest shareholder, with an approximately 34% equity stake in PTVI.

Importantly, the transaction would also fulfill PTVI's divestment obligation under Indonesia mining law and pave the path for an extension of its mining license. We believe MIND ID acquiring an additional 14% equity stake in PTVI, which is higher than the statutory requirement of 11%, underscores the government's intention to increase control and ownership of the Indonesian nickel miner.

Despite the increasing ownership and control by the government via MIND ID, the parent's ability to divert timely credit support to PTVI would depend on MIND ID's ability to control or direct the company's strategy and the disposition of its cash flow, in our assessment. We may deem that control exists even if MIND ID owns less than 50% of PTVI's shareholder capital.

However, the extent of support would be subject to the final rights and obligations that would be vested to MIND ID and other minority shareholders like VCL and SMM post-transfer of the 14% equity stake to MIND ID. PTVI expects the transaction to be completed in 2024. Consequently, the company also expects more definitive details--such as the transaction mechanism and size, and which shareholder has ultimate control and may consolidate PTVI--to only be finalized over the coming year.

We anticipate prospects of increasing government and group influence and control via MIND ID in spite of the presence of significant minority shareholders like VCL (approximately 33.9%), SMM (approximately 11.5%) once the proposed transaction closes. PTVI also has 20% of its shares broadly held as free float on the Indonesia Stock Exchange. Conversely, the strong presence of minorities in PTVI could inhibit MIND ID's ability to divert credit support unilaterally.

Therefore, establishing the level of control that MIND ID will be vested with post transaction will be crucial in determining whether PTVI achieves any rating uplift from group support. It is also possible that our review of the final transaction details and ownership structure concludes that the increasing state ownership in PTVI via MIND ID is not sufficient to warrant a rating uplift. This would largely be based on our view that MIND ID does not have sufficient control over PTVI such that it could divert timely credit support in times of need to the company.

We believe VCL would remain a supportive shareholder despite the regulatory requirement to dilute its ownership in PTVI under Indonesia's mining law. This is based on our expectation that VCL is unlikely to negatively interfere in the company's operations and financial decisions, or prevent MIND ID from directing support to PTVI. Instead, VCL would likely continue to play an important role in PTVI's operations and growth plans.

We assess MIND ID's credit quality to be low investment-grade (with a group credit profile of 'bbb-') and that the company could have greater incentive to provide timely credit support to PTVI after the transaction closes.Our view of MIND ID's investment-grade credit quality is underpinned by its larger claims of Freeport Indonesia PT (PTFI) cash flows starting from 2023, which will support the group's free cash flow through 2024. MIND ID's majority claim on dividends from PTFI (based on MIND ID's 51.2% effective stake in PTFI since January 2023) supports the group's diversity and scale of cash flows and reduces the group's reliance on dividends from its thermal coal mining subsidiary, Bukit Asam Tbk. PT, for debt servicing.

With MIND ID's increasing ownership and influence in PTVI, the company will likely become increasingly involved in and supportive of PTVI's business strategy. MIND ID will have to ensure, in its capacity, that PTVI's track record of mining operations, commitment to environmental management, and its long nickel reserve life persist. These are important considerations for foreign joint venture (JV) partners in downstream projects, particularly because the government aspires to entrench the country in the global electric vehicle value chain.

MIND ID, the state-owned mining company, is charged to manage the government's interests in the domestic mining industry, which entails preserving the government's control over strategic mineral reserves and driving domestic downstream development across the group's minerals value chain. Beyond the policy imperative to support its members, the presence of cross-default clauses may provide strong incentive to encourage the parent group to divert timely credit support to its subsidiaries in times of need, if indeed PTVI were to ultimately fulfil the definitions of a material subsidiary in MIND ID's U.S. denominated bond indentures.

Our base case projects MIND ID's annual adjusted EBITDA (including PTFI's dividends) at Indonesian rupiah (IDR) 36 trillion-IDR40 trillion for 2023 and 2024. We forecast the group's ratio of funds from operations (FFO) to debt at 40%-46% over the period. This considers the company's sizable cash balance of about IDR25 trillion and our projections of broadly stable reported debt of IDR82 trillion-IDR86 trillion through 2024. The ratio was 31.8% in 2022.

PTVI's investment plans would improve its operating scale and diversification, bringing it closer to 'BB+'-rated mining peers.We estimate that, on an attributable basis, PTVI's mining and smelting operations will at least double once these investments are completed in 2027. Until then, we regard the company's single asset concentration and smaller operating scale than the higher-rated peers to be a relative weakness.

Moreover, PTVI is likely to face execution risks, including the risk of cost overruns and delays in project ramp-up, given the magnitude of the planned expansion. These risks could result in a temporarily weakened financial profile which may include higher leverage (adjusted debt-to-EBITDA ratio) of above 2x, which we would not regard as commensurate with a 'bb+' stand-alone credit profile based on PTVI's current operating scale.

PTVI plans to add two new nickel mines to its portfolio by 2027, on top of a planned brownfield expansion of the Sorowako mine for limonite ore mining during the same period. The additional nickel mining output will be sold to downstream nickel processing JVs in which PTVI will have minority stakes. The company will own 100% of the two nickel mines it plans to organically develop, namely in Bahodopi and Pomalaa.

These JVs have a cumulative nickel metal production capacity of about 250,000 ton per annum on a 100%-basis, which is about 5x the size of PTVI's current production scale, with a product split of 73,000 ton nickel metal in ferronickel and about 180,000 tons of nickel metal in mixed hydroxide precipitate. PTVI has a 49% equity stake in Sambalagi JV, which will operate the ferronickel facility alongside two Chinese partners. The company plans to acquire minority stakes by exercising call options in the other JVs after the assets are operational from 2027.

PTVI's adjusted leverage would likely peak at 1.8x-2.2x during 2025 as its investment cycle commences.Our base case forecasts adjusted debt will increase to about US$1 billion in 2025, which includes our estimate of a US$500 million-US$600 million debt guarantee to the Sambalagi JV. This is largely driven by our expectations for annual negative free operating cash flows (FOCF) of US$500 million across 2024-2025 amid elevated capital outlay and about US$400 million of equity injection into the Sambalagi JV. PTVI's sizable cash balance of US$768 million as of Sept. 30, 2023 will largely mitigate the shortfall in FOCF. Earnings accretion from the company's new projects would likely start from 2026, which would support deleveraging following the construction phase.

We project PTVI's EBITDA will be stable at US$400 million-US$500 million through 2025, given our expectations for a resilient cost structure. This is despite our projection for nickel prices to average lower during 2024 (US$18,000/ton) and 2025 (US$19,000/ton), when compared with 2023 year-to-date average of about US$22,000/ton. This is based on our latest metals price assumptions. Energy costs, which make up 30%-40% of PTVI's cash costs, will likely decline in tandem with lower thermal coal prices. Indonesian thermal coal prices have at least halved since peaking in 2022.

In our assessment, PTVI's financial profile will become increasingly sensitive to commodity price volatility as investment picks up. Based on our sensitivity analysis, we estimate that a US$1,000/ton drop in nickel prices could shave US$50 million-US$70 million off the company's EBITDA per annum, all else being equal. This, in turn, would lead to an increase in leverage by 0.2x-0.4x, under our base-case expectations.

The positive outlook reflects the prospects of increased group support from PTVI's new ownership structure, which includes increasing influence under ownership of MIND ID and increasing certainty that PTVI would obtain a mining license extension.

The positive outlook also reflects our forecast for the company's adjusted debt-to-EBITDA ratio (including corporate guarantees for the Sambalagi JV) to remain well below 0.5x for 2023, and to reach 1.5x-2.0x for 2024.

We could revise the outlook back to stable if we do not expect PTVI to benefit from timely group support should there be any unexpectedly onerous terms of the proposed deal that could alter our view of the ownership transfer and new ownership structure.

We could also revise the outlook to stable despite the prospects of group support if we observe a deterioration in PTVI's stand-alone credit profile. Weakening credit metrics such as an adjusted debt-to-EBITDA ratio (including corporate guarantees for the Sambalagi JV) remaining above 2.0x after expansionary capital expenditure (capex) would indicate such a decline.

We would likely raise the ratings if we expect PTVI to benefit from timely group and government support under the proposed changes to its ownership structure. This would likely be indicated by increasing control by MIND ID, and could result in a one-notch upgrade of PTVI to 'BB+'. (ends)