Standard & Poor's: PT ANTAM Tbk. Rating Raised To 'B' From 'B-' On Improving Leverage; Outlook Positive

(SINGAPORE (S&P Global Ratings) July 8, 2019)--The rating upgrade on ANTAM reflects the company's execution on its operational targets and downstream projects, which have led to increased cash flows. We believe this will lead to the EBITDA to interest coverage ratio remaining above 3x and do not expect liquidity to constrain the company in the next 12 months. However, we expect free operating cash flow will continue to be directed toward downstream projects and increasing dividends to the parent, which will limit reduction in gross debt levels.

ANTAM's leverage has been improving over the past few years as the company has increased production and resumed measured ore exports while completing construction projects. Debt-to-EBITDA ratios have improved from over 20x in 2015, to 14x in 2016, 6.6x in 2017 and 3.3x last year. Absolute debt levels have remained stable; improving cash flows helped boost interest coverage levels.

While leverage has been decreasing, ANTAM has also been completing downstream capacity expansion. The nickel plant in Pomalaa increased capacity in 2017 to 27,000-30,000 metric tons per year from 18,000-20,000 metric tons previously.

We expect the first phase of the Halmahera ferronickel plant is nearing completion now with an additional 13,500 metric tons of annual capacity, which will begin to come online in the second half of this year. The ownership of the PT ICA plant has also been resolved, and the production is increasing and showing progress towards financial stability.

As these projects are completed ANTAM is planning to add a smelter-grade alumina refinery (SGAR) in West Kalimantan. We expect ANTAM to take an equity position in the project and begin the two-year construction later this year.

ANTAM has obtained export quotas from the Indonesian government on output from these downstream projects. These quotas have supported their growth in production and sales. Nickel ore export quotas increased to 2.7 million metric tons (mmt) in 2017, then to 3.9 mmt in 2018 as the Halmahera plant progressed. The same amount has been granted for 2019, with an expected additional 1.3 mmt quota in July bringing the total to 5.2 mmt. We expect these to be in place through the end of the ban relaxation in 2022.

An export quota for 840,000 metric tons of bauxite ore was granted in 2017 and 2018, and we expect this to increase to three metric tons in 2019 as the SGAR project begins.

We view ANTAM as strategically important to its parent PT Indonesia Asahan Aluminium (Persero) (INALUM). However, it is neutral to ANTAM's creditworthiness as INALUM's stand-alone profile is not significantly better than ANTAM's.

INALUM carries large debt, which was used to increase the stake in PT Freeport Indonesia Tbk. (PTFI), and is dependent on dividends from the subsidiaries to service the debt. We expect the group will rely on these dividends, especially from PTFI and PT Bukit Asam Tbk. until the economic interest in PTFI increases in 2022. We also believe the Indonesian government would support the debt at INALUM, but that support to ANTAM would come from INALUM.

The positive outlook reflects our view that ANTAM will maintain leverage of below 3x debt to EBITDA while continuing to execute on its downstream expansion projects. We expect the company will also maintain sufficient liquidity to service its capital structure.

We would revise the outlook to stable if ANTAM's operating performance deteriorated, resulting in weaker financial ratios, specifically debt to EBITDA sustained above 3x. This could result from lower metal prices than expected, high oil prices pressuring margins, or reduced ore export quotas.

We would also revise the outlook to stable if we saw the company's liquidity position significantly weaken. An indication of deteriorating liquidity could be negative free operating cash flows rapidly consuming a dwindling cash balance.

We could raise the rating on ANTAM if the ratio of debt to EBITDA was sustained below 3x with sufficient liquidity from higher cash flows, reduced short-term debt, or lower capital spending.

We would also raise the rating if the INALUM group's consolidated cash flows and debt servicing capacity improved, or if debt levels reduce through repayment resulted in a better stand-alone profile.

ANTAM is a diversified mining and metals company in Indonesia and internationally. The company is involved in the exploration, excavation, processing, and marketing of nickel ore, ferronickel, gold, silver, bauxite, alumina, and coal. ANTAM is a 65%-owned subsidiary of INALUM. (ends)