Fitch Affirms Bayan Resources at 'BB-'; Outlook Stable

(Fitch Ratings - Jakarta - 04 Nov 2020) -- Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Indonesian coal miner PT Bayan Resources Tbk and the rating on its outstanding bonds at 'BB-'. The Outlook on the IDR is Stable.

Bayan's credit profile remains adequate for its current rating level, despite revisions to Fitch's commodity price assumptions (see "Fitch Ratings Updates Mid-Cycle Metals and Mining Price Assumptions", dated 28 August 2020 at https://www.fitchratings.com/site/pr/10134526).

We raised our forecast for Bayan's sales volume in 2020 to 32.5 million tonnes (MT) after its sales volume reached 26MT in January-September, and compared with 29.2MT in 2019. We continue to expect production volume to remain around 32MT in 2021 and 2022 and then rise to 35MT in 2023 after the completion of a hauling road.

Bayan's rating reflects the low-cost position of its main mine, adequate reserves, diversified customer base and strong financial profile. This is partly offset by its mine concentration, regulatory risks in Indonesia and the inherent cyclical nature of the coal industry.

KEY RATING DRIVERS

Inventory Clearing Supports Volumes: Fitch expects Bayan's sales volume to rise in 2020 after stronger-than-expected sales in January-September, when it benefitted from its committed and contracted sales and cleared inventory built up from last year. Inventory built up in end-2019 because of intermittent disruptions to shipping coal from Bara Tabang due to low river water levels. We expect production volume to decline to about 28MT in 2020 (9M20: 21.5MT) from 32MT in 2019, as the company's mines shut for seven weeks in April-May due to the coronavirus pandemic.

Fitch expects Bayan's sales and production volumes to remain at about 32MT in 2021-2022, before it starts ramping up production in 2023 towards its medium-term production target of 50MT once it completes the construction of a hauling road in 2022.

Low-Cost Position: Fitch expects Bayan's EBITDA per tonne to remain above that of most peers due to the low-cost structure of its key Tabang concessions, which have an average life-of-mine strip ratio of 3.6x (2019: 3.1x), and their well-connected infrastructure and logistics network. Bayan reduced its average cash cost to USD30.3/tonne in 9M20 from USD35/tonne in 2019, driven by a lower strip ratio, higher sales volume and lower fuel-settlement costs. Fitch expects the average cash cost to stay at USD32-33/tonne in 2020-23, translating to EBITDA per tonne of around USD7.5 in 2020 and USD10-12 in 2021-2023.

Limited Asset Diversity: Tabang (including North Pakar) accounts for more than 75% of Bayan's total 2P reserves and production. The contribution from Tabang is likely to remain high in the medium term, with most of the increase in output in the coming years from the operational mines at Tabang and North Pakar.

Road to Mitigate Operational Issues: The company's overall coal sales are also exposed to the weather-related issues as barging from the Tabang concessions is interrupted when water levels are low at the tributaries now used for barging coal to the Mahakam River. Bayan is building a 100km road from the concession to the Mahakam River that will provide an alternative route to ship its coal. The road is expected to be ready by mid-2022, subject to timely receipt of permits, and it will materially reduce these operational issues at Tabang.

Strong Financial Profile: We expect Bayan's financial profile to remain quite strong despite low coal prices, as the company is supported by low costs, robust sales and modest capex. We forecast Bayan's FFO net leverage to remain below 1.0 for 2020-2022 and expect it to reach a net cash position in 2023, compared with our negative rating trigger of 2.5x FFO net leverage. Bayan paid dividends of USD66.7 million in 2020, or 30% of its 2019 net earnings, versus our expectation of a 50% dividend payout ratio. We continue to incorporate a payout ratio of 50% in 2021-2023 in our rating case.

Bayan's capex in 2020 is also expected to be 10%-15% lower than our previous expectations of USD80 million, as works on the hauling road are expected to accelerate only towards end-2020 and 2021 due to a slight delay in receiving the required regulatory approvals due to the pandemic. Given the capex till 2022 would be mainly driven by the construction of the road, we believe Bayan has some flexibility to defer capex, if the coal market weakens.

Diversified Customer Base: Bayan's diversified customer base should continue to support stable demand for its coal over the next four years. Bayan's customers are more geographically diversified compared with those of most peers. In 1H20, Bayan exported mainly to the Philippines (26%), Malaysia (16%), China (13%) and India (11%). It also has a diverse product offering, as its coal ranges from Tabang's 4000-4300kcal low-sulphur and ash content coal to high calorific value (over 6000kcal) coal from its other mines.

Adequate Reserves: Bayan has one of the largest reserves compared with its coal-mining peers in Indonesia with proved (1P) reserves at 580MT resulting in reserve life of around 12 years based on the planned increase in production to around 50MT over the medium term. Bayan's proven and probable (2P) reserves are 1,150MT or a mine life of about 23 years.

DERIVATION SUMMARY

Bayan's closest peer is PT Indika Energy Tbk (BB-/Negative) as it has a similar operational risk profile. Indika's larger production scale, the longer operating record of its main Kideco Jaya Agung coal mine and integrated operations are offset by Bayan's better cost position and stronger financial profile, with lower sensitivity to price and volume assumptions. However, Bayan has faced intermittent operational disruption due to bottlenecks, whereas Indika's operations are more integrated and have a stronger record of uninterrupted production. Indika's negative outlook reflects its low rating headroom with its leverage breaching or remaining close to Fitch's negative sensitivity.

Golden Energy and Resources Limited (GEAR, B+/Stable) has higher reserves and a longer reserve life than Bayan, but Bayan's higher rating reflects its larger production scale and better cost structure. GEAR's financial profile is also weaker due to its acquisition capex. GEAR's rating will remain constrained until it is able to increase its production scale and earnings.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Volume: Steady production and sales volumes after temporary weakness in production in 2020. Sales in 2020 of 32.5MT incorporates 28MT of production and 4.5MT of inventory

- Selling price in line with Fitch's revised coal price assumptions with Newcastle at USD58/tonne in 2020, USD68 in 2021, USD67 in 2022 and USD 66 after that

- Total cash cost around USD32/tonne during 2020-2023

- Capex of USD70 million in 2020, USD150 million in 2021 and USD70 million in 2022, which comprises about USD25 million of maintenance capex per year with the remaining as growth capex. In 2023 we expect capex to fall to USD40 million mainly driven by maintenance capex.

- Dividend pay-out ratio of 50%.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Increase in scale to about 40MT a year, with an average remaining reserve life of 15-20 years, while maintaining a low-cost position and stable financial profile, with FFO net leverage of below 1.5x

- Material progress towards infrastructure enhancement to ensure continuity of operations, limiting the company's exposure to weather-related issues.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- FFO net leverage of above 2.5x

- FFO fixed-charge coverage falling below 4.0x (2019: 12.1x)

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity: Bayan's USD400 million bond is the company's only debt, which was used to repay all its outstanding short-term loans used for working-capital purposes. Bayan's liquidity position improved after it issued the bond, refinancing most of its short-term debt, which had increased substantially in 2019 as the company's working capital requirements rose with the inventory build-up amid the operational issues at Tabang.

Bayan paid dividends of USD66.7million and USD300 million in August 2020 and July 2019, respectively, equivalent to dividend pay-out ratios of 30% and 50%, respectively, which is likely to persist over the next two to three years. We do not expect the company to require additional funding support over this period as it had a cash balance of USD350 million as of 30 September 2020, including the funds from the bond issuance. We also think Bayan has some flexibility to cut capex and dividends if needed.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg