Fitch Affirms Golden Energy and Resources at 'B+'; Outlook Stable

Tuesday, April 13 2021 - 01:39 AM WIB

(Fitch Ratings - Singapore - 12 Apr 2021)--Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) on Golden Energy and Resources Limited (GEAR) at 'B+'. The Outlook is Stable. The agency also affirmed GEAR's senior unsecured US dollar bond at 'B+' with a 'RR4' Recovery Rating, which reflects average recovery prospects for bondholders.

The affirmation reflects the strong business profile of GEAR's key thermal coal mining subsidiary, PT Golden Energy Mines Tbk (GEMS, B+/Stable). GEMS' production volumes rose, and it maintained its profitability in spite of coal price weakness in 2020. GEAR's rating also benefits from its diversification via investments in metallurgical coal and gold in Australia. The acquisitions are expected to enhance the group's credit profile over the medium term, although contribution to GEAR's cash flow is likely to remain minimal over the next two years.

GEAR's rating is based on the credit metrics with proportionate consolidation of 62.5%-owned GEMS, as we assess GEAR's linkage with GEMS as moderate, and full consolidation of Stanmore Coal after adjusting for minority leakages. GEAR's standalone holding company credit metrics are moderate, mitigating structural subordination risk.

KEY RATING DRIVERS

Cost Flexibility: We expect GEMS' flexibility to manage its costs in line with coal price movements and its low-cost structure with life-of-mine strip ratio of 4.2x to support its operating cash flows. GEMS EBITDA per tonne improved modestly to USD4.4 in 2020 from USD4.0 in 2019, driven by its ability to meaningfully curtail cash costs by reducing the strip ratio and cutting contract mining rates to third-party contractors, and the benefits from declining fuel costs. Fitch expects GEMS to maintain its EBITDA per tonne a USD4-5 after peaking at USD5.5 in 2021.

Increasing Production Scale: We expect GEMS's production to increase to close to 40 million tonnes (mt) in 2022 (2021E: 35mt, 2020: 34mt), in line with management expectations, subject to regulatory approval of the production quota. Fitch believes GEMS' strong compliance with requirements, including domestic market obligations (DMO), mitigate the regulatory risk. GEMS needs minimal capex on infrastructure to support rising volumes, and will spend USD20 million-25 million annually over the next three years to upgrade the capacity of hauling roads, coal handling plants and barge loading facilities.

Robust Financial Profile: We expect GEAR's consolidated financial profile to improve as EBITDA contribution from Stanmore Coal increases after operations ramp up at its new mining area. GEAR raised its effective stake in Stanmore Coal, an Australian metallurgical coal-mining company, to 60% in 2020, which supports GEAR's efforts to diversify its business profile.

We expect GEAR's consolidated group leverage, measured by net debt/EBITDA, to remain at or below 1x from 2021 (2020: 1.5x). We also expect GEAR's holding company standalone interest cover to improve to about 2.8x in 2021, after weakening in 2020 to around 1.2x (excluding final dividend of 2020); assuming the company refinances its maturing loan facility.

Acquisitions Support Diversification: We expect acquisition of the Stanmore Coal stake and a 50% stake in the Ravenswood gold mine to support GEAR's business diversification. We expect Stanmore Coal to contribute to 20%-25% of the group's EBITDA starting 2022. However, dividends from the acquisitions will remain minimal over the next two years in light of their own large capex plans.

GEMS' Limited Mine Diversity: The PT Borneo Indobara (BIB) mine accounts for more than 90% of GEMS' total production and 67% of its proven and probable (2P) reserves. BIB's production ramp-up plans mean the contribution from GEMS' other mines will remain small over the next four years. The reserve concentration risk is partly offset by the geographical spread, with about 30% of 2P reserves outside of Kalimantan. Operational risk is mitigated by agreements with leading Indonesian mining contractors, such as PT Saptaindra Sejati, a subsidiary of PT Adaro Energy Tbk, and PT Putra Perkasa Abadi.

Long Reserve Life: GEMS has one of the largest reserves among coal-mining peers in Indonesia. GEMS' reserves are the fourth-largest in Indonesia, with proven reserves of around 807mt at end-2020 (proven and probable reserves: 1,033mt), or a reserve life of 20.2 years based on its target annual production of 40mt. GEMS' BIB mine accounts for 72% of the proven reserves at 589mt, with a second-generation licence valid until 2036.

Moderate Linkages: Fitch maintains its assessment of moderate linkages between GEAR and GEMS under our Parent and Subsidiary Linkage Rating Criteria, with moderate legal and operational ties GEAR has majority representation on GEMS' board, and is involved in managing the operation. GEAR's standalone operations are not significant and it depends on dividends from its subsidiaries, primarily GEMS, to service its debt.

An agreement with GEMS' shareholders ensures that the company will maximise profit distribution by paying at least 80% of its free cash flow as dividends. However, GMR Coal Resources Pte. Ltd, which owns 30% of GEMS, has also appointed key management personnel to the company and has veto power in major corporate transactions.

DERIVATION SUMMARY

The ratings on GEAR are based on the financial metrics of the group, and factor in the group's adequate financial profile, large reserve base of its key assets, the low-cost position of GEMS, and the limited but improving scale of operations.

PT Indika Energy Tbk (BB-/Negative) has more integrated operations across the thermal coal value chain, but GEAR benefits from improving diversification after acquiring Stanmore Coal, although the latter's contribution to cash flow will be minimal in the next two years. The expected ramp-up in thermal coal production of GEAR's key subsidiary - GEMS - should result in its volumes reaching those of Indika in 2021. Indika's larger scale in terms of EBITDA and well-established operations justify the one-notch difference in their IDRs, as GEAR's key assets, GEMS and Stanmore, are still ramping up production. The Negative Outlook on Indika reflects the limited headroom in its rating because of our expectations of weakening financial profile with high leverage.

Compared with PT Bayan Resources Tbk (BB-/Stable), GEAR's business profile benefits from diversification into hard coking coal. While GEMS now has larger scale in terms of volume, Bayan's better profitability from its stronger energy-adjusted cost position supports its stronger operating cash flow, explaining the one-notch differential in their ratings. GEAR and Bayan have strong financial profiles.

KEY ASSUMPTIONS

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

- Index coal prices in line with Fitch's mid-cycle commodity price assumptions, adjusted for the difference in calorific value (thermal coal average Newcastle 6,000 kcal/kg, free on board (FOB): USD72/tonne in 2021, USD66/tonne in 2022 and 2023, and USD63/tonne thereafter) and hard coking coal (Australia premium spot, FOB: USD 135/tonne in 2021 and 2022, and USD 140/tonne thereafter).

- GEMS' total volume of coal sales to be at 34.9mt in 2021; thereafter increasing by 3mt-5mt a year until 2024.

- Capex incurred by GEMS at USD20 million in 2021, USD25 million-27 million a year during 2022-2023 before declining to USD12 million in 2024

- Outflow of USD50 million in 2021 at GEAR for the equity injection to acquire stake in Ravenswood gold mine.

- Metallurgical coal sales volumes of 2.1mt-2.3mt per year in 2021-2024, and EBITDA contribution of around USD16 million-75 million per year from Stanmore Coal in 2021-2024.

- Stanmore Coal capex of USD35 million-45 million a year during 2021 and 2022, declining to USD12 million and USD8 million in 2023 and 2024, respectively.

RATING SENSITIVITIES

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

- GEAR's holding company's standalone EBITDA/interest cover of above 2.5x on a sustained basis (2020: 1.2x)

- Sustainable improvement in the scale of operations for the group;

- Net adjusted debt/EBITDA of less than 2x, based on a proportionate consolidation of GEMS and full consolidation of Stanmore Coal after adjusting for minority interests.

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

- GEAR's holding company's standalone EBITDA/interest cover of below 2.0x;

- Net adjusted debt/EBITDA of more than 3x, based on a proportionate consolidation of GEMS and full consolidation of Stanmore Coal after adjusting for minority interests.

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: GEAR's healthy cash flow generation and well-spread debt maturities underpin the group's adequate liquidity. The group had USD380 million of debt at end-2020 (end-2019: USD320 million), which includes USD110 million of short-term debt, of which USD58 million is a revolving working-capital facility at GEMS. In comparison, it had cash and cash equivalents of USD275 million. The debt increased primarily to fund the investment in Stanmore Coal.

The group's debt, at GEMS and the holding-company level, has a gradual repayment structure except for the bond repayment in 2023. We expect the group to require partial refinancing of the bond, before 2023. We regard the refinancing risk as low, after taking into account GEAR's adequate credit profile and access to banks and capital markets.

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. (ends)

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