Moody's assigns Baa2 rating to Inalum's proposed notes; outlook negative

(Singapore, May 06, 2020) -- Moody's Investors Service has assigned a Baa2 senior unsecured rating to the proposed senior notes to be issued by Indonesia Asahan Aluminium (Persero) (P.T.) (Inalum, Baa2 negative).

The outlook is negative.

Inalum plans to use the proceeds redeem certain of the company's existing bonds, acquire shares in other mining companies, and refinance outstanding indebtedness of the group.

RATINGS RATIONALE

The Baa2 rating on the proposed notes is in line with Inalum's issuer rating and Moody's rating on the company's existing senior unsecured bonds.

"The proposed bond issuance will fund its planned acquisition of a 20%-25% stake in Vale Indonesia, refinance debt at Inalum and its subsidiaries and lengthen its debt maturity profile," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

Still, Moody's expects Inalum's weaker financial performance amid weak commodity prices, coupled with the proposed debt-funded acquisition of a stake in Vale Indonesia, will drive consolidated debt levels to around $6.5 billion, and gross adjusted leverage to 8.0x in 2020 from 6.2x in 2019.

Moody's expects leverage to remain elevated at 8.0x-8.5x through 2022, until PT Freeport Indonesia (PTFI) starts paying meaningful dividends which will improve the group's consolidated EBITDA. We do not expect any reduction in the group's absolute debt levels through 2022.

Inalum owns 51.2% (beneficial equity limited to 41.2%) of PTFI, which operates the world's second largest copper mine and largest gold mine at Grasberg. The development of the underground mine at Grasberg is progressing as per plan, although Moody's expects PTFI to start contributing material dividends only from 2022-2023.

"Although debt levels will rise at the holding company level, the additional interest expense can be serviced with dividends upstreamed primarily from its 66%-owned coal subsidiary, PT Bukit Asam (Persero) Tbk," adds Dhruv, also Moody's Lead Analyst for Inalum.

Moody's expects Bukit Asam, will account for over 90% of dividends Inalum receives from its subsidiaries. Inalum's other subsidiaries. PT Aneka Tambang (Persero) Tbk (ANTAM) and PT Timah (Persero) Tbk, which are also 65%-owned, are relatively small, financially weaker and unlikely to upstream a meaningful amount of dividends.

Inalum's Baa2 issuer rating reflects the application of Moody's rating methodology for government-related issuers — published in February 2020 — that combines: (1) its ba2 baseline credit assessment (BCA); and (2) a three-notch uplift based on Moody's expectation of a high likelihood of extraordinary support for the company from the government of Indonesia (Baa2 stable) in times of need.

Inalum's ba2 BCA continues to benefit from the company's diversified mining portfolio across coal, gold, nickel, tin, copper and aluminum, as well as its low-cost, globally competitive operations.

Despite additional debt at the holding company, notching for structural subordination is mitigated on the basis of the Government of Indonesia's (Baa2 stable) 100% ownership in Inalum. Moody's expects support from the government, if required, will flow to Inalum directly as opposed to the operating subsidiaries.

Inalum's liquidity is weak, and its cash sources will not be sufficient to meet capex requirements across the group and debt maturities of $1.0 billion at the holding company over the next 12-18 months. Nevertheless, refinancing risk is low given the company's government ownership and access to the bank and bond markets. As such, Moody's expects Inalum to refinance in a timely manner.

Inalum is the government-appointed holding company for mining state-owned entities. It is responsible for managing the country's mineral reserves and developing Indonesia's downstream industry. The government also appoints board-level staff at Inalum and plays a key role in Inalum's budget planning, investments and financing decisions.

ESG CONSIDERATIONS

In terms of environmental, social and governance (ESG) factors, Inalum's ratings reflect elevated environmental risk, as the company's mining and aluminum smelting activities require government approval and licenses. Bukit Asam, the largest contributor of dividends to Inalum, is exposed to carbon transition risks as countries seek to reduce their reliance on coal power.

However, this risk is somewhat mitigated as 60% of its revenue is generated through domestic sales in Indonesia, a region with growing energy needs.

The Inalum group also faces moderate social risks relating to its mining activities, including health and safety risk, and interactions with local communities.

Inalum has low governance risk. The Government of Indonesia -- through the Ministry of State Owned Enterprises -- owns 100% of the company, and also appoints the board of commissioners and directors. Inalum's subsidiaries, Bukit Asam, ANTAM and Timah are listed on the Indonesian Stock Exchange.

RATING OUTLOOK

The negative outlook reflects Inalum's elevated leverage and weak liquidity, which in turn reflect the weaker credit profiles of its operating subsidiaries amid a softer commodity price environment. (ends)