R&I Affirms BBB-, Stable: PT. Smelting

(14 April 2021)--PT. Smelting (PTS) is a copper smelter and refinery company in Indonesia. It is a 60.5% owned consolidated subsidiary of Mitsubishi Materials Corp. (Issuer Rating: A-). Other shareholders are PT Freeport Indonesia (25%, PTFI), Mitsubishi Corp. RtM Japan Ltd. (9.5%) and JX Nippon Mining & Metals Corp. (5%). A 75% stake in the company is thus held by Japanese shareholders. PTS and its shareholders have signed various support contracts to allow the company to conduct business operations and financial activities smoothly. Such support is anticipated above all from Mitsubishi Materials, which effectively takes control of PTS, and will underpin the creditworthiness of PTS.

PTS has a capacity to produce 300,000 tons of copper cathode per year. Its copper cathode is mainly sold in Indonesia or exported to Southeast Asia, with sales support provided by Japanese shareholders.

The company can stably sell by-products from the production process in Indonesia, as evidenced by the fact that it supplies sulfuric acid and copper slag to an adjacent fertilizer plant and cement plant, respectively. Most of the necessary copper concentrates are supplied by PTFI. Though the economy of scale is limited, PTS's production structure allows it to achieve certain levels of profits and cash flow if its smelter and refinery operate stably.

Pursuant to the new mining law, which obliges mining companies to add high value to Indonesia's raw minerals before exporting, PTFI is required to build a new copper smelter by the end of 2023. After the completion of the construction, PTS will no longer be the only copper smelter in Indonesia. In R&I's view, it is unlikely that these moves will lead to a drastic review of transaction terms between PTS and PTFI and cause other changes, but careful attention should be paid to future developments. In addition, PTS is exposed to risks inherent to business activities in Indonesia, including the foreign currency restrictions which require settlement in rupiah for domestic trades, as well as tax and labor-related issues. R&I's evaluation factors in the possibility that such risks may affect its stable business activities and financial position.

The primary rating methodologies applied to this rating are provided at "R&I's Basic Methodology for Corporate Credit Ratings" and "R&I's Analytical Approach to Parent and Subsidiary Companies". The methodologies are available at the web site listed below, together with other rating methodologies that are taken into consideration when assigning the rating. (ends)