JCR Assigned BBB- Rating on PT Adaro Indonesia
Japan Credit Rating Agency, Ltd. (JCR) announces the following credit rating.
Rationale
(1) The rating primarily reflects PT Adaro Indonesia (AI)’s and PT Adaro Energy Tbk (the group)’s prominent position in Indonesia and south-east Asia, strong earnings record with efficient management and modest financial leverage. On the other hand, the rating is constrained by the weak coal prices and moderately increasing stripping ratio at AI. The rating outlook is stable. While the company’s profitability slightly declined after the coal price fell, it still remains high among peers in Indonesia. An increase in cost is inevitable when stripping ratio rises. But the company is expected to keep the current level of margin and earnings using its capacity to expand production and sales volume efficiently.
(2) The group is a publicly listed, the second largest mining company in Indonesia. The company forms a vertically integrated group from mine pit to port, holding subsidiaries and affiliates engaged in mining, barging, ship loading, dredging, port services and marketing. It has recently undertaken power generation projects as well as, building coal fired power plants of its own and JV, making the group cover pit to power now. The group owns the largest producing coal concession in Southern hemisphere, which produces around 50 million tons a year from its South Kalimantan mine’s three pits. The group has good record of continuous growth and efficient operation in South Kalimantan. In recent three years, the group has acquired stakes in five more coal properties in Sumatra and Kalimantan (Central and East), which are currently under development for mining. As of today, the group controls (including option) on 12 billion tons of thermal coal resources as measured by JORC-compliant studies. Of these resources, 1.1 billion tons of coal are JORC-compliant proven reserves.
(3) AI is one of the largest operating companies in the group. It is the direct owner of coal concessions in South Kalimantan (3 pits; Tutupan, Paringin and Wara), producing around 50 million tons a year. It has 4,722 million tons resources that included 921 million tons reserves as of December 2012. AI has the license of first generation Coal Cooperation Agreement valid until 2022 with 2 times of 10 years extension options. It is a largest single location coal producer in Southern hemisphere and one of the top 5 coal exporters in the world (the largest domestic coal supplier in Indonesia, too). AI is 100％ owned subsidiary of Adaro Energy. The mine produces one of the world’s cleanest coals, trademarked “Envirocoal”. It is a sub-bituminous, moderate calorific value coal, ultra-low sulfur, ash and NOx emissions. The company exports about 75％ of its coal to the world. All remaining is shipped to domestic customers. Overseas customers are primarily power generation providers, predominantly in Asia. It has diversified clienteles across Asia, Europe and America, where no single customer has more than 15％ share by volume or revenue.
(4) The group has a good earning record throughout the recent commodity market cycles. It has been keeping gross profit margin above 20% and has good headroom in regards of the break-even point. This is buttressed by group’s integrated business model and the largest single concession in Southern hemisphere. The management and senior employees are comprised of well-experienced and knowledgeable persons in each field. The group showed very good record of production expansion, controlling costs and LTIFR in its South Kalimantan operation.
(5) The Group’s debt to equity ratio is moderate 0.6 as of the end of June 2013. Its fixed asset to Group equity is 1.76 on the same date. The group has substantial amount of both equity (USD3 billion) and goodwill (USD1 billion). Although there is little possibility of impairment in view of its earnings and cash flow generating power, JCR evaluates quality of equity considering goodwill and other intangible assets. DER of the group is 0.6 and 0.9 (on goodwill deducted base) respectively. While the financial debt is denominated by USD, 80% of the group’s revenue consists of exports based on the transactions by USD. This does not mean that the group is immune to foreign currency fluctuations. However, the structure works as natural hedge and resilience.
(6) Five coal properties recently acquired in Sumatra and Kalimantan are currently under development for mining. Due to the weak coal market, it may take several more years to start productions on commercial basis. In the short run, these investments produce little cash flow. Hence, it might take
some time to see the recovery of ROA and turnover ratio of the group. However, in the long run, the demand for thermal coals is expected to grow gradually, which gives natural earning opportunities to the top coal miners in Indonesia. The group is in a position to capture those opportunities as one of them.
(7) In general, mining business can be highly affected by government policies through increased regulation, stringent licensing requirement, taxes, royalties and so on around the world. Thus, the government policy and the relations between the company and the government must be paid attention sometimes on a case by case basis. Indonesian government has been considering ore export ban and imposing a tax on coal exports for years. It is reported that the ban went into effect on January 12, 2014, while the government also agreed to ease ore export ban. Due to remaining uncertainty of the government policy and its enforcement, JCR thinks it should keep an eye on developments of the situation. At this moment, JCR thinks coal export is unlikely to be a target of ore export ban because Indonesian coal export significantly contributes to acquire foreign currency. Another reason is that coal can be hardly processed on commercial basis, not like nickel or bauxite. In regard to restriction on export volume, it will not be a constraint if a miner has allowance of DMO (domestic market obligations). AI operates under a 1st Generation CCoW (coal contracts of work) which has a lex specialis status against prevailing law. Thus, AI is indemnified by the GOI from any new taxes or levies.
Yoshihiko Tamura, Chief Analyst
Honda Fumihiro, Chief Analyst
Hiroshi Tonegawa, Analyst
Rating
Issuer: PT Adaro Indonesia
<Assignment>
FC (Foreign Currency Long-Term Issuer Rating) Rating: BBB- Outlook: Stable
Rating Assignment Date: January 14, 2014