Oct 2, 2011

Fitch affirms Adaro ratings at BB+

Fitch Ratings has affirmed PT Adaro Indonesia's (Adaro) long-term foreign and local currency issuer default ratings (IDR) at BB+. The outlook is stable. 
Fitch has also affirmed Adaro's US$800 million senior unsecured notes due in 2019, guaranteed by its parent, PT Adaro Energy Tbk (ADRO) at senior unsecured BB+. 
The ratings of Adaro are based on the credit profile of Adaro Energy given the strong rating linkages as per Fitch's parent-subsidiary linkage methodology. 
Adaro is wholly-owned by Adaro Energy and its operating and financial policies are tightly controlled by the parent and its shareholders. 
There is a high level of operational integration between the two companies while there is limited ring-fencing of Adaro's cash flows. 
Adaro is the primary source of cash generation for Adaro Energy; accounting for 80% of Adaro Energy's consolidated EBITDA generation of about US$900 million in 12m to Dec 2010 (FY10). 
Moreover, Adaro Energy continues to raise debt at Adaro to fund its investments outside of Adaro's operations. The ratings reflect Adaro's position as one of the world's lowest-cost producers of thermal coal, a track record of strong and profitable production growth, established relationships with creditworthy customers, solid liquidity and the robust credit metrics of both Adaro Energy and Adaro. 
The ratings also take into consideration the possible weakening of credit metrics relative to H1 2011 due to Adaro Energy's partly debt-funded resource acquisition and development activity in the short- to medium-term. 
Fitch believes that Adaro Energy has entered a phase of rapid expansion of its coal resources and development as evidenced by its acquisitions and investments in new coal resources in 2010 and to-date in 2011. 
Increasing diversity of mining locations will help reduce Adaro Energy's reliance on a single mining concession in South Kalimantan in Indonesia. 
Development of greenfield assets are subject to numerous risks. However, these are mitigated, to a certain extent, by Adaro's experience and expertise in developing and operating coal mines and related infrastructure. 
Adaro is exposed to volatile coal prices. Fitch expects demand for Indonesian thermal coal to remain robust given increasing demand from Indonesia and rapidly developing markets like China and India.  Adaro's low cash cost of production (US$44/metric ton in H1 2011) and resultant robust cash margins (US$/23 metric ton) provide the company substantial financial flexibility if coal prices decline. 
Evolving mining regulations in Indonesia remain a risk although Fitch notes that Adaro has not been affected by regulatory changes to date. 
Both Adaro and Adaro Energy continue to maintain strong credit metrics. As at end-June 2011, Adaro Energy's funds from operations (FFO)-adjusted gross leverage was 1.6x and FFO interest coverage 8.7x (1.4x and 8.7x for Adaro). 
Liquidity is underscored by cash reserves of US$607 million and undrawn committed credit facilities of US$1.26 billion as at H1 2011. Adaro has demonstrated strong access to both bank and capital markets. 
Negative rating action may result if Adaro Energy's FFO gross leverage is sustained above 2.75x or its FFO interest coverage falls below 5x for two consecutive years. 
Other negative rating guidelines are material deviation from its policy of maintaining strong liquidity; adverse regulatory developments that will significantly impair Adaro Energy's financial profile; further substantial investments that weaken Adaro's financial or operating risk profile and a sustained weakening of coal prices. 
A positive rating action may be taken if Adaro Energy successfully increases production from its currently operational and newly acquired greenfield assets, and significantly increases its scale and diversification in terms of production sites, while maintaining FFO gross leverage below 2.0x.  

Disclosure: No position at the stock mentioned above.

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