Standard & Poor's Ratings Services (S&P) today revised its outlook on Indonesia-based thermal coal miner PT Berau Coal Energy (Berau Energy) to positive from stable.
At the same time, we affirmed the BB- corporate credit rating on Berau Energy and the BB- issue rating on the senior secured notes guaranteed by Berau Energy.
Standard & Poor's also assigned its BB- issue rating to a proposed issue of US$500 million senior secured notes by Berau Energy. The proposed notes will mature in 2017.
"Our positive outlook on the corporate credit rating reflects our view that Berau Energy's financial risk profile will continue to improve over the next two years," said Standard & Poor's credit analyst Xavier Jean.
"We expect production growth and steady thermal coal prices to result in stronger cash flows and improving leverage over the period."
Under our base-case scenario, we project Berau Energy's ratio of total debt to EBITDA to improve gradually to about 1.8x in 2013, from about 2.2x in 2012.
"We also expect the company's ratio of total debt to total debt plus equity to decline to about 56% in 2013, from about 61% in 2012."
"In our opinion, Berau Energy's growing production and higher EBITDA should lower the sensitivity of its financial performance to slower production growth or weaker gross profit per ton," Jean said.
The rating on Berau Energy is a combination of what we consider as the company's current and expected "weak" business risk profile and "significant" financial risk profile, as defined in our criteria.
The rating reflects the Indonesian coal producer's mineral, customer and single-mine concentration risks, regulatory uncertainty, and its aggressive capital structure.
Berau Energy's good record of production growth, improving cash flows, and low, albeit increasing, cost production profile partially offset these weaknesses.
The issue rating on the proposed US$500 million notes reflects the 'BB-' long-term corporate credit rating on Berau Energy. The rating on the proposed notes is subject to our review of the final issuance documentation, and confirmation of the amount and terms of the notes.
The notes are secured by first-priority liens on the company's debt and interest reserve accounts and the capital stocks of the subsidiary guarantors, including PT Berau Coal.
Berau Energy expects to use the proceeds from the proposed notes to repay US$340 million of its senior secured credit facility and the remaining US$160 million for general corporate purposes and capital expenditures.
Berau Energy's main operating subsidiary, PT Berau Coal, unconditionally guarantees the proposed notes. The notes will rank pari passu with the US$450 million notes, issued by Berau Capital Resources Pte. Ltd. in 2010 and also unconditionally guaranteed by Berau Energy.
The positive rating outlook reflects our expectation that Berau Energy's production will continue to grow steadily in 2012 and 2013.
It also reflects our projections of gross profit per ton of US$22-US$25 and of improved cash flows and lower leverage over the period. We also do not expect debt to decline materially before the maturity of Berau Energy's US$450 million senior secured notes.
S&P could raise the rating if we expect Berau Energy's production ramp-up in 2012 and 2013 to materialize while gross profit per ton exceeds US$22.
"We believe this will require (1) average selling prices above US$75 per ton; (2) cash costs of about US$50 per ton; and (3) average monthly production volumes exceeding 2.25 million tons over the first half of 2013."
A rating upgrade would also be contingent on the absence of credit-negative operational or financial policy changes from Berau Energy's parent Bumi PLC (not rated), including a more aggressive dividend distribution or related-party transactions that could weaken Berau Energy's financial risk profile or disrupt operations.
A downgrade seems less likely in the coming months given our current operating expectations. However, we could revise the outlook to stable or lower the rating if one of the following occurs:
Berau Energy's trend of stronger cash flows and decreasing leverage is interrupted. This could materialize if production and sales volumes fall short of our current expectations, while lower average selling prices or higher cash costs weaken the ratio of debt to EBITDA to above 2.5x for a sustained period.
Indonesia's mining regulation or accounting changes such that Berau Energy's sales, profitability or cash position is materially affected.
Disclosure: No position at the stock mentioned above.
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