Sept 26 -
-- We expect Berau Energy's profitability to be lower in 2013 than we had earlier anticipated.
-- This, along with lower sales growth, will likely result in weaker cash flows and higher leverage than we had expected over the next 12 months.
-- As a result, we are revising our rating outlook on Berau Energy to negative from positive.
-- We are also affirming our 'BB-' corporate credit rating and issue ratings on the senior secured notes that Berau Energy guarantees.
On Sept. 26, 2012, Standard & Poor's Ratings Services revised its rating outlook on Indonesia-based coal mining company PT Berau Coal Energy Tbk. (Berau Energy) to negative from positive. At the same time, we affirmed our 'BB-' long-term corporate credit rating on the company and our 'BB-' issue ratings on all the company's outstanding senior notes.
We revised the outlook to negative as we believe Berau Energy's financial performance will be weaker over the next 12 months than we previously anticipated. We believe the company's "significant" financial risk profile could weaken to "aggressive," as defined in our criteria, reversing a recent improvement.
We expect Berau Energy's gross profit per ton and sales volume growth to be weaker than we earlier expected for 2013. These factors will likely weaken the company's debt-to-EBITDA ratio to about 4x in 2013, compared with our expectation of less than 2x when we revised the rating outlook on the company to positive in February 2012. We base our financial forecasts on the following assumptions:
-- A gross profit per ton of coal sold, before depreciation and amortization, of about US$15 in 2013. This is weaker than the US$22-US$25 we had previously anticipated. Sales contracts for the majority of 2013 coal production will likely be based on the current subdued prices, while production costs should remain elevated over the period.
-- Sales volumes of about 23 million tons in 2013. These are lower than our original expectation of about 27 million tons because we expect subdued market demand for coal to persist in 2013.
We believe incremental supply from the seaborne thermal coal market in Asia at a time of softer demand growth will likely limit a rapid, substantial, and sustainable price recovery over the next six months at least. Yet, the currently lower price environment--with Newcastle benchmark prices hovering around US$90 per ton--is starting to test the higher-cost producers in Australia and marginal producers in Indonesia. This could provide some support from further material price falls.
Berau Energy's limited short-term refinancing needs mitigate, in our view, the potentially negative effect of an investigation by Berau Energy's majority owner, Bumi PLC (not rated), into unconfirmed, alleged financial irregularities at Berau Energy. The company has about US$37.8 million in accrued interest and about US$1.8 million in short-term debt due as of June 30, 2012.
The affirmed rating on Berau Energy is a combination of the company's current "weak" business risk profile and "significant" financial risk profile. 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 and low, albeit increasing, production costs partially offset these weaknesses.
Berau Energy's liquidity is "adequate," as defined in our criteria. The company's liquidity is sensitive to thermal coal prices and sales volumes. Nevertheless, we believe the company can fund its short-term debt repayment and capital spending with its internal cash flows and cash balance.
We expect Berau Energy's liquidity sources to exceed its liquidity needs by about 1.2x or more over the next 12 months.
Our liquidity assessment incorporates the following factors and assumptions:
-- Liquidity sources over the next 12 months include our expectation of funds from operations of US$100 million-US$120 million. The company had about US$521.6 million in cash and cash equivalents as of June 30, 2012. This cash balance includes funds that it can only use to pay taxes, debt, and interest (the precise numbers are not publicly available).
-- Liquidity needs over the next 12 months include our expectation of capital spending of about US$300 million. They also include about US$37.8 million in accrued interest, about US$1.8 million in short-term debt, and dividend payables of about US$26.8 million as of June 30, 2012. The company also substantially reduced its tax payables to US$37.3 million, from US$129.3 million for the quarter ended March 31, 2012.
The negative outlook reflects our expectation that sluggish coal prices and lower sales volumes will likely weaken the company's cash flows over the next 12 months, interrupting the recent trend of improvement in the financial risk profile.
We could lower the rating if one of the following occurs:
-- Berau Energy's cash flows weaken such that its debt-to-EBITDA ratio increases above 4x for more than 12 months. This could materialize if: (1) production and sales volumes fall below 22 million tons in 2013, while its gross profit per ton of coal sold declines below US$15 over the period; or (2) the company engages in further debt-funding capital spending in excess of our expectations.
-- Credit-negative operational or financial policy changes from Bumi PLC, including a more aggressive dividend distribution or related-party transactions weaken Berau Energy's financial risk profile or disrupt its operations.
-- Indonesia's mining regulations or accounting changes such that Berau Energy's sales, profitability, or cash position is materially affected.
We could revise the outlook to stable if Berau's debt-to-EBITDA ratio stabilizes between 2.5x and 3.5x. We believe this could materialize if the company's gross profit per ton exceeds US$20 with sales volumes exceeding 25 million tons for more than 12 months.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; Outlook Action
PT Berau Coal Energy
Corporate Credit Rating BB-/Negative/-- BB-/Positive/--
PT Berau Coal Energy
Senior Secured BB-
Berau Capital Resources Pte. Ltd.
Senior Secured BB-