Singapore, November 02, 2022 -- Moody's Investors Service has has affirmed the B1 corporate family rating (CFR) of Golden Energy And Resources Ltd (GEAR), and the B1 rating on the $375 million senior secured notes issued by GEAR.
At the same time, Moody's has assigned a B1 rating to the proposed senior secured notes due 2027 to be issued by GEAR as part of an exchange offer for its existing notes. GEAR will not receive any cash proceeds from the new notes.
The outlook remains stable.
"The ratings affirmation reflects our expectation that, while GEAR's potential segregation of its Indonesian thermal coal assets will reduce its scale and business diversity, the company's large cash balance and dividends from its 64%-owned Australian subsidiary Stanmore Resources Limited will ensure that GEAR maintains good liquidity over the next few years," says Maisam Hasnain, a Moody's Vice President and Senior Analyst.
"Stanmore has substantially enlarged its scale following its acquisition of Australian metallurgical coal miner BHP Mitsui Coal Pty (now renamed Stanmore SMC Pty Ltd (SMC)) earlier this year. The acquired mines have a long track record of operations and low-cost structure, backed by a long reserve life," adds Hasnain, also Moody's Lead Analyst for GEAR.
RATINGS RATIONALE
On 1 November 2022, GEAR announced an offer to exchange its existing $375 million notes due 2026 with new notes maturing in 2027, at the same 8.5% coupon as GEAR's existing notes[1].
The exchange offer is to loosen certain bond covenants, including amendments to permit the potential segregation of GEAR's 62.5% stake in its Indonesian thermal coal mining subsidiary, PT Golden Energy Mines Tbk (GEMS). A segregation includes a potential distribution, transfer or divestment of all of GEAR's interest in GEMS.
A potential segregation would first require GEAR to get noteholders to release its GEMS stake as security on the notes. Apart from the removal of the GEMS stake as security, the new notes being offered under the exchange offer will have the same security package as the existing notes, which includes GEAR's 64% shareholding in Stanmore.
The exchange offer is conditional on holders of at least 75% of the outstanding principal (i.e., $281.25 million) of GEAR's existing notes tendering for the new notes. Once the exchange is complete, GEAR intends to redeem any outstanding 2026 notes at a make-whole premium with its internal cash.
GEAR's credit quality following the potential segregation of GEMS will be anchored by the fundamental credit strength of Stanmore. Moody's expects Stanmore to maintain steady annual coal production of 12 – 13 million metric tons, and low leverage of 1.0x – 1.5x over the next 12-18 months. Moody's also expects Stanmore to generate consolidated EBITDA of around $1.0 billion in 2022, declining to around $850 million in 2023 as metallurgical coal prices normalize from their record-high levels earlier this year.
Nonetheless, GEAR's B1 ratings are constrained by (1) its dependence on cash dividends from Stanmore to service its debt; (2) short track record of owning and operating the SMC mines under Stanmore; (3) exposure to cyclical metallurgical coal prices; and (4) uncertainty over future growth and investment plans that could further increase the complexity of the group's structure.
Moody's expects GEAR to maintain good liquidity at the holding company level over the next 18-24 months. A standalone cash balance of $94 million as of 30 June 2022 and Moody's expectation for GEAR to receive $150 – 180 million in dividends from GEMS during the second half of 2022, will be sufficient to meet GEAR's cash needs, which include the redemption of up to $94 million of its residual 2026 notes post the exchange offer.
If a potential segregation of GEMS is implemented, Stanmore and its subsidiaries will account for most of GEAR's earnings and cash flow. However, Stanmore is not a subsidiary guarantor of GEAR's US dollar notes. As a result, noteholders' claims in a distressed situation are subordinate to liabilities at Stanmore and its operating subsidiaries. This subordination risk is reflected in GEAR's B1 CFR.
The outlook is stable, reflecting Moody's expectation that GEAR will maintain good liquidity at the holding company level, supported by steady dividends from Stanmore, and that GEAR will not provide further funding to support any of its subsidiaries or joint venture investments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely over the next 12-18 months given GEAR's increased operational concentration following the potential segregation of GEMS.
Nevertheless, Moody's could upgrade the ratings over time if GEAR (1) substantially increases its scale and business diversity, (2) generates steady dividends from all its investments, (3) is not required to provide additional funding to support these businesses, and (4) maintains debt serviceability at the holding company level such that its interest coverage from dividend receipts exceeds 3.0x — excluding the interest reserve account — on a sustained basis.
Conversely, Moody's could downgrade GEAR's ratings as a result of (1) weakening industry fundamentals or a higher cash usage at Stanmore, which reduces the cash flow available for paying dividends to GEAR; (2) aggressive financial policies, including large debt-funded investments; (3) additional funding support rendered to its subsidiary and joint venture investments; or (4) debt at Stanmore and its subsidiaries does not decline.
Specific indicators that Moody's would consider for a downgrade include interest coverage at GEAR on a standalone basis falling below 1.5x or consolidated adjusted debt/EBITDA rising above 3.0x.
The principal methodology used in these ratings was Mining published in October 2021 and available at https://ratings.moodys.com/api/rmc-documents/76085. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Listed on the Singapore Stock Exchange, Golden Energy And Resources Ltd (GEAR) is an energy and resources company with investments in coal and gold. Following the potential segregation of PT Golden Energy Mines Tbk, an Indonesian thermal coal producer, GEAR's primary investments are a 64% effective stake in Australian metallurgical coal producer Stanmore Resources Limited, and a 50% joint venture stake in Australian gold producer Ravenswood Gold Mine.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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REFERENCES/CITATIONS
[1] SGX filing 01-Nov-2022
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Maisam Hasnain, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Vikas Halan
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
