Singapore, November 11, 2021 -- Moody's Investors Service has affirmed Golden Energy And Resources
Ltd's (GEAR) B1 corporate family rating (CFR) and the B1 rating
on its senior secured bond.
The outlook remains stable.
"The ratings affirmation reflects our expectation that GEAR will have
sufficient funds to finance its commitment of up to $300 million
in the planned entitlement offer of ordinary shares by its subsidiary,
Stanmore Resources Limited, to help fund Stanmore's planned
Australian coal mines acquisition," says Maisam Hasnain,
a Moody's Vice President and Senior Analyst.
"Furthermore, additional funding support to Stanmore for the
acquisition is not expected," adds Hasnain, also Moody's
lead analyst for GEAR, adding "If that situation materializes,
GEAR's liquidity would weaken considerably and pressure its B1 ratings
and stable outlook."
RATINGS RATIONALE
On 8 November, GEAR's subsidiary Stanmore signed a definitive
share purchase agreement with BHP Minerals Pty Ltd (BHP) to acquire BHP's
80% effective interest in BHP Mitsui Coal Pty Ltd (BMC),
a metallurgical coal mine operator in Queensland, Australia.
The transaction will close by mid-2022, subject to regulatory
and shareholder approvals.
Stanmore intends to fund $600 million of the $1.35
billion purchase price with an entitlement offer of ordinary shares.
Stanmore will fund the remaining amount via a committed $625 million
acquisition debt facility and Stanmore's internal cash. Stanmore
has obtained executed binding commitment letters with credit funds for
the acquisition debt facility, which will be non-recourse
to Stanmore and GEAR.
GEAR's holding company cash balance of around $100 million
as of 30 June 2021 and its projected dividends from its 62.5%-owned
Indonesian coal mining subsidiary, PT Golden Energy Mines Tbk (GEMS),
will be sufficient to meet its $300 million commitment in Stanmore's
entitlement offer.
While GEAR has guaranteed up to $600 million (inclusive of its
$300 million commitment under Stanmore's shares entitlement)
on behalf of Stanmore for the acquisition, additional funding requirements
for GEAR are mitigated by the presence of an underwriting commitment of
up to $300 million from Indonesian Stock Exchange-listed
financial services firm, PT. Sinar Mas Multiartha Tbk (SMMA).
SMMA is an associate of GEAR's controlling shareholders.
The proposed acquisition of BMC will increase GEAR's scale and business
diversification. The acquired mines have a long track record of
operations and low-cost structure, backed by a long reserve
life.
However, dividends from BMC remain susceptible to metallurgical
coal price volatility, and will likely be constrained by debt service
requirements under the acquisition debt facility. BMC will represent
GEAR's largest acquisition to date and will result in a sizeable
increase in GEAR's consolidated debt. While Moody's
expects BMC, along with GEAR's other investments to be self-financing
on an ongoing basis, funding support from GEAR to its subsidiaries
will pressure GEAR's B1 ratings and stable outlook.
The transaction also exposes the company to execution risks, although
these may be tempered by a transitional service agreement that is being
negotiated with BHP to ensure operations at BMC are not disrupted by the
change in ownership.
GEAR's B1 ratings remain supported by its majority ownership of
GEMS, a low-cost coal producer with growing production volumes
and steady dividends that help service GEAR's holding company debt.
However, GEAR's ratings will be constrained over the next 12-18
months given its limited track record of steady dividends from its non-GEMS
investments; its exposure to the cyclical thermal and metallurgical
coal sector; and rising governance risks associated with its increasingly
complex group structure.
While GEMS, Stanmore and their respective subsidiaries will account
for most of GEAR's earnings and cash flow, these entities are not
subsidiary guarantors of GEAR's US dollar notes.
As a result, noteholders' claims in a distressed situation are subordinate
to liabilities at GEMS, Stanmore and their operating subsidiaries.
This subordination risk is reflected in GEAR's B1 CFR.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
GEAR's ESG Credit Impact Score is Highly Negative (CIS-4),
reflecting the company's very high exposure to environmental risks
and high exposure to social risks stemming from its Indonesian thermal
coal mining operations, and governance risks stemming from its growth
strategy.
The company's exposure to environmental risk is Very Highly Negative (E-5
Issuer Profile Score), driven by very high carbon transition risks
for thermal coal, GEAR's key earnings driver. Nonetheless,
this risk could decline over the next 2-3 years if GEAR materially
increases earnings and cash flow generation from its investments in Australian
metallurgical coal and gold.
GEAR's exposure to social risk is Highly Negative (S-4 Issuer
Profile Score), driven primarily by coal mining's high exposure
to human capital, health and safety, responsible production
and demographic and societal trends. GEAR has implemented a number
of initiatives to address these risks, including occupational health
and safety standards and local community assistance.
GEAR's exposure to governance risk is Highly Negative (G-4
Issuer Profile Score), reflecting the challenges associated with
the company's growth and diversification strategy, and its
increasingly complex group structure with large cash leakages to minority
shareholders.
OUTLOOK
The stable outlook reflects Moody's expectation that GEAR will not
be required to provide additional funding to support Stanmore's
planned BMC mines acquisition, and that operational and executional
risks associated with the planned acquisition will not weaken GEAR's
debt serviceability at the holding company. The stable outlook
also reflects Moody's expectation that GEAR will adhere to conservative
policies with respect to its growth and diversification plans over the
next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely over the next 12 months, given the large
spending requirements and execution risk associated with GEAR's growth
plans, GEAR's cash flow concentration and its complex group structure.
Nevertheless, Moody's could upgrade the rating over time if
GEAR (1) continues to increase its scale, (2) generates steady dividends
from all of its investments, (3) is not required to provide additional
funding to support these businesses, and (4) maintains the debt
servicing ability of the holding company, 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 rating if (1) the
company's liquidity weakens as a result of additional funding support
to its joint venture investments or subsidiaries, in particular
to Stanmore for its planned acquisition of BMC; (2) GEAR is unable
to execute its growth and diversification plans; (3) it adopts aggressive
financial policies, including continued debt-funded investments;
or (4) industry fundamentals weaken or cash usage at GEMS rises,
including higher-than-expected capital spending that reduces
the cash flow available for paying dividends to GEAR.
Credit metrics indicative of a downgrade include GEAR's interest coverage
on a standalone basis falling below 1.5x or consolidated adjusted
debt/EBITDA remaining above 3.0x.
The principal methodology used in these ratings was Mining published in
October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1292752.
Alternatively, please see the Rating Methodologies page on www.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.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Maisam Hasnain, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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