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Rating Action:

Moody's assigns first-time Baa2 issuer rating to Inalum

26 Oct 2018

Singapore, October 26, 2018 -- Moody's Investors Service has assigned a Baa2 issuer rating to Indonesia Asahan Aluminium (Persero) (P.T.) (Inalum) and a Baa2 rating to the company's proposed senior unsecured notes.

The outlook on the ratings is stable.

This is the first time that Moody's has assigned ratings to Inalum.

Proceeds from the notes issuance will be used to fund a portion of Inalum's proposed $3.85 billion payment to increase its share ownership of PT Freeport Indonesia (PTFI) to 51.23%, inclusive of the government of Papua's 10% stake, from 9.36%.

RATINGS RATIONALE

Inalum's Baa2 issuer rating reflects the application of Moody's rating methodology for government-related issuers — published in June 2018 — that combines: (1) its ba2 baseline credit assessment (BCA); and (2) a three-notch uplift based on Moody's expectation of a high likelihood of extraordinary support for the company from the government of Indonesia (Baa2 stable) in times of need.

"Inalum's ba2 BCA reflects its diversified mining portfolio across coal, gold, nickel, tin, copper and aluminium, as well as its low cost, globally competitive operations," says Brian Grieser, a Moody's Vice President and Senior Credit Officer.

Inalum is the government-appointed holding company for mining state-owned entities. It is mandated with the responsibility of managing the country's mineral reserves and developing Indonesia's downstream industry.

Inalum owns and manages the Government of Indonesia's 65% stakes in PT Aneka Tambang Tbk (Antam), PT Bukit Asam Tbk and PT Timah Tbk, as well as its current 9.36% interest in PTFI. PTFI controls the rights to mine the Grasberg minerals district.

Inalum is a low cost miner of commodity products benefiting from its captive power sources, competitive pricing arrangements with its mining contractors, integrated commercial relationships with other state-owned enterprises, and its strategically located mineral reserves and downstream facilities.

In line with its mandate to control domestic mineral reserves, Inalum is acquiring the shares in PTFI, who controls over 70% of Indonesian copper reserves, to bring its ownership to 51.23%.

On 28 September 2018, Inalum entered into various agreements with Freeport-McMoRan Inc (Ba2 stable) and companies under Rio Tinto plc (A3 stable) to acquire the shares in PTFI. The acquisition cost of $3.85 billion includes about $800 million that Inalum will lend to the regional government of Papua to fund the latter's co-investment in PTFI.

"Inalum will benefit from the scale of PTFI's operations, who mines the world's second largest copper mine and largest gold mine at Grasberg. However, credit risk will rise due to a considerable increase in financial leverage and complex capital expansion projects at PTFI," adds Grieser, who is also Moody's Lead Analyst for Inalum.

Moody's expects the share acquisition to be debt-funded; increasing Inalum's pro forma leverage to around 4.0x from 1.0x at 30 June 2018.

Closing of the PTFI transaction is subject to certain conditions including 1) Inalum raising funds to finance the acquisition; 2) a new mining license (IUPK) is issued to PTFI; 3) the resolution of certain environmental issues at PTFI; 4) the extension of the export approval for concentrates; and 5) various other conditions.

Inalum's standalone credit profile will be constrained because PTFI is not expected to begin paying material dividends before 2022.

PTFI is undertaking a substantial investment program to transition the Grasberg mining operations from open pit to underground and the construction of a copper smelter by 2023, which will consume substantially all of its cash flows and expected expansion payments from Inalum.

Debt service at Inalum will be dependent on cash dividends received from its 65%-owned subsidiaries, its aluminium operations and cash balances over the next four years. Although the group has sizeable capital spending plans across its businesses — including the complex transition to underground mining at Grasberg — Moody's expects Inalum to prudently manage its cash flow, such that there is sufficient liquidity at the holding company to service its obligations.

Moody's expectation of support for the company from the Indonesian government in times of need reflects Inalum's strategic importance as Indonesia's state-owned national mining holding company and the government's track record of support for Inalum.

The Indonesian government consolidated its mining state-owned enterprises by injecting all its mining assets into Inalum in 2017, in part to support Inalum's acquisition of PTFI. The government also appoints board-level staff at Inalum and plays a key role in Inalum's budget planning, investments and financing decisions.

The outlook on Inalum's ratings is stable, reflecting the stable outlook for Indonesia's sovereign rating, as well as Moody's expectation that Inalum will manage its liquidity profile, such that it can service interest payments as well as cash contributions to PTFI.

A ratings upgrade is unlikely over the next 12-18 months, given Inalum's sizeable debt and capital spending plans, and the sovereign rating level.

Over the longer term, Moody's could consider raising Inalum's BCA if: 1) free cash flow generation at its operating subsidiaries exceed Moody's expectations, leading to higher dividends paid to Inalum, material debt reduction and solid interest coverage; and 2) the company demonstrates sustained improvements in its credit profile and maintains financial discipline as it pursues growth.

However, an improvement in the BCA or upgrade to the sovereign rating will not automatically result in an upgrade of Inalum's ratings.

Inalum's ratings could experience downward pressure if: 1) Moody's downgrades Indonesia's sovereign rating; 2) Inalum's operations experience disruptions, leading to lower production volumes and earnings than Moody's had expected; 3) Industry fundamentals deteriorate, leading to a decline in earnings and cash dividends received from its operating subsidiaries; or 4) Inalum begins paying dividends before the company deleverages materially or engages in large debt-funded acquisitions.

Specific indicators that Moody's would consider in downgrading Inalum's ratings include dividend cash flows received from operating subsidiaries to interest falling below below 1x.

The methodologies used in these ratings were Mining published in September 2018, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Indonesia Asahan Aluminium (Persero) (P.T.) (Inalum) was established in 1976 and is Indonesia's only producer of aluminium ingot.

Inalum is also a miner and processor of coal, gold, tin, nickel, and bauxite, with its operations also including aluminum smelting and production.

In 2017, Inalum was appointed by the Government of Indonesia as the holding company for the state's mining assets, and the government transferred its equity interests in PT Aneka Tambang Tbk (65%), PT Bukit Asam Tbk (65%), PT Timah Tbk (65%) and PT Freeport Indonesia (9.36%) to Inalum.

Inalum is 100% owned by the Government of Indonesia through the ministry of state-owned enterprises.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Brian Grieser
VP - Senior Credit Officer
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

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
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

No Related Data.
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