Singapore, September 29, 2021 -- Moody's Investors Service has upgraded Bayan Resources Tbk (P.T.)'s
corporate family rating (CFR) to Ba2 from Ba3. Moody's has
also upgraded Bayan's senior unsecured notes rating to Ba2 from
Ba3.
At the same time, Moody's has revised the outlook to stable from
positive.
"The upgrade to Ba2 reflects our expectation that Bayan will maintain
very strong credit metrics over the next 12-18 months, with
very good liquidity and effectively no debt following the early repayment
of its outstanding US dollar notes with cash next month,"
says Maisam Hasnain, a Moody's Vice President and Senior Analyst.
RATINGS RATIONALE
"Bayan's Ba2 ratings are supported by its rising thermal coal volumes
following higher production at its Tabang mines in recent years;
the long reserve life of its mines; the company's solid profitability;
and minimal reliance on incremental debt," adds Hasnain,
also Moody's Lead Analyst for Bayan.
Amid stronger operating cash flows due to high coal prices, Bayan
has continued to proactively repay debt ahead of scheduled maturity.
On 20 September 2021, the company announced that it would redeem
the $149 million remaining of its US dollar notes in October 2021,
well ahead of its scheduled maturity of January 2023. Bayan had
redeemed $251 million of its outstanding notes with cash in May
2021.
Following Bayan's notes repayment, Moody's expects the
company to operate with a net cash position and minimal reliance on incremental
debt funding over the next few years. The company plans to fund
the expansion of its production capacity and infrastructure with internal
cash flow.
Bayan's construction of a 100-kilometer haul road connecting its
Tabang mines to the Mahakam River along with a new barge loading facility,
scheduled for completion in 2022, will help increase Tabang's production
capacity to around 60 million tons in the next 3-4 years from around
32 million tons currently, and reduce the risk of weather-related
operational disruptions. Mahakam is a larger river that is less
exposed to water-level fluctuations than Bayan's current principal
waterways to transport coal.
While Bayan's credit profile is constrained by its single-commodity
exposure to thermal coal in Indonesia, its low-cost mining
operations provide a considerable buffer against coal price downturns.
This, in part, reflects the company's Tabang mines,
which contribute around 85% of its coal production, and are
among the lowest-cost energy-adjusted global coal mines
with a very low stripping ratio of around 2.5x.
Despite meeting all its domestic contractual sales obligations,
Bayan has only sold 10%-20% of its coal volume domestically
in recent years, below the 25% level mandated under Indonesia's
Domestic Market Obligation (DMO) regulation for coal miners. The
company will seek to address its domestic sales volume shortfall of around
3.8 million tons this year by paying a penalty of $1 to
$1.5 per ton of coal, based on penalty rates communicated
by Indonesia's mining ministry in 2020. An unforeseen large increase
in penalties from the mining mininstry that substantially weaken Bayan's
liquidity could pressure its Ba2 ratings.
Moody's expects Bayan's liquidity to remain very good over the next 12-18
months, with cash on hand and projected operating cash flow sufficient
to fund its proposed capital spending, debt repayments and dividends.
As of 31 July 2021, Moody's estimates that the company also had
around $274 million undrawn under multi-year committed working
capital facilities with four banks.
The ability to draw down on these working capital facilities provides
Bayan flexibility in the event of unforeseen cash needs, such as
an adverse court ruling regarding its ongoing litigation with a former
joint venture partner, which had claimed $153 million plus
interest and costs. That said, Bayan has yet to record any
provisions against this case. According to the company, a
final ruling on this case is likely in 2022 or 2023.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Bayan's ESG Credit Impact Score is highly negative (CIS-4),
reflecting its very high exposure to environmental risks and high exposure
to social risks stemming from thermal coal mining. Bayan's
low-cost mining operations, and adherence to operating within
publicly articulated financial policies, including low leverage
levels, help offset some of its ESG risks.
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, and very high physical climate risks associated
with periodic low water levels at the rivers Bayan relies on to barge
coal from its key Tabang mines to its customers. Physical climate
risk will decline by 2022 once Bayan completes its haul road to the Mahakam
River, a larger river that is less exposed to water-level
fluctuations.
Bayan'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. Bayan engages in several social
initiatives including community development projects, such as,
education funding, infrastructure development and economic support
for the locals.
Bayan's exposure to governance risk is moderately negative (G-3
issuer profile score). The score reflects Bayan's concentrated
ownership and uncertainty around its key shareholder's (Dato'
Low who owns around 55% of Bayan) long term ownership plans.
The presence of Korean state-owned electric utility KEPCO,
which owns 20% stake through its subsidiaries, helps partially
temper ownership concentration risks. Also, since its debt
restructuring in 2015, Bayan has consistently prepaid debt and operated
with very low leverage.
OUTLOOK
The stable outlook reflects Moody's expectation that Bayan will generate
strong earnings and cash flow, with a minimal reliance on incremental
debt while maintaining very good liquidity over the next 12-18
months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the rating is unlikely over the next 12-18 months,
given Bayan's current scale and lack of diversification.
Nonetheless, upward rating pressure could arise over time if Bayan
increases production significantly or improves its geographic and product
diversification while maintaining a strong credit profile.
Moody's could downgrade the rating if (1) Bayan experiences a material
disruption in its operations; (2) industry fundamentals deteriorate,
leading to a decline in earnings; or (3) the company's underlying
financial or operational strategy changes materially, including
higher-than-expected capital spending, material debt-funded
acquisitions or aggressive shareholder returns.
Specific financial indicators for a downgrade include adjusted debt/EBITDA
approaching 3.0x or adjusted EBIT/interest expense trending down
to 3.0x.
The principal methodology used in these ratings was Mining published in
September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Bayan listed on the Indonesian Stock Exchange in 2008 and is engaged in
surface open-cut mining of coal mines primarily in East and South
Kalimantan.
Bayan's founder, Dato' Low Tuck Kwong, is the largest shareholder
with a 55% stake. Korea Electric Power Corporation owns
20% through its subsidiaries, PT Sumber Suradaya Prima owns
10%, Bayan's management and founders hold an 11.8%
stake, and the balance is publicly owned.
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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