Inalum's smelting plant - Photo by Industry Ministry

JAKARTA (TheInsiderStories) – State-owned mining holding PT Indonesia Asahan Aluminium (Inalum) has sold multi-tranche Senior Unsecured Notes US$4 billion on Thursday (08/11), said sources closed to the deal. The proceeds will use to finance the short term loans from Bank of Tokyo Mitsubishi.

The management of the company deny to comment and give explanation on the deal.

This Global Bond received a Baa2 rating from Moody’s and BBB- from Fitch Ratings. Demand for the notes quite higher oversubscribed by 4 times.

The notes have four tranche from three to 30 years, in different values ​​and interest. In details $1 billion of 2021 with 5.5 percent yield, $1.25 billion of 2023 with 6 percent yield, $1 billion of 2028 with 6.875 percent yield, and $750 million of 2048 with yield of 7.375 percent.

BNP Paribas, CIti and MUFG mandated as the Joint Global Coordinators while Joint Book-runners are BNP Paribas, CIMB, Citi, Maybank, MUFG, SMCB Nikko and Standard Chartered.

On Sept. 7, 2018, Inalum has secured $3.8 billion short-term loan facility from a syndicate banks led by Bank of Tokyo Mitshubisi to payPT Freeport Indonesia (PTFI) divestment shares.

To pay this debt, the miner has announced to issue global bond in in the Singapore Stock Exchange, said the chief executive Budi Gunadi Sadikin on Sept. 6. At that time, he explained, the step was taken in order to relieve the company cash flow.

Meanwhile, the Energy and Mineral Resource (EMR) Minister Ignasius Jonan ensured that PTFI divestment transaction will be carried out end of 2018. He is optimistic the negotiation can be finalized as soon as possible considering the measures taken by Inalum.

On Oct. 26, Moody’s Investors Service has assigned a Baa2 issuer 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 PTFI to 51.23%, inclusive of the government of Papua’s 10 percent stake, from 9.36 percent.

“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.

Last month, the Organization for Economic Cooperation and Development has warned Indonesian government on state-owned enterprises (SOEs) which are involved in the government infrastructure and energy businesses could expose cash flow constraint and causing higher fiscal risks for the government,

Its also said, the government policies to keep fuel and electricity prices unchanged despite higher global oil prices have also has a possibility hurting their balance sheets.

According to the government’s data, about 20 listed SOEs have seen their leverages gone up significantly with debt-to-EBITDA level soared to about five times from one times in 2011.

As the central government has limited funds at its disposal, SOEs as key agents of the infrastructure development has duty to fulfill the financing. However, this raised problems cause these SOEs have to borrow heavily to secure working capital budgets for some large projects.

Unfortunately, the projects are often delayed and take many years before starting to generate revenue. Even worse, some projects outside the island of Java may not be profitable at all.

If this trend continues, then the SOEs could be forced to cease all investment within the next five years to control their finances, renegotiate debt or ask for recapitalization from the government. In total, there are 26 SOEs recorded US$363.5 million loss last year. That was lower than $421 million in 2016.

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.

The miner owns and manages the Government of Indonesia’s 65 percent stakes in PT Aneka Tambang Tbk (IDX: ANTAM), PT Bukit Asam Tbk (IDX: PTBA) and PT Timah Tbk (IDX: TINS), as well as its current 9.36 percent 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 percent of Indonesian copper reserves, to bring its ownership to 51.23 percent.

On Sept. 28, Inalum entered into various agreements with Freeport-McMoRan Gold & Copper 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. The company’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 percent-owned subsidiaries, its aluminium operations and cash balances over the next four years.

Although the group has size-able 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.

The agency’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.

Inalum was established in 1976 and is Indonesia’s only producer of aluminium ingots. Its also a miner and processor of coal, gold, tin, nickel, and bauxite, with its operations also including aluminum smelting and production.

Email: linda.silaen@theinsiderstories.com

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The Insider Stories Founder Linda Silaen has a solid, proven history, established over more than a decade as a journalist with a leading internasional news organization, of being the first with the biggest economic news stories in Indonesia. Specializing in corporate news, Linda is also a veteran of some of the biggest macroeconomic and general news stories as Indonesia rapidly transforms into a major market economy. One of the founders of the original blog from which this company developed, Linda’s knowledge of investors’ information communications and data us developed from unrivaled networking skills that make her a well-known name among CEOs, bankers, government officials and private equity investors both in Indonesia and other countries.

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