Photo by Delta DuniaMoody's Investors Service says that the twin challenges of low coal prices and a size-able bond maturity continue to challenge Indonesian mining-services contractor, PT Bukit Makmur Mandiri Utama - Photo by the Company

JAKARTA (TheInsiderStories) – Indonesian coal-mining contractor provider PT Bukit Makmur Mandiri Utama Tbk (BUMA) entered an approximately Rp7 trillion ($500 million) contract with PT Tanah Bumbu Resources (TBR), a subsidiary of coal-mining group Geo Energy Resources Limited.

Moody’s Investors Service set Ba3 stable rating for BUMA and B2 stable for Geo Energy based on this transaction. According to the rating agency, the transaction is credit positive for BUMA because it increases the company’s scale, provides cash flow visibility owing to the contract’s long-term nature, and reduces customer concentration.

Furthermore for Geo Energy, the mining contract will improve production and sales volumes, and diversify revenue away from its only producing mine at subsidiary PT Sungai Danau Jaya (SDJ).

Maisam Hasnain, Analyst, Corporate Finance Group of Moody’s said: “We estimate the life of TBR’s mine at around seven years, which translates into BUMA receiving around $71 million of incremental revenue each year, a 9% increase from its total revenue of around $750 million for the 12 months that ended 30 September 2017.”

He added, BUMA is also the contract miner for SDJ’s mine, which is adjacent to the TBR mine. Therefore, BUMA can leverage mining equipment used at SDJ’s mine for its mining activity at TBR, reducing the need to purchase additional equipment and saving on its capital spending requirements.

The TBR contract will help reduce BUMA’s customer concentration risk because the pro forma revenue contribution from its largest customer, PT Berau Coal, will decline to 53% from 59% for the 12 months that ended 30 September 2017, as shown in the exhibit.

Berau Coal is 90%-owned by PT Berau Coal Energy Tbk (IDX: BRAU), which is currently restructuring its debt. BUMA and Geo Energy said mining activity will start this month.

Geo Energy completed the acquisition of TBR in June 2017 and estimated that TBR had proved and probable coal reserves of 47 million tons, with a minimum average calorific value of not less than 4,200 kilo calories per kilogram.

Although commercial production of coal at TBR was delayed for two quarters, Geo Energy’s credit profile was not materially affected because of the company’s strong liquidity and moderate leverage as measured by Moody’s-adjusted debt to EBITDA of around 3.5x as of December 2017.

Over the next 12-18 months, after production at TBR ramps up, we expect Geo Energy to expand its production volume to 11-12 million tons from 7.7 million tons in 2017, and its consolidated revenue to rise to $400-$450 million from $316.3 million in 2017.

Based on the company’s estimates, TBR will contribute about half of targeted production in 2019-20, and account for 40%-45% of Geo Energy’s consolidated revenue over the next two years.

The combined mining plan for SDJ and TBR also allows the company to benefit from cost savings from overburden dumping, which refers to the soil above the minerals being mined. Under the company’s plan, the overburden from the TBR mine will be dumped into the SDJ mine. Geo Energy also is in the process of finalizing the coal off-take contract for TBR.

Currently, Geo Energy faces customer concentration risks with Engelhart CTP Singapore, a coal trading company with international operations, being the sole offtaker for all the production from the SDJ mine. The company aims to diversify its off-takers for output from the TBR mine to reduce customer concentration risk.

Last year, Geo Energy has issue senior notes $300 million with coupon rate 8.0%. Following the bond issue, Geo Energy has a strong liquidity position with cash holdings of over $100 million on an ongoing basis.

With total proved and probable reserves of 90 million MT, Geo Energy has a relatively short reserve life of about 6 years at production levels of 15 million MT per annum. As such, the company will need to keep reinvesting in the business and make acquisitions in order to grow and replenish its mining reserves.

“Geo Energy’s improving financial and cash flow metrics should allow the company flexibility to make acquisitions as well as reasonable shareholder payments,” Moody’s said.

Geo Energy Resources Limited is a coal mining group, established since 2008, with offices in Singapore and Indonesia. The company owns mining concessions in South and East Kalimantan.

Geo Energy has been listed on Singapore Stock Exchange’s main board since 2012. As of 30 June 2017, its promoter shareholders, including Charles Antonny Melati and Dhamma Surya own 47.9% of the company, while the public owns 37.6%.

Established in 1998, and acquired by PT Delta Dunia Tbk (IDX: DOID) in 2009, BUMA is the second largest coal mining services provider in Indonesia. With close to 20% market share, BUMA currently provides service to 6 coal customers on 8 different project sites.

Some of the largest coal producers in Indonesia, such as Berau Coal, PT Adaro Energy Tbk, and PT Kideco Agung, are among BUMA’s customers, with whom BUMA has enjoyed entrenched partnerships over the span of 12-18 years.

In 2016, BUMA recorded 299.8 million of overburden removal and 35.1 MT of coal, resulting in $611 million of revenues, $217 million of EBITDA, and 37.1% of EBITDA margin.

Email: linda.silaen@theinsiderstories