Moody's Investors Service has affirmed PT Indonesia Asahan Aluminium (Inalum or MIND ID)' Baa2 issuer rating and the Baa2 ratings on the miner' senior unsecured notes - Photo by the Company

JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed PT Indonesia Asahan Aluminium (Inalum or MIND ID)’ Baa2 issuer rating and the Baa2 ratings on the miner’ senior unsecured notes. At the same time, the agency has changed the ratings outlook to negative from stable.

“The negative outlook reflects the weaker than expected operating performance of some of Inalum’ subsidiaries, mainly on account of margin contraction amid softer commodity prices, and slower than expected capacity and downstream expansion,” says Nidhi Dhruv, a Moody’s senior analyst on Monday (04/13).

Its expects MIND ID’ weaker financial performance, coupled with the proposed debt-funded acquisition of a 20 – 25 percent stake in PT Vale Indonesia Tbk (IDX: INCO), will drive debt levels to around US$6.5 billion, and gross adjusted leverage to 8.0x-8.5x in 2020 from 6.2x in 2019.

However, the interest on the additional debt can be serviced out of dividends upstreamed from its 65 percent-owned coal subsidiary, PT Bukit Asam Tbk (IDX: PTBA), which Moody’s expects will account for over 90 percent of dividends at the company level. Inalum’ other subsidiaries, both also 65 percent-owned, PT Aneka Tambang Tbk (IDX: ANTM) and PT Timah Tbk (IDX: TINS), are relatively small and financially weaker.

“Inalum’ Ba2 continues to benefit from the company’ diversified mining portfolio across coal, gold, nickel, tin, copper and aluminium, as well as its low cost, globally competitive operations,” adds by Dhruv.

MIND ID‘ rating also incorporates its 51.2 percent ownership (beneficial equity limited to 41.2 percent) of PT Freeport Indonesia (PTFI), which operates the world’ second largest copper mine and largest gold mine at Grasberg, West Papua. The development of the underground mine is progressing as per plan, although Moody’s expects PTFI to contribute material dividends only in 2022 – 2023.

The miner’ liquidity is weak, and its cash sources will not be sufficient to meet capital expenditure requirements across the group, and debt maturities of $1.0 billion at the holding company over the next 12 – 18 months. Nevertheless, refinancing risk is low given the government ownership and access to the bank and bond markets. As such, Moody’s expects Inalum to refinance in a timely manner.

MIND ID is the government-appointed holding company for mining state-owned entities. Its responsible for managing the country’ mineral reserves and developing Indonesia’ downstream industry. The government also appoints board-level staff at the company and plays a key role in Inalum’ budget planning, investments and financing decisions.

He also rated, the negative outlook reflects the miner’ elevated leverage and weak liquidity, which in turn reflects the weaker credit profiles of its operating subsidiaries amid a softer commodity price environment. But an upgrade is unlikely, given the negative outlook.

Nevertheless, the outlook could return to stable if free cash flow generation at its operating subsidiaries exceeds Moody’s expectations, leading to higher dividends paid to Inalum, material debt reduction and solid interest coverage also the company demonstrates sustained improvements in its credit profile and maintains financial discipline as it pursues growth.

Moody’s could downgrade the ratings if Indonesia’ sovereign rating is downgraded, MIND ID’ operations experience disruptions, leading to lower production volumes and earnings than currently expects. Then, industry fundamentals deteriorate, leading to a decline in earnings and cash dividends received from its operating subsidiaries.

There are delays in executing the company’ deleveraging through earnings growth or Inalum begins paying material dividends before the company deleverages significantly or engages in large debt-funded acquisitions.

MIND ID was established in 1976 and is Indonesia’ 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 ANTM, PTBA, TINS, and PTFI to Inalum. The miner is 100 percent owned by the government through the ministry of state own enterprises.

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