Inalum Smelting Plant : Photo by SOEs Ministry

JAKARTA (TheInsiderStories) – 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 percent, 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 in the last report released on Friday (26/10).

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: ANTM), PT Bukit Asam Tbk (IDX: PTBA) and PT Timah Tbk (IDX: TINS), as well as
its current 9.36 percent interest in PTFI. The unit of Freeport-Mcmoran Gold & Copper Inc. (NYSE: FCX), 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 (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, will 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 Inalum raising funds to finance the acquisition, a new mining license is issued to PTFI, the resolution of certain environmental issues at PTFI, the extension of the export approval for concentrates, and various other conditions.

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

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 the miner’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 size-able 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 ratingvwill 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.

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

The state-owned company is 100 percent owned by the Government of Indonesia through the ministry of state-owned enterprises.

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