Overview;
1. Indonesia based coal producer Bumi is unlikely to substantially lower its debt over the next 12 months in our opinion.
2. We expect Bumi's operating cash flow to remain weak because of high production and financing costs and taxes, slower than anticipated production growth and lower coal prices, thereby limiting the company's potential to reduce debt.
3. We are lowering our long term corporate credit rating on Bumi and our rating on the company's guaranteed senior secured notes to 'BB-' from 'BB'. We are also lowering our long term ASEAN regional scale rating on Bumi to axBB from axBB+.
4. The negative outlook reflects our expectation that Bumi's financial performance is likely to be weak for the current rating over the next 12 months at least.
Rating Action;
Standard & Poor's Ratings Services lowered its long term corporate credit rating on Indonesia-based thermal coal producer PT Bumi Resources Tbk to BB-from BB. The outlook is negative. At the same time, we lowered the rating on the company's guaranteed senior secured notes to BB- from BB. We also lowered our long term ASEAN regional scale rating on Bumi to 'axBB' from axBB+.
Rationale;
We downgraded Bumi because we expect the company's ratio of funds from operations to debt to remain less than 12% over next 12 months because of its weak cash flows and still high debt.
We expect Bumi's debt to remain at about USD 4.5 billion with an average cost of debt of more than 12% over the next 12 months at least. Over the past two years, Bumi has been considering selling its stakes in its non-coal assets to reduce debt. But the company's ability and willingness to execute such asset sales for paying off debt is untested, in our view.
We also believe such a process could take time and will be subject to elements beyond Bumi's control, including market conditions and regulatory approvals. Although the company may use the partial repayment of receivables from PT Recapital Asset Management and PT Bukit Mutiara to pay off debt, we do not view these amounts as large enough to materially lower debt. We are uncertain whether these entities can raise funds to pay Bumi. Therefore, we do not consider such repayments as likely over next 12 months.
We believe Bumi's internal cash flows the company's most likely source of funds for repaying debt will be limited over the next 12-18 months. This is predominantly because of still high production and financing costs and a slower than expected growth in production. Further contractor underperformance in the second half of 2012 and in 2013 will remain a risk, in our view. We believe the measures that Bumi is currently implementing to improve production and lower production costs may take time to fully translate into substantial incremental cash flows.
Bumi's gross profit per ton is broadly in line with our expectations, despite the fall in coal prices since the beginning of 2012 and still high mining, fuel and mining contractor costs. The company's gross profit per ton of coal sold declined to USD 33 in the Q1 of 2012 as we had expected, from USD 39 in 2011.
We assess Bumi's financial risk profile as aggressive and its business risk profile as fair. The company's financial metrics are weaker than those of similarly rated peers. We forecast Bumi's ratio of debt to debt plus equity to remain at 75% to 80% over the next 2 years. Our projections are based on a proportionate consolidation of Bumi's stakes in its coal companies: PT Kaltim Prima Coal and PT Arutmin Indonesia. We include pension liabilities, asset retirement obligations, and accrued redemption premiums while calculating total debt. Our base-case projection assumes:
1. Bumi will produce 71 million to 72 million tonnes of coal in 2012 and about 76 million tonnes in 2013, on a 100% mine ownership basis. We have lowered our production estimates for Bumi by 2 million tonnes to 3 million tonnes for 2012 to reflect the effect of heavy rains and contractor underperformance on production in the first half of 2012. Our production estimate is about 3 million tonnes to 4 million tonnes lower than the company's target for 2012.
2. Gross profit per ton of coal sold of USD 28 to USD 32 in 2012 and 2013, translating to an EBITDA margin of 25% to 27%.
3. Cash interest cost will remain more than USD 400 million because of continued high cost legacy debt and refinancing costs.
We believe Bumi is unlikely to benefit from its plans to refinance its high cost debt, particularly the debt from China Investment Corporation with lower cost debt in the next 12 to 18 months. Refinancing costs and accrued redemption premiums in such refinancing will likely negate interest cost savings. We have not considered any debt prepayments or resulting interest cost savings in our base case. Bumi refinanced USD 600 million of a CIC loan in October 2011 with lower-cost debt. The interest cost savings from this refinancing have not materialized.
Source - Reuters
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