JAKARTADAILY.ID - Moody's Investors Service has affirmed Indonesia Asahan Aluminium (Persero) (P.T.)'s (Inalum) Baa2 issuer rating and the Baa2 ratings on the company's senior unsecured notes. The outlook on the rating remains stable.
"The rating affirmation reflects the stronger performance of PT Freeport Indonesia (PTFI) (Baa3 stable) and commencement of dividends from PTFI, which contributes to substantially lower leverage at the consolidated level. We expect PTFI to displace Bukit Asam as the highest dividend contributor to Inalum from 2023," says Nidhi Dhruv, a Moody's Vice President, and Senior Analyst.
The Baa2 issuer rating combines (1) Inalum's ba1 Baseline Credit Assessment (BCA); and (2) a two-notch uplift based on Moody's expectation of a high likelihood of extraordinary support for the company from the Government of Indonesia (Baa2 stable) in times of need. Moody's has raised Inalum's BCA to ba1 from ba2.
Inalum is the government-appointed holding company for mining state-owned entities. It is responsible for managing the country's mineral reserves and developing Indonesia's downstream industry. The government also appoints board-level staff at Inalum and plays a key role in the company's budget planning, investments, and financing decisions.
Inalum's ba1 BCA continues to benefit from a diversified mining portfolio across coal, gold, nickel, tin, copper, and aluminum, as well as its low-cost, globally competitive operations. Inalum's rating also considers its 51.2 percent ownership (beneficial equity limited to 41.2 percent of PTFI, which operates the world's second-largest copper mine and largest gold mine at Grasberg.
PTFI has successfully transitioned to underground mining since 2021, and the production ramp-up so far has been in line with the company's expectations. Inalum has also started receiving dividends from PTFI in 2021. In the current year, PTFI paid an interim dividend of $850 million, with Inalum receiving $162 million of the amount. PTFI's dividend contribution will increase to over 65 percent of the total dividends that Inalum receives. This compares to a 54 percent contribution to dividends in 2021.
The operating and financial performance of Inalum's subsidiaries, P.T. Timah Tbk, P.T. Aneka Tambang Tbk, and P.T. Bukit Asam Tbk has also improved and is likely to be sustained over the next 1-2 years.
"Although there are ongoing delays in Inalum's plans for capacity and downstream expansion in coal, nickel, and bauxite, the company's expanded export license for bauxite ore and the availability of a domestic market for nickel ore have mitigated the associated near-term risks," says Dhruv, who is also Moody's Lead Analyst for Inalum.
Moody's expects Inalum's debt levels to remain at around $7.0 billion-$7.2 billion through 2024, although its financial leverage will decline to below 4.0x on the back of additional dividends from PTFI, buoyant commodity prices and stable volumes.
The Government of Indonesia is considering a reorganization of Inalum by establishing a new wholly-owned entity, MIND ID. All of Inalum's debt and assets, including investments in the operating subsidiaries, will be transferred to MIND ID, while Inalum will be an operating company for downstream aluminum operations under MIND ID. The reorganization is expected to be completed by year-end.
"A potential reorganization of the group under MIND ID, and any associated changes to the structure and inter-dependencies between operating companies, could add to the group's complexity. We will consider these factors when details become available," adds Dhruv.
Inalum has excellent liquidity. Cash and cash equivalents of $2.9 billion, together with expected cash flows from operations ($160 million) and dividends from subsidiaries and PTFI ($700 million), will be sufficient to meet Inalum's capital expenditure contribution to PTFI and maintenance capex. Inalum has no major debt maturities over the next 12 months.
Moody's expects Inalum to also initiate dividend payments to the Government of Indonesia on the back of dividend receipts from PTFI while maintaining its financial metrics and liquidity position in line with the rating level.
The stable outlook reflects Moody's expectation that Inalum will manage its financial and liquidity profile such that it can service interest as well as cash contribution requirements for its downstream capacities and joint ventures.
Factors that could lead to destabilization of the ratings
There is limited upward pressure on the rating, given the execution risks from substantial expansion and downstream projects for Inalum's subsidiaries and PTFI, which lead to a regulatory overhang. Upward rating pressure would also require the credit quality of the key dividend contributors, PTFI and Bukit Asam, to strengthen.
In conjunction with the qualitative factors, specific indicators that Moody's would consider for an upgrade include (1) dividend cash flow received from operating subsidiaries/interest exceeding 1.5x, (2) consolidated adjusted debt/EBITDA below 3.0x, and (3) (CFO-dividend)/debt over 40 percent on a sustained basis.
An upgrade of the sovereign rating will not automatically result in an upgrade of Inalum's ratings.
Moody's could downgrade the ratings if (1) Indonesia's sovereign rating is downgraded; (2) Inalum's operations experience disruptions, leading to lower production volumes and earnings than Moody's currently expects; (3) industry fundamentals deteriorate, leading to a decline in earnings and cash dividends received from its operating subsidiaries and PTFI; (3) delays in growth or downstream projects of its subsidiaries or PTFI that lead to regulatory concerns; or (4) Inalum begins paying material dividends or makes large debt-funded acquisitions that increase its absolute debt meaningfully.
Specific indicators that Moody's would consider for a downgrade include (1) dividend cash flow received from operating subsidiaries and PTFI/interest falling below 1.0x, (2) consolidated adjusted debt/ EBITDA exceeding 5.0x, or (3) (CFO-dividend)/debt below 35 percent on a sustained basis.
Indonesia Asahan Aluminium (Persero) (P.T.) (Inalum) was established in 1976 and is Indonesia's only producer of aluminum ingots. Inalum, through its subsidiaries and associates, is a miner of coal, gold, copper, tin, nickel, and bauxite, with operations in downstream aluminum smelting and production, ferronickel production, and gold and tin refining.
Inalum has been appointed by the Government of Indonesia as the holding company for the state's mining operators and owns 65-66 percent stakes in P.T. Aneka Tambang Tbk, P.T. Bukit Asam Tbk and P.T. Timah Tbk. It also has 51.2 percent beneficial ownership of PT Freeport Indonesia (PTFI), which includes the Government of Papua's 10 percent stake. However, Inalum's economic interest will be around 19 percent through 31 December 2022, and 41.2 percent thereafter.
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