Singapore, March 12, 2014 — Moody’s Investors Service says the decline in Adaro Indonesia PT’s (Adaro) full-year 2013 results were mainly reflective of weak coal prices, but remain broadly in line with Moody’s expectations. There is no immediate impact on the company’s Ba1 corporate family rating with a stable outlook.
“Similar to other regional coal miners, Adaro’s operating performance in 2013 was primarily driven by the weakness in global coal indices amidst continued oversupply in the market and softer domestic prices in China. The company reported strong sales volume growth and lower production costs, but these improvements could not offset the 19% decline in its average selling price,” says Brian Grieser, a Moody’s Vice President and Senior Analyst.
Net revenue for Adaro fell 10.7% while adjusted EBITDA declined by 32% to $648 million. Adaro reported weaker overall profitability with adjusted EBITDA margin contracting to 21.7% in 2013, compared to 28.3% in the previous year.
Coal production grew 11% to 52.3 million tonnes (MT), which was in line with the company’s target production of 50-53 MT. On production cost, Adaro’s cost control initiatives successfully reduced its average cash cost (excluding royalties) by 10.1% to $38.7/tonne compared to a year ago.
“Looking ahead, we expect market conditions in 2014 to remain challenging as an oversupply of coal in the region will dampen prospect for a meaningful rebound in coal prices,” adds Grieser, who is also lead analyst for Adaro.
“Despite a reduction in total borrowings, Adaro’s adjusted debt/EBITDA ratio increased to 2.7x in 2013, from 2.0x a year ago, on the back of lower EBITDA. Given our expectation that Adaro’s credit metrics will stabilize and begin to strengthen in 2014 and the quality of the company’s liquidity position, we remain comfortable with its current Ba1 rating despite leverage currently exceeding 2.5x,” says Grieser.
In line with its cash preservation policy, Adaro’s liquidity remains strong with a cash balance of $412 million at end-2013 and its next material maturity is in 2019 when its $800 million notes come due. As at end-2013, Adaro also had committed and undrawn facility of $278.5 million.
Adaro is the principal cash flow generator of Adaro Energy (unrated) and plays a key role in Adaro Energy’s vertical integration strategy. Adaro has been a borrower and funds have been channeled through Adaro Energy to the wider group for non-operating subsidiaries’ capital expenditures as well as for prepayment of services. Loans extended to Adaro Energy is expected to be repaid through dividend received from subsidiaries, including Adaro.
In 2013, Adaro Energy embarked on a capex reduction strategy in light of the challenging market conditions. Its capex decreased by 66% to $165 million. Moody’s views this as positive for Adaro as a reduction in Adaro Energy’s funding requirements will correspondingly reduce the amount of borrowings required, which Adaro Energy typically makes through Adaro.
For Adaro, an upgrade is unlikely because of weak market conditions. Furthermore, Adaro is already one of the most highly rated single-commodity mining companies globally. Its revenue base remains relatively small on a global basis and the company lacks the diversity in production seen in similarly rated global peers.
We would consider downgrading Adaro’s ratings if the company experiences material disruptions in its operations or if industry fundamentals deteriorate to the extent that Adaro’s ability to service its debt weakens. Such trends could be evidenced by adjusted debt/EBITDA of more than 2.5x and/or EBIT/interest of less than 4x on a sustained basis coupled with a deterioration in its liquidity profile.
If Adaro Energy’s adjusted debt/EBITDA exceeds 3x-3.5x and/or EBIT/interest falls below 3x on a sustained basis, then Adaro’s ratings would come under pressure.
Other negative rating trends include: 1) event risk as a result of any adverse decision regarding the offsetting of VAT payments; 2) any change in laws and regulations, particularly on the mining concessions, that would affect the business; 3) any abrupt change in its financial or operational strategy and/or dividend policies; and 4) weakening of its liquidity profile such that cash balances fall below $150-200 million.
Adaro Indonesia is one of the largest single-site coal producers in the southern hemisphere and one of the world’s largest sub-bituminous coal companies. It exports approximately 80% of its products to Southeast Asia, the US and Europe, while the rest is for the domestic market. It is wholly owned by Adaro Energy, an integrated energy group, listed on the Indonesia Stock Exchange.
Brian J. Grieser
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service Singapore Pte. Ltd.
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Philipp L. Lotter
MD – Corporate Finance
Corporate Finance Group
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Releasing Office:
Moody’s Investors Service Singapore Pte. Ltd.
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