Fitch Ratings has upgraded
At the same time, Fitch Ratings Indonesia has upgraded GEMS's National Long-Term Rating to 'A+(idn)' from 'A(idn)'. The Outlook is Stable.
The upgrade reflects an improvement in GEMS's business profile after an increase in production in 2022, making its operational scale comparable with that of 'BB-' rated peers in
GEAR is in the midst of transferring its 62.5%% stake in GEMS to its parent, PT Dian Swastika Sentosa (DSS), via a distribution in specie. We do not expect the transaction to have an impact on GEMS's rating. GEMS will be rated on a standalone basis, even if GEAR's stake transfer is successful. The 'BB-' rating has factored in our conservative assumptions on shareholder returns, including higher dividend payouts to reflect potential influence from DSS and the ultimate shareholder, the Sinar Mas family.
'A' National Long-Term Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.
Key Rating Drivers
Enlarged Scale: GEMS's business profile has improved materially over the last few years as it has consistently added production, increasing its scale to 38 million tonnes per annum (mtpa) in 2022 (2021: 30mtpa, 2020: 34mtpa). GEMS is now the third-largest thermal coal miner in
Low Capex Requirement: GEMS's capex on infrastructure to support the higher production volume will be minimal at about
Cost Flexibility: We expect GEMS's flexibility to manage its costs to move in line with coal prices and its key mine's low-cost structure, with a life-of-mine strip ratio of 4.5x (2022: 5.1x), to support its operating cash flow through the commodity cycle. GEMS has been in a competitive cost position and was able to meaningfully curtail costs during the previous downturn in 2019-2020. We therefore expect the miner to be able to sustain its EBITDA per tonne above
Asset Concentration: GEMS's mine,
We believe the operational risk is mitigated by GEMS's contracts with well-known Indonesian mining contractors with good operational records, such as PT Putra Perkasa Abadi,
Long Reserve Life: GEMS has the fourth-largest reserves in
Conservative Financial Profile: We expect GEMS to be able to maintain a conservative financial profile on strong operating cash flow from increasing volumes coupled with minimal capex requirements. This is even as we expect GEMS to continue its policy of paying about 80% of its free cash flow as dividends to its shareholders. We forecast GEMS's gross leverage, defined by gross debt/EBITDA, to remain below 0.1x and net cash position to be maintained over the next four years.
Derivation Summary
GEMS's closest peer is
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Volume reaching 40mtpa in 2023 (2022: 38.4mtpa) before increasing by about 4mtpa until 2026.
Coal prices in line with the coal price deck on an energy-adjusted basis. We assume an average selling price of
Strip ratio for the BIB mine to increase to about 4.8x in 2023 before reducing to 3.5x-4.2x in 2024-2026 as we factor in the company's flexibility to reduce costs in line with our coal price assumptions;
Cash cost, excluding royalties, of
Annual capex of
Dividend payout ratio of 80%. Special dividend of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch does not expect an upgrade in the near term as the company's operational scale is expected to remain commensurate with the current rating level in the rating horizon to 2026.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustained increase in the net debt-to-EBITDA ratio to above 2.0x; and/or
Evidence of weakened external funding access.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Comfortable Liquidity: GEMS has strong free cash flow generation, a net cash position, and well-distributed amortising debt, which support its comfortable liquidity position. We do not expect its debt to increase over the next three-to-four years because of its modest capex requirements. Its short-term debt is about
Issuer Profile
GEMS is a coal-mining company in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
GEMS's rating is subject to a cap of 'consolidated+1' based on our Parent and Subsidiary Linkage Rating Criteria. Hence, GEMS's rating cannot be more than one notch higher than the rating of its parent, GEAR.
ESG Considerations
GEMS's ESG Relevance Score for GHG Emissions & Air Quality was raised to '4' from '3' due to its revenue concentration in thermal coal, which faces the risk of declining demand in the medium term because of its high carbon footprint. Funding access for thermal coal companies has also progressively tightened, which has a negative impact on GEMS's credit profile and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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