Fitch Ratings has upgraded PT Golden Energy Mines Tbk's (GEMS) Long-Term Issuer Default Rating to 'BB-' from 'B+'.

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 Indonesia. GEMS is now rated one notch above the consolidated credit profile of its parent, Golden Energy and Resources Limited (GEAR, B+/Rating Watch Negative), given our assessment of 'Open' legal ring-fencing, 'Porous' access and control and 'Porous' funding and cash management under the strong subsidiary-weak parent path.

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 Indonesia and we expect its annual production to continue to ramp up until it reaches 50-55mtpa over the medium term, in line with management guidance and subject to regulatory approvals on production quotas.

Low Capex Requirement: GEMS's capex on infrastructure to support the higher production volume will be minimal at about USD25 million-35 million per annum in 2023-2026 to upgrade the capacity of hauling roads, coal-handling plants and barge-loading facilities. We expect GEMS's robust operating cash flow to be sufficient to fund the modest capex and do not expect the company to need any additional external funding till 2026.

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 USD8 in 2024-2025 and above USD6 in 2026, when we assume substantially lower coal prices in line with Fitch's commodity price deck.

Asset Concentration: GEMS's mine, PT Borneo Indobara (BIB), accounts for more than 90% of its total production and about 67% of proven and probable (2P) reserves. BIB's production ramp-up plans mean the contribution from GEMS's other mines will remain small, at least until 2026. The reserve concentration risk is partly offset by BIB's spread-out operations in light of its large scale.

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, PT Saptaindra Sejati, a subsidiary of PT Adaro Indonesia (BBB-/Stable), and PT Cipta Kridatama, a subsidiary of PT ABM Investama Tbk (B+/Stable).

Long Reserve Life: GEMS has the fourth-largest reserves in Indonesia, with proven reserves of around 770 million tonnes and 2P reserves of about 993 million tonnes, which translate to a proven reserve life of 20 years. GEMS's BIB mine contributes 72% of the proven reserves at about 560 million tonnes, with the mining licence valid until 2036.

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 PT Indika Energy Tbk (BB-/Stable). We think both Indika and GEMS have a competitive cost position with demonstrated ability to manage costs in line with coal price movements and an adequate reserve life for their key mines. We think GEMS has a moderately larger scale with plans to expand further, which is offset by Indika's stable and well-established operations with a much longer track record. We think Indika's diversification strategy beyond thermal coal would help it mitigate the challenges arising from tightening funding access for thermal coal players from increasing ESG considerations. However, we think this difference is offset by GEMS's more conservative financial profile with a net cash position and limited dependence on external funding, justifying rating both at the same level.

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 USD57/tonne (t) in 2023 (2022: USD75.1/t), USD42.2/t in 2024, USD40.6/t in 2025 and USD34.7/t in 2026;

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 USD32.7/t in 2023, USD28.5/t in 2024, USD26.9/t in 2025 and USD24.1/t in 2026;

Annual capex of USD35 million in 2023 and remaining at USD25 million in 2024-2026.

Dividend payout ratio of 80%. Special dividend of USD200 million in 2024 and USD50 million in 2025 to maintain the cash balance in line with historical levels.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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 USD66 million, which is easily covered by its cash position of about USD330 million as of end-2022. GEMS also has a committed credit line of USD64.5 million from a domestic bank, with less than USD10 million being utilised currently.

Issuer Profile

GEMS is a coal-mining company in Indonesia with the fourth-largest reserves in the country. GEMS operates three mining concessions, with BIB the largest. Its proven reserve life is 19 years and 2P reserve life is 25 years. Singapore-based GEAR owns 62.5% of GEMS and Indonesian entity ABM Investama, via a subsidiary, owns 30%.

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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