Fitch Affirms Indonesia's MIND ID at 'BBB-'; Outlook Stable

(Fitch Ratings - Singapore/Jakarta - 01 Nov 2023): Fitch Ratings has affirmed PT Mineral Industri Indonesia (Persero)'s (MIND ID) Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB-' with a Stable Outlook. Fitch has also affirmed MIND ID's senior unsecured rating and the rating on its outstanding senior unsecured notes at 'BBB-'.

MIND ID is rated on a top-down basis, one notch below the rating of Indonesia (BBB/Stable), in line with Fitch's Government-Related Entities (GRE) Rating Criteria. This is based on our assessment of strong linkages between MIND ID and the state, as well as the state's incentive to provide support.

MIND ID's Standalone Credit Profile (SCP) of 'bb-' incorporates a robust business profile underpinned by its commodity diversification and healthy mining cost positions, along with a weaker financial profile based on our forecast of proportionately consolidated EBITDA leverage of over 3.5x, consolidated funds from operations (FFO) margin of less than 15% and negative free cash flow (FCF).

Key Rating Drivers

Strong State Linkage: Fitch regards MIND ID's status, ownership and control by the Indonesian sovereign as 'Strong'. The company is fully owned by the government and is the state's mining holding company (holdco). The government transferred its stakes of around 65% in three companies - PT Bukit Asam Tbk (PTBA), PT Aneka Tambang Tbk (ANTAM) and PT Timah Tbk (Timah) - to the holdco. It also mandated the holdco to acquire additional shares in PT Freeport Indonesia (PTFI, BBB-/Positive), which operates the strategically important Grasberg mine.

We assess the sovereign's support record as 'Strong'. The government injected capital of IDR3.5 trillion into ANTAM in 2015 via a rights issue and consolidated mining assets under the holdco in 2017 to improve its business profile. There has been no direct government support since then, but the MIND ID group has benefitted from robust access to state-owned banks to meet financing needs. We expect the strong government support to continue, given the importance of the mining sector in government policy-making.

State's Incentive to Support: We regard the socio-political implications of a default by MIND ID as 'Moderate'. A default could damage the government's reputation and hamper MIND ID's project funding, but is not likely to result in severe socio-political fallout at the group's mining operations. We assess the financial implications of a default as 'Very Strong'. MIND ID is one of Indonesia's key state-owned enterprises and its default could damage investor confidence in the sovereign and other GREs.

Commodity Diversification, Healthy Cost Positions: MIND ID produces various commodities such as thermal coal, nickel, bauxite, tin, aluminium, copper and gold through subsidiaries and associates PTBA, ANTAM, Timah, PT Indonesia Asahan Aluminium (Inalum), PTFI and PT Vale Indonesia Tbk (PTVI). The copper, nickel, thermal coal and bauxite assets have healthy positions in the first half of global cost curves, according to CRU. PTFI's Grasberg mine is one of the largest assets globally for copper and gold, Timah is among the top-five tin producers globally, and Inalum is Indonesia's sole aluminium producer.

Higher Dividends from PTFI: MIND ID's share of dividends from PTFI has increased to 51.2% from 2023, from below 20% earlier, and we expect MIND ID to receive around USD1 billion annually on average over 2023-2025 (2022: around USD580 million). The government has allowed PTFI to continue exporting copper concentrate until May 2024, by which time the company expects to begin operations at its USD3 billion smelter. Our dividend inflow forecast assumes a transfer of 10% stake in PTFI to the regional governments by end-2024, which would reduce MIND ID's interest to 41.2%.

Improving Downstream Integration, Some Risk: We expect MIND ID's subsidiaries PTBA, ANTAM and Timah to generate significant revenue from various downstream projects from 2024 - a 1,320MW coal-fired power plant, and additional capacities for ferronickel production and tin smelting. These should allow the group to capture additional margin in the value chains and improve EBITDA stability.

We expect MIND ID to continue investing in downstream processing projects, either directly or through joint ventures (JVs). As a result, MIND ID's capex and acquisition-related outflows are likely to remain elevated, and the complexity of its group structure could increase further. Sustained capex and JVs with large debt could affect Fitch's assessment of MIND ID's financial profile and SCP.

Potentially Higher Stake in PTVI: Fitch believes MIND ID is best placed to acquire PTVI's further equity stake, which regulations require it to sell to an Indonesian party. We assume MIND ID will acquire an additional interest of almost 15% for USD450 million in 2024. We intend to include only the benefit from potential dividends and not consolidate PTVI, similar to the approach used for PTFI, unless MIND ID obtains substantial de-facto control. We think a larger shareholding in PTVI will slightly improve MIND ID's business profile by increasing its exposure to nickel, a key energy-transition metal.

Higher Leverage, Negative FCF Likely: We forecast MIND ID's EBITDA leverage to increase to above 3.5x from 2025 (2023 estimate: 3.3x, 2022: 3.2x). This is based on proportional consolidation of the three key subsidiaries PTBA, ANTAM and Timah to account for significant minority interest, and includes dividends from PTFI. Our leverage forecast incorporates weaker consolidated EBITDA and margins on lower commodity prices, and sustained investment outflow. We expect MIND ID's consolidated FCF to be negative over the 2023-2026 period, after being positive in 2021 and 2022.

Derivation Summary

Our assessment of sovereign support can be compared with that for other GREs such as PT Pertamina (Persero) (BBB/Stable), PT Telekomunikasi Indonesia Tbk (Telkom, BBB/Stable) and China Minmetals Corporation (Minmetals, BBB+/Stable).

The ratings on Indonesia's national oil company, Pertamina, are equalised with that of the sovereign, reflecting a 'Very Strong' score on all GRE support parameters: ownership and control, support record, and socio-political and financial implications of default. MIND ID scores lower on control, support and socio-political implications of default.

The government effectively controls the prices of most of the fuels distributed by Pertamina and supports the company through various mechanisms, including subsidy reimbursements for fuels sold under the public-service obligation mandate. A default by Pertamina would damage Indonesia's energy security because of its impact on the large investments needed in the oil and gas sector, domestic fuel production and state imports.

The ratings on Telkom, a majority state-owned telecommunications company, are constrained by the sovereign rating. Similar to MIND ID, we assess Telkom at 'Strong' for ownership and control as well as support record, and 'Moderate' for socio-political implications of default. We do not think its financial default would result in a major disruption to service provision. We assess the financial implications of default at 'Strong', against 'Very Strong' for MIND ID. Telkom is not seen as a proxy state borrower due to its low reliance on debt, given its strong cash flow generation and healthy balance sheet.

We assess Minmetals, which is fully owned by the central government of China (A+/Stable) and has received support in the form of capital injections and subsidies, as 'Strong' for ownership and control, and support record. Similar to MIND ID, we regard the socio-political implications of a default by Minmetals as 'Moderate'. A default would cause a short- to medium-term domestic shortage in base materials, but the gap is likely to be filled by other suppliers in the long run.

We assess the financial implications of a default by Minmetals as 'Strong', because even though a default would make funding difficult for other GREs, the impact would not be as significant as that of closer proxies to the government, such as key oil and power GREs.

MIND ID's SCP can be compared with the credit profile of peers such as Freeport-McMoRan Inc. (FCX, BBB-/Positive), Zijin Mining Group Co., Ltd (BB+/Stable), Hudbay Minerals Inc. (BB-/Stable) and PT Indika Energy Tbk (BB-/Stable).

FCX is a top-three global producer of copper with world-class mines in Indonesia, Peru, Chile and the US. The company is also a major producer of gold and molybdenum. FCX's ratings reflect the company's large-scale assets, long-lived mines with competitive costs in North and South America and low first-quartile costs in Indonesia. FCX's stronger credit profile is underpinned by a larger EBITDA scale and lower leverage than MIND ID.

Chinese mining company Zijin was the world's sixth-largest copper miner, ninth-largest gold miner and fourth-largest zinc miner in 2022 by output. Zijin's ratings are supported by its well-diversified portfolio of precious and base metals, an average cost position in the second quartile of the global cost curve and high-yielding assets with a long mine life. Zijin's EBITDA scale is significantly larger than that of MIND ID, and therefore we assess Zijin's credit profile to be stronger.

Hudbay produces copper with gold, silver and molybdenum by-products at its operations in Peru and gold with copper, zinc and silver by-products at its operations in Canada. The ratings reflect Hudbay's mid-tier size, concentration in two mines and moderate mine lives, along with its extensive record of operating copper mines and low-cost position. Hudbay's weaker operating profile compared with MIND ID, resulting from its asset concentration and lower scale in terms of EBITDA (including recurring dividends), is balanced by a stronger financial structure due to lower leverage.

Indika is an Indonesia-based conglomerate whose main asset is Kideco, one of Indonesia's largest thermal coal mines, in which it owns a 91% stake. Fitch expects Kideco to continue to underpin Indika's credit profile over the next two to three years, despite the group's efforts to increase non-thermal coal earnings. We assess that MIND ID benefits from better commodity diversification, apart from being much larger than Indika in terms of EBITDA (including dividends). However, MIND ID's leverage profile is weaker.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Average annual aluminium output of 240 kilotonnes (kt) over 2023-2025 (2022: 224kt)

- Coal sales volume to increase to 41 million tonnes by 2025, from 32 million tonnes in 2022

- Average nickel ore sales volume to jump to 10.4 million wet metric tonnes (WMT) over 2023-2025, from 7.0 million WMT in 2022; ferronickel sales to increase to 34kt by 2025 (2022: 24kt)

- Average annual tin sales of 20kt over 2023-25 (2022: 21kt)

- Consolidated capex, equity investments and acquisition-related outflow of USD2.7 billion over 2023-2025.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Positive rating action on the sovereign, provided there is no significant weakening of the likelihood of the government extending support to MIND ID.

- Strengthening of the likelihood of state support.

- Improvement in MIND ID's SCP. MIND ID's SCP may be revised upwards if total debt/EBITDA leverage, based on proportional consolidation of PTBA, ANTAM and Timah and recurring dividend inflows from PTFI and other minority stakes, is forecast to remain below 3.5x on a sustained basis, and consolidated FCF is estimated to remain neutral or positive.

A higher SCP, driven potentially by factors such as commodity prices being higher than our expectations, lower capex, better operating cost control and use of cash for debt repayment, would lead to an upgrade of the IDR based on equalisation with the sovereign rating, according to Fitch's criteria.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Negative rating action on the sovereign.

- Weakening of the likelihood of state support.

For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in its rating action commentary of 1 September 2023:

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Public Finances: A marked improvement in the government revenue ratio in the next few years closer to the level of 'BBB' category peers, including from better tax compliance or a broader tax base, which would strengthen public finance flexibility.

- External Finances: A material reduction in external vulnerabilities, for instance, through a sustained increase in foreign-exchange reserves, a further decline in the dependence on portfolio flows or lower exposure to commodity price volatility.

- Structural: Significant improvement in structural indicators, such as governance standards, closer to those of 'BBB' category peers.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- External Finances: A sustained decline in foreign-exchange reserve buffers, resulting, for example, from outflows stemming from a deterioration in investor confidence or large foreign-exchange interventions.

- Public Finances: A material increase in the overall public debt burden closer to the level of 'BBB' category peers; for example, resulting from rising fiscal deficits or accumulation of debt by publicly owned entities.

Liquidity and Debt Structure

Healthy Liquidity: MIND ID had readily available cash, including time deposits, of around IDR35 trillion on a consolidated basis as of end-2022, compared with IDR19 trillion in short-term bank borrowings and current maturities of long-term debt. Included in the short-term borrowings was USD750 million under a revolving loan facility that can be extended until June 2024. In total, we estimate MIND ID had around IDR21 trillion of debt due in 2023-2024, as of end-2022.

The group's substantial cash balance, supported by dividend inflows from PTFI, should be sufficient to meet these maturities. MIND ID's robust banking relationships mitigate residual liquidity risk from weak cash flow if commodity prices fall sharply or capex is higher than we expect.

On a standalone basis, MIND ID has USD311 million of US dollar notes due in November 2023, and the revolving loan facility maturing in 2024. We estimate that MIND ID's cash balance and inflows from dividends will be sufficient to address these debt maturities.

We expect the group to refinance a large portion of the USD2 billion of debt maturing in 2025-2026, mainly at the standalone level, given its investment plans. We see limited refinancing risk for MIND ID, based on its robust business profile and track record.

Issuer Profile

MIND ID is fully owned by the Indonesian government and acts as the parent company for the state's mining assets. Its various subsidiaries and associates are involved in mining and processing diverse commodities such as thermal coal, nickel, aluminium, tin, copper and gold. Its EBITDA (including dividends received) was around USD2 billion in 2022.

Summary of Financial Adjustments

Material adjustments include the following:

- Unamortised borrowing costs (2022: IDR1.83 trillion) have been added back to debt. Supplier financing liabilities (2022: IDR225 billion) have also been treated as debt.

- 70% of reported short-term financial assets (2022: IDR3,054 billion), which consist of mainly bonds issued by the government and investment-grade issuers, has been treated as cash.

- Loss on impairment of mining properties (2022: IDR62 billion) has been excluded from EBITDA.

- Additional investment in PTFI and other associates and JVs (2022: IDR2.95 trillion) has been treated as part of capex.

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

MIND ID's IDR, senior unsecured rating and ratings on outstanding bonds are one notch below the rating of Indonesia.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores. (ends)