Moody's assigns Baa2 issuer rating to MIND ID; outlook stable

(Singapore, May 19, 2023) -- Moody's Investors Service (Moody's) has assigned a first-time Baa2 issuer rating and ba1 Baseline Credit Assessment (BCA) to Mineral Industri Indonesia (Persero) (P.T.) (MIND ID), and affirmed its Baa2 senior unsecured rating.

The outlook on all ratings is stable.

At the same time, Moody's has withdrawn the Baa2 issuer rating and ba1 BCA of Indonesia Asahan Aluminium (Persero) (P.T.) (Inalum). The outlook was stable before the withdrawal.

The rating actions follow the government's recent restructuring exercise. On 8 December 2022, Government Regulation Number 45 and 46 was issued to establish a new state-owned entity (SOE) as Indonesia's mining holdco entity, as well as to transfer all assets, rights and obligations of Inalum as a strategic function of the government's mining holding company to a new holding company.

On 21 March 2023, MIND ID was formally established as a wholly government-owned entity. Substantially all of Inalum's liabilities and assets, including the ownership of all the mining subsidiaries, were transferred to MIND ID. Following the completion of the restructuring, Inalum will now be an operating company for downstream aluminum operations under MIND ID.

MIND ID's Baa2 ratings are in line with Moody's ratings on Inalum prior to the rating withdrawal.

"The Baa2 ratings reflect our view that MIND ID has a similar credit quality with the previously rated Inalum given that the new holding company now holds substantially all the assets and liabilities of Inalum. We also continue to expect support from the Indonesian government for MIND ID, reflecting its strategic importance as Indonesia's state-owned national mining holding company," says Rachel Chua, a Moody's Vice President - Senior Analyst.

RATINGS RATIONALE

MIND ID's Baa2 issuer rating combines (1) its ba1 BCA; and (2) Moody's expectation of a high likelihood of extraordinary support for the company from the government of Indonesia in times of need, that results in a two notch uplift. MIND ID has strategic importance as a state-owned mining company responsible for managing Indonesia's mineral reserves and developing the country's downstream industry.

MIND ID's ba1 BCA is supported by (1) the diversification of its mining operations across various types of metals; (2) its low-cost, globally competitive operations; and (3) Moody's expectation that cash dividends received from its 65%-owned subsidiaries as well as the 51.2%-owned Freeport Indonesia (P.T.) (PTFI, Baa3 stable) will provide sufficient interest coverage of at least 1.0x.

MIND ID holds a 51.2% stake in PTFI, which operates the world's second-largest copper mine and largest gold mine at Grasberg. The development of the underground mine at Grasberg is progressing as planned, and Moody's expects PTFI to continue contributing material dividends in 2023-24.

At the same time, the BCA also reflects MIND ID's sizable expansion and downstream projects that are underway or in planning stages across its businesses, and its exposure to volatile commodity prices. Key downstream projects include construction of PTFI's $3 billion copper smelter and the $830 million smelter-grade alumina refinery. Both projects are expected to complete by 2024.

Moody's forecasts MIND ID's EBITDA will decline to around $2.2 billion in 2023 and $2.1 billion in 2024 from $2.6 billion in 2022 as commodity prices moderate. Nonetheless, MIND ID's EBITDA will be supported by its higher economic interest in PTFI, which increased to 51.2% at the start of 2023 from 18.7% in 2022.

Moody's projects MIND ID's debt levels will remain at around $7.0 billion through 2024. Moody's also expects the company's leverage to stay within 3.0x-3.5x in 2023 and 2024, from 2.2x in 2022. While leverage has increased on the back of lower earnings in 2023-24, it will stay within the parameters of MIND ID's Baa2 rating.

On 7 February 2023, the government announced that MIND ID has to own the majority of Vale Indonesia Tbk (P.T.) (PTVI) by the end of the year. Moody's understands discussions with the government are ongoing, but a potential acquisition to a majority stake from 20% currently, will lead to additional cash outflows and likely weaken MIND ID's credit metrics. Moody's will evaluate the transaction when more details around the stake purchase, acquisition price and funding source are available.

The stable outlook reflects Moody's expectation that MIND ID will manage its financial and liquidity profiles such that it can service its interest and cash contribution requirements for its downstream capacity and joint ventures.

MIND ID has an excellent liquidity profile (on holding company basis) to meet its cash needs and expansionary capital spending and investments through December 2024. As of 31 December 2022, the company had cash and time deposits of $465 million at the holding company level and $1.6 billion on a consolidated basis. We expect interest payments at MIND ID to be funded by existing cash balances at the holding company level, dividends received from subsidiaries and cash flow generated from its aluminium business.

These sources are sufficient to fund the company's annual cash needs including interest expense of around $663 million, capital spending and investments of around $1.0 billion and dividends which we expect will be around $833 million.

Moody's has decided to withdraw the ratings of Indonesia Asahan Aluminium (Persero) (P.T.) for its own business reasons. Please refer to the Moody's Investors Service Policy for Withdrawal of Credit Ratings, available on its website, https://ratings.moodys.com.

ESG CONSIDERATIONS

In terms of environmental, social and governance (ESG) risks, Moody's has considered (1) the company's energy-intensive operations; (2) its exposure to health and safety risk through PTFI which has reported a high number of security-related fatalities such as sporadic shooting incidents within its project area; (3) social opposition to mining activities; and (4) its reasonable degree of transparency into its operating performance despite its full ownership by the Indonesian government.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward rating pressure for MIND ID is limited, given that its issuer rating is already rated in line with Indonesia's sovereign rating.

However, Moody's could upgrade MIND ID's issuer rating if Indonesia's Baa2 sovereign rating is upgraded, MIND ID maintains its BCA at the current ba1 level, and Moody's support assessment incorporated in MIND ID's rating remains unchanged.

Upward pressure on MIND ID's ba1 BCA is limited over the next 12-18 months, given the execution risks associated with the substantial expansion and downstream projects of MIND ID's subsidiaries and PTFI, which lead to regulatory overhang. Upward rating pressure would require the credit quality of its key dividend contributors, PTFI and Bukit Asam, strengthens.

Specific indicators that Moody's would consider for an upgrade of MIND ID's ba1 BCA include (1) dividend cash flow received from operating subsidiaries/interest exceeding 1.5x; (2) consolidated adjusted debt/EBITDA below 3.0x; and (3) (cash from operations [CFO]-dividends)/debt over 40% on a sustained basis.

An improvement in MIND ID's BCA will not automatically result in an upgrade of its issuer rating.

Moody's could downgrade MIND ID's issuer rating if (1) Indonesia's sovereign rating is downgraded; (2) the company's BCA deteriorates to below ba1; or (3) the government's ownership in MIND ID declines or the government reduces its control of the company by some other means, which would require a reassessment of the level of support incorporated into its ratings.

Moody's would downgrade MIND ID's BCA if (1) its operations experience disruptions, leading to lower production volumes and earnings than currently expected; (2) industry fundamentals deteriorate, leading to a decline in earnings and cash dividends received from its operating subsidiaries and PTFI; (3) delays in the growth or downstream projects of its subsidiaries or PTFI lead to regulatory concerns; or (4) the company 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 of MIND ID's BCA include (1) dividend cash flow received from operating subsidiaries and PTFI/interest falling below 1.0x; or (2) consolidated adjusted debt/EBITDA exceeding 5.0x.

The methodologies used in these ratings were Mining published in October 2021 and available at https://ratings.moodys.com/rmc-documents/76085, and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/rmc-documents/64864. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com  for a copy of these methodologies.

Mineral Industri Indonesia (Persero) (P.T.) (MIND ID) was established in 2023 and structured to replace Indonesia Asahan Aluminium (Persero) (P.T.), which was established in 1976. Through its subsidiaries, MIND ID mines coal, gold, tin, nickel and bauxite, with operations in downstream aluminium smelting and production, ferronickel production, and gold and tin refining.

MIND ID has been appointed by the Government of Indonesia as the holding company for the state's mining operators. It owns 65%-66% stakes in Aneka Tambang Tbk (P.T.) (ANTAM), Bukit Asam Tbk (P.T.) (Bukit Asam) and Timah Tbk (P.T.) (Timah), and a 100% stake in Indonesia Asahan Aluminium (P.T.). It also has 51.2% beneficial ownership of Freeport Indonesia (P.T.) (PTFI), which includes the Government of Papua's 10% stake. (ends)