R&I Affirms BBB-, Stable: PT. Smelting

(Apr 21, 2022)--PT. Smelting (PTS) is a copper smelter and refinery company based in Indonesia. It is a 60.5% owned consolidated subsidiary of Mitsubishi Materials Corp. (Sec. Code: 5711, Issuer Rating: A-). The remaining 39.5% is held by PT Freeport Indonesia (PTFI), whose major shareholders include U.S.-based Freeport- McMoRan Inc. PTS has signed various support contracts with the two shareholders for its smooth business operations and financial activities. In particular, Mitsubishi Materials, which effectively takes control of PTS, is anticipated to offer support, underpinning the creditworthiness of PTS. PTS has a capacity to produce 300,000 tons of copper cathode per year. Its copper cathode is mainly sold in Indonesia or exported to other Southeast Asian countries, with sales support provided by Mitsubishi Materials. In Indonesia, the company can stably sell by-products from its production process, supplying sulfuric acid and copper slag to an adjacent fertilizer plant and cement plant, respectively. Most of the necessary copper concentrates are supplied by PTFI. Though economies of scale are limited, PTS's production structure allows it to achieve certain levels of profits and cash flow if its smelter and refinery operate stably.

In 2023, PTS will shift to a business model under which it offers copper concentrate smelting services to PTFI. This will reduce its sales and total assets, but is expected to allow PTS to achieve broadly stable margin and profit generation. Furthermore, PTFI's stake in PTS will increase to over 60% in the first half of 2024 in exchange for funds to pay for the ongoing capacity expansion construction project at PTS, and PTS will likely be deconsolidated by Mitsubishi Materials. R&I will keep a close eye on the impact this transaction may have.

Pursuant to the new mining law, which obliges mining companies to add high value to Indonesia's raw minerals before exporting, PTFI is required to build a new copper smelter. After the completion of the construction, PTS will no longer be the only copper smelter in Indonesia. Careful attention should be paid to future developments. In addition, PTS is exposed to risks inherent to business activities in Indonesia, including the foreign currency restrictions which require settlement in rupiah for domestic trades, as well as tax and labor-related issues. R&I's evaluation factors in the possibility that such risks may affect its stable business activities and financial position.

The primary rating methodologies applied to this rating are provided at "R&I's Basic Methodology for Corporate Credit Ratings" and "R&I's Analytical Approach to Group Companies". The methodologies are available at the web site listed below, together with other rating methodologies that are taken into consideration when assigning the rating. (ends)