(The following statement was released by the rating agency) Fitch Ratings-Singapore-November 28: Fitch Ratings has revised its Outlook on Golden Energy and Resources Limited (GEAR) to Stable from Positive and affirmed the Long-Term Issuer Default Rating (IDR) of GEAR at 'B+'. The agency has also affirmed GEAR's senior unsecured US dollar bond at 'B+' with a 'RR4' Recovery Rating. The Outlook revision reflects Fitch's expectation that GEAR's scale of EBITDA will be lower than previously expected under Fitch's recently lowered long-term coal price assumptions (see Fitch Ratings Updates Mid-Cycle Metals and Mining Price Assumptions, dated 6 November 2019). This is despite the company's on-track production volume ramp-up. We calculate GEAR's EBITDA and credit metrics with proportionate consolidation of its 67%-owned key subsidiary, PT Golden Energy Mines Tbk (B+/Stable), as we assess GEAR's linkage with GEMS as moderate. We do not expect GEAR's adjusted EBITDA to rise above USD150 million before 2022. GEAR's 'B+' ratings reflect the group's adequate financial profile, healthy reserve life and low cost position of its key mine, PT Borneo Indobara (BIB). The Recovery Rating of 'RR4' reflects average recovery prospect for its US dollar bondholders. Key Rating Drivers Moderate Linkages: The linkages between GEAR and GEMS are moderate, as assessed under Fitch's Parent and Subsidiary Rating Linkage criteria. GEMS accounts for almost all of the group's consolidated EBITDA; GEAR's standalone operations are not significant and most of its earnings are derived from GEMS's dividends. GEAR retains majority representation over GEMS's board, and is actively involved in managing GEMS's operation. An agreement between GEMS's shareholders ensures that the company will maximise profit distribution by paying at least 80% of its free cash flow as dividends. However, GMR Coal Resources Pte. Ltd, which owns 30% of GEMS, has also appointed key management personnel and has veto power in major corporate transactions. We expect GEAR to continue to seek acquisitions or investments to diversify its portfolio. We may reassess the linkages between GEAR and GEMS, including the Standalone Credit Profile of GEAR and its dependence on cash flow from GEMS, after further acquisitions. Decline in Profitability: We expect GEMS's EBITDA per tonne to remain between USD4/tonne and USD5/tonne (2018: USD6.8/tonne) during 2019-2022, mainly on account of lower average selling prices. The decline in the profitability is in line with the industry; however, for GEMS the impact on cash flow is offset partly by our expectation of volume growth. We also expect the group to maintain a net debt position until 2022, as compared with a net cash position in 2017. Increasing Production Scale: We expect GEMS's production to increase to 36 million tonnes (mt) in 2020 (2019E: 30mt, 2018: 22.6mt), driven mainly by the production from BIB. The company targets BIB's annual production to surpass 50mt by 2022. After the capacity expansion, GEMS's own port will be able to support shipping of about 44mt a year. GEMS also has contracts with third party ports, which would be used once their annual production surpasses 44mt. GEMS's expected increase in production volumes is dependent on the quotas it receives from the state. Fitch does not think this is a major risk to GEMS in light of its regulatory compliance in supplying to the domestic market. We expect GEMS to require minimal capex towards infrastructure to support the increasing volumes, spending about USD25 million-30 million annually over the next three years to upgrade the capacity of the hauling roads and crushers. GEMS's lower capex requirement, compared with some of its peers, is due to the close proximity of its main mine to the port. Limited Mine Diversity: BIB accounts for more than 90% of GEMS's total production and above 65% of the proven and probable (2P) reserves. We expect with BIB's production ramp-up and the contribution from GEMS's other mines, including the recently acquired PT Barasentosa Lestari (BLS), to remain small. Still, we believe the concentration of operational risk is mitigated by its contracts with two established mining contractors, PT Saptaindra Sejati (a subsidiary of PT Adaro Energy Tbk) and PT Putra Perkasa Abadi, which are among the top-five mining contractors in Indonesia. GEMS benefits from the low-cost structure of BIB, which is among the lowest-cost mines in the world due to the low strip ratio of 4x, coupled with short haulage requirements. However, the calorific value (CV) of GEMS's coal is lower than the Indonesian average, which results in a lower selling price. Long Reserve Life: GEMS has one of the largest reserves compared with its coal mining peers in Indonesia. GEMS's reserves are the fourth-largest in Indonesia, with proven reserves of around 800mt at end-September 2019 (end-December 2018: 818mt), or a reserve life of 27 years based on its 2019 total expected production. GEMS's acquisition of BSL in the second half of 2018 had further improved its reserve base by adding 150mt of proved reserves. GEMS's BIB mine holds 586mt of the proven reserves, with a second-generation licence valid till 2036, alleviating any licence renewal uncertainty which is being faced by some peers. Adequate Financial Profile: We expect GEAR's adjusted financial profile, based on the proportionate consolidation of GEMS, to remain adequate for its rating despite the decline in the coal prices. We expect the adjusted net debt/EBITDA to continue decline to below 2x, starting 2020 (2019E: 2.1x), supported by the rise in production volumes without major capex requirements. On a standalone basis, we expect GEAR's (the holding company) interest cover to improve again to 3x in 2020, as its dividend income improves, after declining to about 2.3x in 2019. Diversification Credit Positive: GEAR intends to continue to increase its investment portfolio which could diversify its earnings. Fitch regards any acquisitions by GEAR as an event risk. We expect that GEAR's business profile may benefit from further asset and geographical diversification, if the company is able to acquire a majority of Stanmore. Stanmore's net cash position, expanding earnings and moderate capex requirements in the medium-term may support GEAR's financial profile. Derivation Summary The ratings of GEAR are based on the proportionately consolidated financial metrics of GEMS, to incorporate the presence and influence of significant minority shareholding. The ratings factor in the group's adequate credit ratios, large reserve base, limited mine diversity and low-cost position. GEAR's leverage and coverage are stronger than those of PT Indika Energy Tbk (BB-/Stable); and GEMS has a longer reserve life. However, Indika's operations are larger, more integrated and more diversified, which we believe justifies the one-notch difference in their IDRs. The production capacity of Indika's key coal asset, Kideco, is well-established, and is at its peak compared with GEMS, which is boosting production. We also think that both companies demonstrate similar sensitivity to declines in coal prices. Key Assumptions Key assumptions for Rating Case: - Index coal prices in line with Fitch's mid-cycle commodity price assumptions, adjusted for the difference in CV (thermal coal average Newcastle 6,000 kcal/kg, FOB: USD73/tonne in 2020 and USD72/tonne in 2021 and USD70/tonne in 2022). - Total volume of coal produced: 30mt in 2019, 36.1mt 2020, 42.3mt 2021 and 47.7mt 2022. - Capex incurred of USD25 million in 2020 and USD30 million in both 2021 and 2022, mainly to ramp up capacity at its BIB mine. - No major acquisitions factored in at GEMS or GEAR level. Key Recovery Rating Assumptions: Recovery analysis for GEAR is on a going-concern basis in case of bankruptcy and assumes that the company would be reorganised and not liquidated. We have assumed a 10% discount to enterprise value to account for bankruptcy-related administrative claims. Going-Concern (GC) Approach The GC EBITDA estimate of USD106mn (FY19E 130mn) reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the enterprise valuation. We have taken a lower sustainable EBITDA as a restructuring would most likely be a result of coal market downturn. An EV multiple of 3.5x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The choice of this multiple considers the EV/EBITDA multiple usedin recent MA transactions in the sector and the multiple at which the Indonesian coal companies are currently trading in the market. In the recovery analysis, we assume repayment of all the debt at GEMS' level, which is all senior secured bank debt. We have assumed 67% of the remaining equity value (post the repayment of subsidiary debt) for the repayment of debt at GEAR level. Recovery of investment in Stanmore Coal: We had added USD35 mn for "value from affiliates" to the remaining equity value of GEMS (due to its 28% stake in the listed company. For the valuation of Stanmore Coal, we have used a going- concern EBITDA of 105mn (2019 end-June: 150mn) with a multiple of 1.2x. This results in a recovery rating of RR2, but a soft cap of RR4 is applied as the assets are located in Indonesia which is a Group D country. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Adjusted EBITDA of USD150 million a year, based on a proportionate consolidation of GEMS - Holding company's standalone EBITDA/interest cover of above 3.0x - Net adjusted debt/EBITDAR of less than 2.5x, based on a proportionate consolidation of GEMS Developments That May, Individually or Collectively, Lead to Negative Rating Action - Holding company's standalone EBITDA/interest cover of below 2.0x - Net adjusted debt/EBITDAR of more than 3.5x, based on a proportionate consolidation of GEMS Liquidity and Debt Structure Adequate Liquidity: GEAR's healthy cash flow generation and well-spread debt maturities underpin the group's adequate liquidity. The group had USD315 million of debt as of end-September 2019 (end-2018: USD269 million), which includes USD48 million of short-term debt versus the cash and cash equivalents of USD183 million. The increase in debt in 2019 was mainly on account of the acquisition of a minority stake in Stanmore. The group's debt, both at GEMS and the holding-company level, has a gradual repayment structure except for the bond repayment in 2022. We expect the group to require partial refinancing of the bond, before 2022. We regard the refinancing risk as low, taking into account GEAR's adequate credit profile and access to banks and capital markets. The entity also has USD 35.7 million of undrawn credit facilities at GEMS's level, which can be used for capital expenditure. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on GEAR, either due to their nature or the way in which they are being managed by GEAR. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg. Golden Energy and Resources Limited; Long Term Issuer Default Rating; Affirmed; B+; RO:Sta ----senior unsecured; Long Term Rating; Affirmed; B+ Contacts: Primary Rating Analyst Shubha Sethi, CFA Associate Director +65 6796 7245 Fitch Ratings Singapore Pte Ltd. One Raffles Quay #22-11, South Tower Singapore 048583 Secondary Rating Analyst Shahim Zubair, Director +65 6796 7243 Committee Chairperson Ying Wang, Managing Director +86 21 6898 7980
Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com; Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) https://www.fitchratings.com/site/re/10090792 Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019) https://www.fitchratings.com/site/re/10058988 Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019) https://www.fitchratings.com/site/re/10089196 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10103281 Solicitation Status https://www.fitchratings.com/site/pr/10103281#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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