Monday, September 26, 2011

Indonesian coal mining sector to perform well next 2-3 years, says S&P

KUALA LUMPUR: The Indonesian coal mining sector will likely continue to perform well over the next two to three years, building on its significant progress in harnessing the nation's rich coal deposits, said Standard & Poor's Ratings Services.

However, an evolving regulatory framework and mineral and mine concentration risks still stand in the way of the sector achieving investment-grade credit characteristics, it said on Monday, Sept 26.

S&P credit analyst Xavier Jean said increasing capital spending and the potential for more aggressive shareholder-friendly initiatives among Indonesian coal producers could also slow the current improvement in these companies' credit profiles.

In a report entitled "Indonesian Coal Producers Power Ahead But Are Still Some Way Off Investment Grade Off Investment Grade' released on Sept 26, S&P said growing demand for energy, global competitiveness, and the Indonesian coal companies' stable financial profiles would support the sector's credit quality over the next two to three years.

The report is based on S&P's credit assessment of eight coal mining companies in Indonesia that represent about 70% of the country's coal production.

"Rich coal deposits, cheaper open-cut mining techniques, low (albeit increasing) personnel costs, and moderate royalties underpin the sector's competitive advantage. Indonesia's proximity to major import markets in Asia is also a sustainable advantage, in our view,' said Jean.

"We also expect robust EBITDA margins for the rest of 2011 and in 2012, and believe companies' strong cash flows will support steady financial profiles," he said.

The report said Indonesia continues to solidify its position as a reliable and competitive supplier of thermal coal, adding that the demand for energy in Asia-Pacific was likely to remain steady notwithstanding the possible softening of GDP growth in the region.

In addition, the modest supply growth will support pricing, it said.

At the same time, companies in the sector have reduced their debt while also accumulating significant cash balances since 2007, factors that should allow them to better absorb price volatility, it said.

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