Fitch Affirms GEAR at 'B+'; Outlook Stable

RATING ACTION COMMENTARY

Fitch Af rms GEAR at 'B+'; Outlook Stable

Tue 12 May, 2020 - 10:15 AM ET

Fitch Ratings - Singapore - 12 May 2020: Fitch Ratings has af rmed the Long- Term Issuer Default Rating (IDR) of Golden Energy and Resources Limited (GEAR) at 'B+'. The Outlook is Stable. The agency also af rmed GEAR's senior unsecured US dollar bond at 'B+' with a 'RR4' Recovery Rating. The af rmation re ects GEAR's more diversi ed business pro le with acquisition of majority stake in Stanmore Coal Limited - an Australia-based metallurgical coal-mining company. The acquisition is expected to support improvement in the group's credit pro le over the medium term, although contribution to GEAR's cash ow is likely to remain minimal over the next two years. Fitch has lowered its coal price and volume assumptions for GEAR's key subsidiary, Golden Energy Mines Tbk (GEMS, B+/Stable). We expect GEMS's coal volumes to fall by 10% to 27.5 million tonnes (mt) in 2020, following a coronavirus-related fall in energy demand. We expect GEMS's volume to rise gradually, to 32.5mt in 2021 and further increase by about 4mt per annum over the following two years. Lower selling prices in 2020 follows the revision to our commodity price assumptions (see "Fitch Ratings Cuts Some Metals, Mining Price Assumptions on Coronavirus Hit", dated 6 April 2020, available at www. tchratings.com/site/pr/10117162 ).

GEAR's rating is based on the credit metrics with proportionate consolidation of its 67%-owned GEMS, as we assess GEAR's linkage with GEMS as moderate and

full consolidation of Stanmore adjusted for minority leakages. The Recovery Rating of 'RR4' re ects average recovery prospect for its US dollar bondholders.

KEY RATING DRIVERS

Moderate Linkages with GEMS: Fitch maintains its assessment of moderate linkages between GEAR and GEMS under Fitch's Parent and Subsidiary Rating Linkage criteria. GEAR retains majority representation over GEMS's board, and is involved in managing GEMS's operation. GEAR's standalone operations are not signi cant and it solely depends on dividends from its subsidiaries, primarily GEMS, to service the debt at its level. An agreement between GEMS's shareholders ensures that the company will maximise pro t distribution by paying at least 80% of its free cash ow 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. Stanmore Acquisition to Support Diversi cation: We expect acquisition of the controlling stake in Stanmore to support GEAR's diversi cation efforts. We expect Stanmore to contribute to about 20%-25% of the group's EBITDA. However, we expect Stanmore to pay minimal dividends over the next three to four years given its capex plans to increases its production volumes. Stanmore's is a small met coal producer (FY19 production: 2.5mt) with healthy nancial pro le re ected in its net cash position. Stanmore Fully Consolidated: GEAR is acquiring a majority stake in Stanmore together with Ascend Global, a Singapore-based investment management fund, with GEAR indirectly holding a maximum of 60% in Stanmore; Ascend will indirectly fund and acquire all shareholdings beyond 60% in Stanmore obtained from the ongoing open offer. Fitch will fully consolidate Stanmore with GEAR in light GEAR's position as the strategic investor after adjusting for any leakages to other minority interests. The company acquired a 32% additional stake (end- 2019: 28%) in Stanmore for AUD82 million in 2020. Temporary Volume Decline at GEMS: We expect GEMS's sales volume to fall by about 10% to 27.5mt in 2020 (2019: 30.8mt) due to weaker demand on account of the economic slowdown caused by the coronavirus pandemic. This is down from our original expectation of a growth to 36mt in 2020. We expect the

company to maintain its growth trajectory after 2020, reaching close to its target peak production volumes of around 40mt by 2023.

GEMS's production base has grown signi cantly over the last few years, expanding by about 8mt in just 2019 from 22.6mt in 2018. GEMS does not require any signi cant infrastructure enhancement to support its volume growth as its own port is able to support shipping of about 44mt a year. We expect the company to reduce capex to about USD10 million in 2020 (2019: USD23 million) and then increase it to about USD25 million a year starting 2021, mainly to upgrade the capacity of the hauling roads and crushers. Decline in Pro tability: We expect GEMS's EBITDA per tonne to be between USD3.1/tonne and USD3.5/tonne in 2020 based on our price assumptions before rising back to remain between USD4/tonne and USD5/tonne (2019: USD4/tonne, 2018: USD6.8/tonne), over the next three years. The decline in the pro tability is in line with the industry, although this is partially offset by the decline in fuel prices. Consequently, we expect GEMS to have a net debt position starting 2020 through our forecast period, as opposed to a neutral position in 2019. GEMS Limited Mine Diversity: The mine PT Borneo Indobara (BIB) accounts for more than 90% of GEMS's total production and above 65% of the proven and probable (2P) reserves. BIB's production ramp-up plans means the contribution fromGEMS's other mines will remain small. The reserve concentration risk is partly offset by the geographical diversi cation of their reserves, with about 30% of their 2P reserves outside the island of Kalimantan. In terms of operations, we believe the risk is mitigated by its contracts with leading Indonesian mining contractors, such as PT Saptaindra Sejati (a subsidiary of PT Adaro Energy Tbk) and PT Putra Perkasa Abadi. GEMS bene ts from BIB's competitive cost structure, given its low strip ratio of 4x, coupled with short haulage requirements. 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 806mt at end-2019 (end-December 2018: 818mt), or a reserve life of 27 years based on its 2019 total expected production. GEMS's acquisition of the PT Barasentosa Lestari (BSL) mine in the second half of 2018 had further improved its reserve base by adding 150mt of proven reserves. GEMS's BIB mine holds 576mt of the proven reserves, with a second-generation licence valid until 2036.

Adequate Financial pro le: We expect GEAR's consolidated nancial pro le to improve from 2021 after weakening marginally in 2020. Stanmore's net cash position and modest earnings expectations post 2020 should support the group's nancial pro le over the medium term, in Fitch's view. We expect GEAR's consolidated group leverage, (with proportionate consolidation of GEMS and full consolidation of Stanmore adjusted for minority interests) (net debt/EBITDA) to fall to below 1.5x in 2021, after rising to around 2.0x in 2020 (2019: 1.8x). We also expect GEAR's holding company standalone interest cover to improve to about 3.0x in 2021, after weakening in 2019 and 2020 to around 1.5x.

DERIVATION SUMMARY

The ratings of GEAR are based on the nancial metrics of the group, adjusted to proportionately consolidate GEMS to incorporate the presence and in uence of signi cant minority shareholding. The ratings factors in the group's adequate nancial pro le, large reserve base of both its key assets, low-cost position of GEMS and limited but improving scale of operations and record. PT Indika Energy Tbk's (BB-/Negative) has more integrated operations across the thermal coal value chain, but GEAR bene ts from improving diversi cation after acquiring Stanmore, although the latter's contribution to cash ow will be minimal in the next two to three years. However, Indika's larger scale and well- established operations justify the one-notch difference in their IDRs, as GEAR's key assets, GEMS and Stanmore, are still boosting production. The Negative Outlook on Indika re ects the limited headroom in its rating because of our expectations of weakening nancial pro le following our revision in coal price and volume assumptions. In comparison with PT Bayan Resources Tbk (BB-/Stable), GEAR's business pro le bene ts from diversi cation into hard coking coal. Bayan's similar scale as GEMS but better cost structure supports its stronger operating cash ow, explaining the one-notch differential in their ratings. Both companies have strong nancial pro les.

KEY ASSUMPTIONS

- 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,

Free on board (FOB): USD63/tonne in 2020 and USD72/tonne in 2021, USD72/tonne in 2022 and USD70/tonne thereafter) and hard coking coal (Australia premium spot, FOB): USD 140/tonne throughout our forecast period.

- GEMS's total volume of coal sales to decline by 10% to 27.5mt in 2020; thereafter increasing by 3mt-5mt a year until 2023, reaching 40mt by 2023.

- Capex incurred by GEMS at USD10 million in 2020 and USD25 million during 2021-2023. - Out ow of USD90 million in 2020 at GEAR for the acquisition of Stanmore and Ravenswood gold mine. - Met coal sales volumes of 1.9mt in 2020, 2.5mt in 2021 and 2.9mt in 2022, and EBITDA contribution of around USD30 million-60 million from Stanmore from 2020-2023.

- Stanmore capex of USD25 million-30 million during 2020-2022, declining to USD12 million in 2023.

Key Recovery Rating Assumptions:

Recovery analysis for GEAR is on a going-concern basis in case of bankruptcy and assumes that the both their subsidiaries, GEMS and Stanmore, 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

GEMS: The GC EBITDA estimate of USD106 million (FY19E USD130million) re ects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the enterprise valuation (EV). We have taken a lower sustainable EBITDA as a restructuring would most likely be a result of a coal market downturn. An EV multiple of 3.5x EBITDA is applied to the GC EBITDA to calculate a post- reorganisation EV. The choice of this multiple takes into consideration the EV/EBITDA multiple used in M&A transactions in the sector through the commodity cycle. In the recovery analysis, we assume repayment of all the debt at GEMS's 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.

Stanmore: The GC EBITDA estimate of USD40 million (FY20E: USD 53million) re ects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the EV. We have taken a lower sustainable EBITDA as a restructuring would most likely be the result of a downturn in the coal market. An EV multiple of 3.5x EBITDA is applied to the GC EBITDA to calculate a post- reorganisation EV. The choice of this multiple takes into consideration the EV/EBITDA multiple used in M&A transactions in the sector through the commodity cycle. In the recovery analysis, we assume drawdown and repayment of Stanmore's committed working capital facility. We have assumed 60% of the remaining equity value (post the repayment of subsidiary debt) for the repayment of debt at GEAR level.

This results in a Recovery Rating of 'RR2', but a soft cap of 'RR4' is applied as the key assets are located in Indonesia, which is a group D country.

RATING SENSITIVITIES

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

- GEAR's holding company's standalone EBITDA/interest cover of above 3.0x on a sustained basis;

- Sustainable improvement in the scale of operations for the group;

- Net adjusted debt/EBITDAR of less than 2.5x, based on a proportionate consolidation of GEMS and full consolidation of Stanmore adjusted for minority interests.

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

- GEAR's 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 and full consolidation of Stanmore adjusted for minority interests.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best- case rating upgrade scenario (de ned as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (de ned as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-speci c best- and worst-case scenario credit ratings, visit https://www. tchratings.com/site/re/10111579 . Adequate Liquidity: GEAR group's healthy cash ow generation and well-spread debt maturities underpin the adequate liquidity. The group had USD320 million of debt as of end-2019 (end-2018: USD269 million), which included USD38 million of short-term debt and USD23 million of debt maturing in 2020 compared with the readily available cash of USD189 million. GEAR's debt is expected to increase by about USD45million in 2020, mainly to fund the two investments, Stanmore and Ravenswood, with part of the USD90 million out ow funded from sale of its investments inWestgold. 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 re nancing of the bond, before 2022. We regard the re nancing risk as low, taking into account GEAR's adequate credit pro le and access to banks and capital markets. Both GEAR's subsidiaries, GEMS and Stanmore, have outstanding committed facilities for working capital purposes. GEMS also has an outstanding USD30 million facility, which it can use for capex. LIQUIDITY AND DEBT STRUCTURE

REFERENCES FOR SUBSTANTIALLYMATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www. tchratings.com/esg .

RATING ACTIONS

ENTITY/DEBT RATING

RECOVE

Golden Energy and Resources Limited

LT IDR

B+ 

Af rmed

•

senior unsecured

LT

B+ 

Af rmed

RR4

VIEWADDITIONAL RATING DETAILS

FITCH RATINGS ANALYSTS

Shubha Sethi, CFA Associate Director Primary Rating Analyst +65 6796 7245 Fitch Ratings Singapore Pte Ltd. One Raf es Quay #22-11, South Tower Singapore 048583

Shahim Zubair Director Secondary Rating Analyst +65 6796 7243 Muralidharan Ramakrishnan Senior Director Committee Chairperson +65 6796 7236

MEDIA CONTACTS

Leslie Tan Singapore +65 6796 7234 leslie.tan@the tchgroup.com Peter Ho ich Singapore +65 6796 7229 peter.ho ich@the tchgroup.com

Additional information is available on www. tchratings.com

APPLICABLE CRITERIA

Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) Country-Speci c Treatment of Recovery Ratings Rating Criteria (pub. 27 Feb 2020) Corporate Rating Criteria (pub. 02 May 2020) (including rating assumption sensitivity) Sector Navigators: Addendum to the Corporate Rating Criteria (pub. 02 May 2020)

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 ( 1 )

ADDITIONAL DISCLOSURES

Dodd-Frank Rating Information Disclosure Form Solicitation Status Endorsement Policy

ENDORSEMENT STATUS

Golden Energy and Resources Limited

EU Endorsed

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