TEXT-S&P Revises Antam Outlook To Negative; Affirms 'B+' Rating

(The following was released by the rating agency)

Overview

-- We believe Indonesia-based mining company Antam is committed to a US$2.5 billion capital spending program, most of which will likely proceed over the next 24 months.

-- Such large capital spending while nickel prices remain uncertain could weaken the company's cash flows more rapidly than we had earlier anticipated.

-- We are revising our rating outlook on Antam to negative from stable.

At the same time, we are affirming our 'B+' long-term corporate credit rating on the company.

Rating Action

On Sept. 27, 2012, Standard & Poor's Ratings Services revised its outlook on Indonesia-based mining company PT Antam (Persero) Tbk. to negative from stable. At the same time, we affirmed the 'B+' long-term corporate credit rating on the company.

Rationale

We revised the outlook because we expect Antam's financial risk profile to weaken due to a higher-than-expected increase in the company's capital spending over the next 24 months. We now estimate that the company's capital expenditure could reach Indonesian rupiah (IDR) 14 trillion in 2012-2013, compared with our earlier forecast of IDR7.8 trillion. We expect most of the capital expenditure to be debt-funded.

Antam is increasingly committed to its stated capital spending plan over the next two years, in our view. This is largely to mitigate a possible drop in profitability if the Indonesian government bans unprocessed nickel ore exports in 2014. Higher capital spending could strain the company's cash flows more than we had expected. Currently subdued nickel prices compound this risk. We forecast Antam's debt-to-EBITDA ratio at more than 4.5x in 2013, from about 1.2x in 2011, and its ratio of funds from operations (FFO) to debt at below 15%, from about 68%. This could lead to a weakening of the company's financial risk profile to "highly leveraged" from "aggressive," as our criteria define these terms. Our estimates are based on the following assumptions:

-- Ferronickel sales of 18,000 tons-19,000 tons annually in 2012 and 2013; nickel ore sales of about 7 million tons in 2012 and 11.5 million tons in 2013; and gold production of about 2,700 kilograms annually in 2012 and 2013. Our base-case still assumes that Indonesia will delay the ban on unprocessed ore exports for companies that have processing projects under development.

-- Base prices of nickel at US$7.50 per pound for the rest of 2012 and US$8 per pound in 2013; and gold prices of about US$1,650 per ounce in 2012 and US$1,400 per ounce in 2013. These prices translate into weaker gross margins of 20%-23% in 2012 and 2013 for Antam. We expect that fuel and mining costs will stay high and that the government could levy additional export taxes on unprocessed ore in 2013.

-- Capital spending of about IDR5.1 trillion in 2012 and up to IDR9 trillion in 2013. Antam already raised IDR3 trillion to fund the modernization of its ferronickel capacity. The company also drew down debt of about US$175 million at its chemical-grade alumina project PT Indonesia Chemical Alumina (PT ICA). We include project-level debt, pension obligations, and asset retirement obligations while calculating total debt.

A potential disposal of Antam shares owned by the Government of Indonesia (BB+/Positive/B; axBBB+/axA-2) will not affect our rating or outlook on the company. We consider Antam to be a government-related entity according to our criteria. However, we assess Antam as having "limited importance" and "limited link" to the government. This means that we do not factor in any exceptional government support in our 'b+' stand-alone credit profile on the company.

The rating on Antam reflects the company's high capital spending plans, its exposure to volatile nickel prices, the weak cost competitiveness of its ferronickel operations, and regulatory uncertainty. Antam's good quality mining assets, second quartile cost position among nickel ore producers, and adequate liquidity temper these weaknesses.

Liquidity

Antam's liquidity is "adequate," as defined in our criteria. We expect the company's liquidity sources to exceed its liquidity uses by about 1.3x in the next 12 months.

Our liquidity assessment incorporates the following factors and assumptions:

-- Liquidity sources include our expectation of FFO of about IDR1,400 billion. As of June 30, 2012, the company has a cash balance of IDR5.2 trillion.

-- Sources also include about US$175 million in available committed bank funding for PT ICA.

-- Liquidity needs include our expectation of up to IDR9 trillion in capital spending, part of which Antam is likely to finance by project-level debt.

The company also had about IDR867.5 billion in dividend payables. Antam does not have short-term debt payable besides about IDR11.1 billion in accrued interest. The company continues to maintain good headroom under the financial covenants of its rupiah-denominated bonds and PT ICA bank facilities.

Outlook

The negative outlook reflects our expectation that the substantial debt-funded capital spending plan could weaken Antam's cash flows and increase its leverage over the next 12 months.

We could lower the rating if Antam's financial risk profile weakens materially, such that its debt-to-EBITDA ratio is above 5x and FFO-to-total-debt ratio is below 15%. This could happen if the company's capital expenditure exceeds IDR5 billion in 2012 and in 2013 and average nickel prices are lower than $7.75 per pound.

We could revise the outlook to stable if Antam's capital spending is more gradual than we expect, such that its debt-to-EBITDA ratio stabilizes below 4.5x and its FFO-to-total-debt ratio is greater than 20%.

Related Criteria And Research

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- S&P Lowers Its Nickel And Aluminum Price Assumptions For The Rest of 2012; Other Metals Price Assumptions Unchanged, July 12, 2012

-- Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed; Outlook Action

To From

PT Antam (Persero) Tbk.

Corporate Credit Rating B+/Negative/-- B+/Stable/--