TRIS Rating Co., Ltd. has affirmed the company and issue ratings of Banpu PLC (BANPU) at “AA-” with “stable” outlook. The ratings continue to reflect BANPU’s leading position in the regional coal market, diversified coal reserves and customer base, as well as a reliable stream of dividend income from its power business. The ratings also take into consideration the 100% takeover of Hunnu Coal Limited (Hunnu). Regulatory risks in Australia and Indonesia as well as the global economic slowdown, which could soften demand for energy and coal price, remain rating concerns. The “stable” outlook reflects the expectation that BANPU will maintain its financial position during the investment period during 2011-2013. A reliable stream of dividends from the power business will provide some cushion for the company amidst a more challenging business environment.
TRIS Rating reported that BANPU is one of the major energy companies in Asia. It was established in 1983 to mine coal in Thailand. The company has continuously expanded and now has coal operations in Indonesia, China, and Australia. The firm simultaneously increased its investments in the power business in both Thailand and China. The Indonesian operation remained the major earnings contributor. In the first half of 2011, the contribution from Indonesia accounted for 62% of earnings before interest, tax, depreciation and amortization (EBITDA). The Australian operation made up 27% of total EBITDA. Operations in Thailand and China comprised 9% and 2% of EBITDA respectively in the first half of 2011. In terms of business segments, contribution from coal segment accounted for 91% of EBITDA while the remaining 9% came from the power segment in the first half of 2011.
TRIS Rating said, coal production of BANPU in Indonesia and Australia, excluding China, in the first half of 2011 totaled 18.3 million tonnes, comprising 10.9 million tonnes from Indonesia and 7.4 million tonnes from Australia. At the end of June 2011, the total coal reserves in Indonesia and Australia were 685.7 million tonnes while the reserves based on BANPU’s percentage of holding stood at 512.5 million tonnes. BANPU’s reserves to production indicated reserve life of around 16 years. BANPU’s coal operation in Australia, operated under Centennial Coal Co., Ltd. (CEY) was in line with expectation. CEY sold 7.4 million tonnes of coal in the first half of 2011 and contributed A$511 million in revenue to BANPU during the first half of 2011. Favorable international coal prices drove CEY’s gross margin to 33% and operating margin to 10%. CEY reported EBITDA at A$159 million, including foreign exchange gain of A$40 million, in the first half of 2011.
In addition to coal operations in Indonesia and Australia, BANPU previously owned three mines via its joint venture in China: Daning, Hebi, and Gaohe. Daning and Hebi produced a total 5.1 million tonnes of coal per year in 2010 while Gaohe is in the pre-production stage. In December 2010, mining license of BANPU’s Daning mine in China, in which BANPU holds a 56% stake, expired. The Daning mine, which normally produced 4 million tonnes of coal per annum had halted production since January 2011. In March 2011, BANPU decided to divest the Daning mine to its local partner. BANPU received a total of US$669 million in cash and booked an investment gain of US$272 million in the first quarter of 2011.
In March 2011, the Banpu Group acquired 12.4% of Hunnu, developer of coal projects in Mongolia, at A$45 million. On 12 September 2011, BANPU announced that it will make tender offer for the remaining equity of Hunnu via its wholly-owned subsidiary, Banpu Minerals (Singapore) Pte. Ltd. Under the terms of the tender offer, the Banpu Group will acquire 87.6% of the common stock at A$1.80 per share and all share options of Hunnu. The transaction will cost BANPU A$423 million. BANPU plans to finance approximately 50% of this transaction with its existing cash on hand and the remainder with bank loans. The offer will be subject to certain requirements, including the approval from the Foreign Investment Review Board of Australia, and the achievement of a relevant interest in Hunnu, indicated by 90% of total shares and options outstanding.
Hunnu was incorporated and listed on the Australian Securities Exchange in February 2010 to acquire and develop coal projects in Mongolia. Currently, Hunnu has 15 prospective coking and thermal coal projects in Mongolia, two of which have a combined 691 million tonnes of coal resources (based on percentage of holding). Most of Hunnu’s coal mines are in the exploration and development phases. Hunnu recorded net losses of A$7.2 million for the year ended December 2010 and A$3.3 million for the first half of 2011. As of June 2011, Hunnu’s assets totaled A$137.1 million with no interest bearing debt while total equity stood at A$116.9 million.
BANPU’s leverage improved after peaking in 2010 when it acquired CEY. The net debt to capitalization fell to 42.4% at the end of June 2011, from 51.6% as of December 2010. BANPU plans heavy capital expenditures of approximately US$350-US$450 million per year during 2011-2015 to enlarge the Group’s coal production and coal reserves in both Australia and Indonesia. The capital expenditures also include the development of the Hongsa project, the independent power producer (IPP) project in Lao PDR. The Hongsa project, in which BANPU holds a 40% stake, requires BANPU to inject equity of US$344 million in 2014-2015. BANPU’s EBITDA is expected to be US$900-US$1,000 million per year, enough to fund the planned capital expenditures. Its annual debt service will be managed at US$200-US$400 million per year. The net debt to capitalization ratio is projected to gradually fall during the next few years. However, if the takeover of Hunnu is successful, BANPU’s leverage will rise, but is expected to remain below its capital structure policy.
BANPU’s consolidated net profit in the first half of 2011 was high at Bt12,324 million. The after tax gain from the divestment of Daning worth Bt6,307 million supported the net profit. The operating margin before depreciation and amortization increased to 23.2% in the first half of 2011 from 17.4% level recorded in 2010 because of favorable coal price. EBITDA improved by 12% over the same period of last year to Bt13,158 million in the first half of 2011. Strong coal prices helped offset the significant decline in the equity contribution from the Chinese coal operation after Daning divestment. Equity income from coal operations in China dropped to Bt174 million in the first half of 2011 from Bt2,536 million in the same period of 2010. Looking forward, 85% of BANPU’s coal sales in 2011 are fixed at favorable price. In addition, production in Indonesia will accelerate during the dry weather. These factors will enhance BANPU’s performance in the second half. However, economic slowdown in major developed countries, such as US, EU, and Japan may depress coal price and BANPU’s coal operation in the medium term.
In July 2011, the Australian government announced it would implement a carbon price scheme as an effort to reduce carbon emission. Under the proposed scheme, companies in carbon-intensive industries will have to pay carbon price. The carbon price will be effective from July 2012 onwards if the proposed scheme passes Australia’s parliament. The price will start at A$23 per tonne of carbon emissions for the first year of implementation and rise by 2.5% per annum. In July 2015, the fixed price will transform into a market price, as per cap and trade emission trading scheme, based on overall pollution caps set by the Australian government. TRIS Rating expects carbon price will have limited impact on CEY and BANPU during the medium term. Compensation packages from Australian government partly mitigate any cost pressure related to the new carbon price. Sales contracts with domestic customers also provide room to pass through the additional cost from the carbon price. In addition, the company plans to implement new technologies to reduce carbon emission. -- End
Company Rating: Affirmed at AA- Issue Ratings: BP125A: Bt2,000 million senior debentures due 2012 Affirmed at AA- BP145A: Bt2,200 million senior debentures due 2014 Affirmed at AA- BP15NA: Bt2,500 million senior debentures due 2015 Affirmed at AA- BP165A: Bt2,100 million senior debentures due 2016 Affirmed at AA- BANPU 184A: Bt5,500 million senior debentures due 2018 Affirmed at AA- BANPU214A: Bt4,000 million senior debentures due 2021 Affirmed at AA- BANPU234A: Bt3,500 million senior debentures due 2023 Affirmed at AA- BANPU264A: Bt2,000 million senior debentures due 2026 Affirmed at AA- Rating Outlook: Stable
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