Investing.com -- Fitch Ratings has lowered the Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) of PT Indika Energy Tbk to ’B+’ from ’BB-’. The rating agency has also reduced the rating of Indika’s outstanding US dollar notes to ’B+’ from ’BB-’, which carry a Recovery Rating of ’RR4’. Additionally, Fitch Ratings Indonesia has lowered Indika’s National Long-Term Rating to ’A(idn)’ from ’A+(idn)’. The Outlook on the IDRs and National Long-Term Rating remains Stable.

The downgrade is based on the projection that Indika’s EBITDA net leverage will exceed 3.0x in 2025-2026, compared to 2.9x in 2024. This is due to a combination of lower coal prices, high production costs, and execution risks associated with the company’s gold mining project, which is experiencing delays. Despite these factors, the ’B+’ IDR acknowledges Indika’s operational scale as a mid-size thermal coal producer in Indonesia, its planned diversification into gold, a robust reserve life profile, and sufficient liquidity.

The ’A’ National Ratings suggest a low default risk compared to other issuers or obligations within the same country or monetary union.

Fitch expects Indika’s EBITDA net leverage to remain above 3.0x in 2025-2026, and the company’s Free Cash Flow (FCF) is likely to be negative during this period due to high capital expenditures on development works for the Awak Mas gold project. The cash flow from new businesses remains small and is insufficient to fully offset the EBITDA reduction due to Indika’s divestments of other coal-related assets in recent years.

The agency expects EBITDA net leverage to recover only in 2027, when Awak Mas production ramps up. However, any further delay in the start of Awak Mas or a continued high-cost structure, especially if coal prices correct sharply, could push back deleveraging.

The Awak Mas project, crucial for Indika’s deleveraging and diversification, is scheduled to start in the second half of 2026, instead of the end of 2025, primarily due to delays in land acquisitions. The project’s EBITDA contribution is expected to be 25% by 2027, based on Fitch’s price assumption of $2,000/oz for gold.

Stable operations at Indika’s Kideco coal mine is key to supporting cash flow generation and planned capital expenditures over the next two to three years. Kideco will generate 80%-90% of total EBITDA for 2025-2026. The EBITDA contribution from new businesses, aside from Awak Mas, is expected to remain small for the next three to four years compared with Indika’s mining business.

Indika has low capital expenditure commitment for its new business beyond 2025, aside from Awak Mas, and minimal maintenance capital expenditure for existing business. However, any unexpected large-scale capital outlay in new businesses that may not generate immediate cash flow return would increase negative pressure on ratings.

Fitch does not expect any significant impact on Indika’s operations from Indonesia’s recently revised rule that requires all proceeds from exports to be locked up for a year. About 65%-70% of Indika’s thermal coal production is exported. Fitch expects exporters such as Indika to have the flexibility to use some of these locked-up amounts to meet operational, capital expenditure, dividend, and debt repayment needs.

Indika’s ultimate majority shareholder, PT Indika Inti Investindo (III), is privately held, and Fitch has no financial information on it. However, the agency believes the majority shareholder’s access to Indika’s cash is limited to shareholder returns, as Indika is listed with public shareholders. In addition, material related-party transactions with the parent are subject to disclosure requirements and approval from independent shareholders.

Factors that could lead to a further downgrade include lower coal prices or further delays in gold production from Awak Mas, leading to EBITDA net leverage sustained above 3.5x, EBITDA interest coverage sustained below 3.0x, and weakened external funding access. Conversely, evidence of reduced execution risk, leading to EBITDA net leverage sustained below 2.5x, could lead to an upgrade in the rating.

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