JPM-Indika Energy Keep calm and go for gold-20250805

Indika Energy (“Indika”) reported flattish sequential results as lower cash costsand royalties under the new system offset the impact of lower ASP of coal. Whilewe continue to expect some deterioration in earnings in subsequent quarters as theimpact of lower coal prices is yet to fully materialize, we think that the additionalliquidity from the upsized Awak Mas loan and its light maturity profile should givethe company enough liquidity buffer. More importantly, the company guidedduring its earnings call that it has acquired the critical land required to start blastingoperations for its Awak Mas gold mine and expects CoD in 2H26. We believe thisprogress is crucial given the multiple delays in the development of the mine so far.We remain OW on the INDYIJ ’29s (96.5 offer, z+653bps, 9.93% ytw) and thinkthat the bonds price in a potential downgrade to B+ levels.

•2Q25 results were better than expected - EBITDA increased by 3% q/q (-47% y/y) to US$38mn despite a 5% q/q (-26% y/y) decline in revenue to US$467mn. The EBITDA margin expanded to 8% from 7% last quarter, whichwas largely due to lower royalty payments as the effective royalty rate for thecompany’s coal business dropped to ~18% in 2Q25 from ~23% in 1Q25. AtKideco, cash costs (ex-royalty) came in at US$34.1/t, slightly lower than US$34.3 last quarter while cash costs (incl royalty) decreased to US$43.6/t fromUS$46.7/t last quarter. This helped to offset the impact of lower ASP of ~US$50/t in 2Q. Cash balances remained flattish at US$585mn against US$1.05bnof total debt, translating into an annualized net leverage of 2.2x.

•Upsized Awak Mas loan adds some liquidity buffer - Indika recently upsizedits Awak Mas loan from US$250mn to US$375mn dual-currency facility andextended its maturity profile. Out of this, US$202mn was drawn to fully repaythe original facility. The new loan extends the company’s maturity profile with~US$210mn of the facility due after the USD bonds. We view this as positiveand expect local banks to remain supportive.

•Progress on gold mine development is positive - During the earnings call,management mentioned that the company has acquired critical land for themine and started blasting activities in June. Note that right of way issues forland acquisition have been a critical roadblock over the past few quarters. Thecompany has budgeted US$158mn of capex for Awak Mas in 2025, out ofwhich it has spent US$36mn in 1H25,and expects to spend ~US$114mn in2H25 and~US$110mn in 2026. COD of the mine is expected in 4Q26. Weassume that peak capacity of 125k oz/yr will be reached in ~2028-29.

•The company has runway until the gold mine comes online even atdepressed coal prices - While we expect results to further soften in the comingquarters assuming ~US$1/t lower cash costs and lower ASPs, we think that thecompany still has the liquidity to get through until the gold mine comes online(see Table 1 below). We highlight the risk of a downgrade from Moody’s as thecompany comes close to downgrade triggers but think that the bonds arealready trading at B+ levels.