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ajor international rating agency Fitch Ratings may raise the debt rating of Indonesia’s second-largest coal producer PT Adaro Energy Tbk (ADRO) to investment grade if the company expands to other coal mining sites, thanks to strong financial fundamentals amid rising demand for coal.

The upgrade of Adaro’s rating grade, which is currently BB+ with a stable outlook, which is one notch below investment grade, may happen in the medium-term, Fitch’s head of Asia Pacific corporate ratings group Andrew Steel told a briefing on Tuesday.

“[Adaro] is one of the world’s lowest-cost producers of thermal coal, and regional demand for thermal coal is extremely strong. The demographics and economic changes throughout the region continue to drive demand for power, and coal remains generators’ choice throughout the region,” he explained.

Indonesia is the world’s largest exporter of thermal coal and Adaro is the nation’s second-largest coal miner with expected output of 46 to 48 million tons in 2011. Nationwide coal production is forecast at 340 million tons.

Adaro’s net income nearly doubled in the third quarter of 2011 from the same period of the previous year to US$376 million, as revenue was up by almost 50 percent to $2.92 billion.

“Adaro is stable and profitable. It also has a long-standing and creditworthy customer base,” Steel said.

Volatile global coal prices should not be a problem for Adaro given its low-production costs that place it in a “strong position to have flexibility in the way that it copes for changes in prices”, but the major constraints for Adaro’s possible rating upgrade are site diversification and debt-funded acquisitions, Steel added.

“Looking at acquisitions, part of it is debt funded, so there will be weakening of its financial profile over the next 12 to 24 months.

“Any improvement in its mine sites diversity are likely to reduce its dependence on a single location of South Kalimantan. Once that location goes through some difficult and challenging conditions, it will be a single-side risk for investors.”

Fitch recently upgraded eight banks and five other companies’ credit ratings to investment status after the ratings agency lifted Indonesia’s sovereign debt status to investment grade.

The firms are state-run giants in the utilities, telecommunication and energy sectors while the banks are mostly state- and foreign-controlled: Pertamina, PGN, PLN, Telkom, Telkomsel, Bank BCA, Bank Mandiri, Bank BRI, Bank BNI, Bank CIMB Niaga, Bank BII and OCBC NISP.

“When other emerging markets move into investment grade, the firsts to follow are state companies, and then it takes quite a long time for the corporates to catch up,” Steel said.

Adaro, Indonesia’s largest coal miner by market value with capitalization of Rp 57.57 trillion as of Tuesday, has seen its shares (ADRO) tumble 30.1 percent in the past year as high volatility in the commodities market has prompted sell-offs of commodities stocks during 2011.