Adaro Plays a Major Role in Indonesian Growth

Mining at Adaro Energy’s massive coal operations in South Kalimantan.

By John Miller, Australian Editor

In less than 10 years since its establishment and less than five years since completing its initial public offering (IPO), PT Adaro Energy Tbk has become one of Indonesia’s most successful companies and one of the world’s leading coal industry players. It continues to develop infrastructure and improve its position in the coal industry, and has further integrated its coal supply chain by moving downstream into power as well as diversifying product offerings and increasing its reserve base through acquisition of deposits in Indonesia.

Adaro Energy was established in 2004 under the name of PT Padang Karunia and has become the second largest thermal coal producer in Indonesia. Through its subsidiaries, the vertically integrated, pit-to-power company has a JORC-compliant coal resource and reserve of 4.6 billion metric tons (mt) and 1.1 billion mt, respectively. Its vision is to be a leading Indonesian mining and energy group while continuing to focus on creating maximum sustainable value from Indonesian coal.

On July 16, 2008, Adaro conducted an IPO and listed on the Indonesia Stock Exchange. It issued 11.14 billion new shares, which was equal to 34.83% of its issued and fully paid capital. With the IPO price of Rp1,100 ($0.11) per share, Adaro raised Rp12.25 trillion ($1.23 billion) from the public in an IPO considered the largest in the history of the Indonesian capital market.

Adaro Energy aims to achieve organic growth from the current reserve base, improving the efficiency of its coal supply chain, products and locations, and through deepening integration, while it achieves inorganic growth through acquisitions of other deposits. Major recent project developments include:

• Overburden Out of Pit Crushing and Conveying System (OPCC) — The project was 96% complete at the end of December 2012 and Adaro estimatedthe system would be commissionedduring May.
• 2×30 mw Mine-mouth Power Plant—Theplant was 95% complete at the end ofDecember 2012 and Adaro estimated commissioning of the first unit to start inJanuary and the second unit by April.
• Capacity expansion at the Kelanis RiverTerminal.

Kalimantan Operations
Adaro Energy’s primary focus is on the Adaro project in South Kalimantan through subsidiary PT Adaro Indonesia. The deposits are in three main areas—Tutupan, Wara and Paringin. Tutupan stretches for 20 km along a ridge in the northeast part of the Adaro area. No major faults are known to disrupt the coal.

The Wara 1 coal deposit is 5 km west of Tutupan Central and is separated from that deposit by the Dahai thrust. The deposit stretches in a northeast direction over 12 km and dips to the southeast at 45˚. Wara 1 comprises three major seams that are characteristically low in ash (less than 3%) but with moisture content of around 40%.

The North Paringin deposit is southeast of Tutupan and around 1 km north of the old Paringin pit. The deposit forms an asymmetrical anticline of 4 km strike length with the eastern limb dipping at 30˚ and the western limb at 60˚. It is also a multi-seam deposit consisting of more than 40 seams ranging in thickness from less than 5 m to greater than 20 m. The quality of North Paringin is similar to Tutupan with ash around 3% and calorific value of around 4,800 kcal. The Paringin deposit extends south of the Balangan River.

Since it began production in 1991, Adaro has used open-pit mining methods to produce coal with primary waste stripping by hydraulic excavators and dump trucks. Under the Coal Contracts of Work (CCoW), the mine’s life is due to expire in 2022 with an option of two extensions of 10 years.

South Sumatra Developments
Adaro Energy’s investments in PT Mustika Indah Permai (MIP), PT Bukit Enim Energi (BEE) and PT Servo Meda Sejahtera (SMS) are part of its strategy in South Sumatra to replicate the proven success of its business model in South Kalimantan to create long-term, sustainable value from Indonesian coal.

During the last quarter of 2012, MIP continued pre-stripping activities at the mine site with stockpile and water control facilities also built. At the end of 2012, more than 1 million bank m3 of material had been removed exposing up to 125,000 mt of coal. Land purchasing progressed and coal crushing started to build stockpile bases. The company continued to build orders for the sale of Ultima, the brand name of MIP’s low-pollutant, low-heat value coal, to end users in Indonesia, China, India, Taiwan, Thailand, the Philippines and Vietnam. MIP is 75%-owned by Adaro through PT Alam Tri Abadi (ATA).

During the fourth quarter of 2012, development alternatives for BEE were studied with the aim of producing a work program and budget for approval by shareholders. Exploration has included surface geological and aerial topographic mapping, sampling and 13,100 m of exploration drilling. An additional exploration drilling program is being carried out in the BEE mining area to provide supplementary data for the preparation of a JORC report on the area’s reserves and resources.

Base line environment and social programs have started. From exploration results to date, BEE is considered compatible with Adaro’s other investments in electricity generation and is being promoted as a long-term, high-volume fuel supply for a dedicated mine-mouth base-load power plant. BEE is 61.04%-owned by Adaro Energy through ATA, 20% by PT Pamapersada Nusantara, 13.92% by PT Triputra Utama Selaras, and 5.04% by PT Bumi Alam Sejahtera.

SMS completed all earthworks and road surfacing during the final quarter of 2012, while some permanent bridges are expected to be completed in 2013. On November 20, 2012, the haul road was officially commissioned by the South Sumatra governor. Phase 1 of the Muara Lematang stockpiling and barge loading facility was also completed and 10 barges and 70,000 mt were loaded prior to the end of the year. The facility will be expanded to an annual capacity of 30 million mt over the next few years with future upgrades planned and timed in accordance with market demand. SMS is 35%-owned by Adaro Energy through ATA.

Other Developments
IndoMet Coal, a joint venture between BHP Billiton and Adaro Energy, is continuing the development of seven CCoWs in Kalimantan. IndoMet Coal continues to assess development options across all seven CCoWs and is constructing access roads and developing port facilities.

In the fourth quarter of 2012, PT Bhakti Energi Persada (BEP) continued to work toward getting the required government permits, acquiring land, securing social and community support, and completing engineering and geological studies. These programs are required to be finished before significant capital expenditures are made. The current development plan is to bring the BEP concessions into production in 2014. Adaro has full control of the management, operations and funding of BEP from the date of signing on May 28, 2012.

Electric Power Development Co. Ltd. (J-Power), Itochu Corp. and PT Adaro Power established PT Bhimasena Power Indonesia (BPI) in July 2011. On October 6, 2011, BPI and state-owned electricity company PLN signed a 25-year power purchase agreement, which includes construction of a 2,000 mw coal-fired power plant in Central Java. BPI expected to achieve financial closure by the end of 2012, but due to challenges related to land acquisitions, the Central Java power plant project will be delayed. It is not expected to be a lengthy delay nor will it harm the project or sponsors.

Adaro said the challenges are not insurmountable and it will deliver this key project as soon as possible, bringing significant benefit to all stakeholders and helping build the nation. Most parties agree Indonesia cannot achieve its potential without increasing the country’s power generation capacity and Adaro intends to help Indonesia achieve its full potential.

Competitive Advantages
Adaro Energy and its subsidiaries have numerous competitive advantages:

• Unlike most conglomerate businesses,Adaro is controlled by five families thatcollectively hold 63%. Adaro believesthe natural checks and balances thatexist in this ownership structure ensureall decisions are made in the best interest of the company and long-termvalue creation.
• Low cost producer—The location andcharacteristics of the major deposit, aswell as the operating strategy and execution, create the capacity to producecoal at a low-cost level.
• Large operation—Adaro Energy and itssubsidiaries are the second largest coalproducer in Indonesia, own and operatethe largest coal mine in Indonesia, andhave the largest single location openpit mine in the southern hemisphereand the fourth largest in the world.
• Unique coal—Adaro Energy’s environmentally friendly coal is trademarkedaround the world as Envirocoal.Growing concern for the environment,as well as understanding Envirocoal’sother benefits, such as lower operatingcosts, will ensure demand for Envirocoal remains firm.
• Highly skilled work force with manyyears of experience—A large and variedwork force and management, made upof people with decades of experiencefrom Indonesia and around the world.Many consider Adaro responsible forestablishing the international marketfor subbituminous environmental coal.
• Diversified loyal blue chip customerbase—Adaro and its subsidiaries sellEnvirocoal to a geographically diversecustomer base of 41 companies in 17different countries. Most have beencustomers for years and substantiallyall are power companies.
• Not restricted by infrastructure—Adaro’s existing infrastructure gives thecompany the capacity to increase production rapidly with minimal capitalexpenditure and to quickly adjust production volume based on market demand and conditions.
• A collection of integrated profit centers—Adaro Energy’s forward thinkingplan enables each subsidiary, whilefully integrated into the Adaro coal supply chain, to become an independentprofit center. Profit from subsidiariesassists the group’s overall incomegrowth. Each subsidiary may becomepublicly listed.
• Experienced subsidiaries—Adaro Energy’s strategic business units are experienced in the sectors of mining, trading,mining contractor service, and infrastructure and logistics.
• High quality assets—As well as the 3.5billion mt of coal reserves and resources, Adaro has a complete production fleet in the form of equipment andfacilities for crushing, stockpiling,transportation, loading, production andother supporting roles.

Consistent Growth
There are several factors that have contributed to Adaro Energy’s consistent growth:

• Demand for its coal is increasing every year.
• Coal mining contractors perform well interms of meeting annual targets.
• The company has sufficient equipmentand CAPEX to support productiongrowth need.
• Adaro has good mine planning.

However, in the current difficult market conditions, Adaro has recognized the need to get back to basics and does this by continuing to focus on the core business and reducing costs and improving efficiency. In addition, Adaro is carefully monitoring spending to preserve cash and maintain margins.

Despite the recent economic downturn, the company remains on-track to deliver its long-term strategies to grow and create maximum sustainable value from Indonesian coal by building a better and more efficient business. It aims to achieve a medium-term annual target of 80 million mt by continuous improvement in the coal supply chain, and to move further downstream into power.

Environmental Initiatives
Many people perceive that coal mining activities disturb the landscape and environment, but Adaro said this is not entirely true. By implementing good mining practices it can maintain and manage the environment without damaging it. In one initiative to maintain CO2, Adaro conducted energy efficiency in its operational activity to reduce solar fuel consumption. It is also developing alternative energy through a biodiesel-fuel pilot plant in collaboration with Komatsu and United Tractors. The B-20 program aims to substitute 20% of fuel with jatropha oil that it plans to apply in 100 dump trucks when it can be mass produced. The program is expected to reduce annual emissions by 20,000 mt.

The company’s environmental performance is strictly regulated and controlled by the use of an environmental management system aligned with ISO 14001 standards. Since the beginning, Adaro Energy has been strongly committed to implementing its mining principles to internationally recognized standards. In recent years it has received a Gold rating in the PROPER Award after four consecutive years of gaining a Green rating from the Ministry of Environment. These awards show that Adaro has complied with all regulatory requirements and has even gone beyond compliance by implementing environment initiatives and sustainable community development programs.

Safety is Vital
Adaro Energy has more than 22,000 employees and boasts many talented recruits from reputable universities, inside and outside Indonesia. It hires more than 70% of its employees from the local community in South Kalimantan.

Adaro is committed to maximizing workplace safety in all operational aspects. It continues to implement an integrated safety, environmental and production management system known as Adaro Safety, Environment and Production, which is aligned with ISO 14001 and OHSAS 18000 international standards. To improve employee awareness of safety, health and environmental issues, as well as to create a safe working environment culture, Adaro has employed a group general manager of SHE to create policies that will be implemented by all levels within the company’s business units and operating subsidiaries. Components of the safety culture include: Top management commitment to worker safety; consistently work on adapting international standards; and punishment for breaking safety rules.