Factors Affecting the Business Activities and Operation Results

which amounted to 45.9 million tons from 38.3 million tons in 2009. In future, it is predicted that the demand for coal will continue to rise. In addition to be focused to meet domestic needs in line with the 33 target fulfillment of the total Energy Mix year 2025 based on Presidential Decree No. 5 Year 2006 on National Energy Policy, increased demand for coal will also be supported by a surge in demand from the Asia market such as China and India as the major markets of Indonesian coal. The high demand from steel industries and power plants in China and the lack of domestic coal supply and supply restrictions of coal in India are predicted will push the sharp rise of coal imports in both countries. Indian coal demand is estimated to reach 696 million tons over this fiscal year through March 2012, while the domestic supply is approximately only 554 million tons. In other words there is a shortage of supply of around 142 million tons, with demand forecast that will continue to grow. Regarding the price, global coal prices is mainly influenced by the dynamics of supply and demand in the world market. Unlike other commodities, coal does not have a standard single price for the global market. Prices can fluctuate significantly in different geographical markets and for different types and qualities of coal. Production and Business Development The business development of the Company and its subsidiaries is determined by the implementation of exploration activities, production planning and logistics management to support coal mining activities and transportation from the mining area to coal processing and loading location. Historically, the Companys business development could be seen from the increment of the production in the last 3 three years. Production volume of the Company and its subsidiaries for the years ended December 31, 2008, 2009 and 2010 and the six-month period ended June 30, 2011 amounted to 1.3 million tons, 1.5 million tons, 1.8 million tons and 1.8 million tons of coal. Through the joint mining operations, the Company obtained additional coal production for 265 thousand tons of coal in 2010 and 543 thousand tons in the six-month periodof 2011 from the mining area of TBA, a third party. Accordingly, the Companys total coal production is 2.0 million tons in 2010 and 2.4 million tons in the six-month period ended June 30, 2011. The Company intends to increase production in the following years. Coal Mining Contractors The mining activities of the Company and its subsidiaries are performed by the mining contractors. The mining contractors lift and transport the overburden layer, mine and transport coal and reclaim the mine. BIB, TKS and KIM have contracts with at least 5 contractor companies. Those designated mining contractors are obliged to provide all equipments, machineries, tools and manpower needed to conduct all mining operations in all mining areas of the Company. The Company believes that by relying on contractors in its subsidiaries mining activities, the Company might reduce the need for capital expenditures significantly, thus the Company could focus its resources to strategic activities, such as mining plan, exploration and marketing. Fluctuations of Prices of Fuel, Spare Parts and Other Supporting Operational Activities Materials Coal is an internationally traded commodity. Coal prices have quite large fluctuations. Factors affecting coal prices fluctuations are:  The volume of coal production in the world, which is influenced by several factors such as the opening of new mines and the closure of old mines, the discovery of new coal reserves, development of current mining operations.  Coal supply constraints which is caused by the disruption and transportation network limitations, general economic conditions, and weather factors.  Crude oil prices fluctuations which will affect to the mining costs increment charged by the mining contractors, increasing cost of coal shipping transportation.  Government policy on the export of coal from the country. The risk of exchange rate fluctuations to the Company is relatively small considering that the Company has a net open position in foreign currencies which is more or less balanced. The risk of interest rate fluctuations to the Company is relatively small considering that the payable balance of the Company is small compared with the total net income. In addition, the Company plans to repay part or all of the payable from the proceeds from the Initial Public Offering. Weather Conditions Erratic weather conditions will affect the coal trade. Disruption of the mining process will affect the coal supply. Poor weather conditions make disruption of mining activity and obstruction in coal distribution. Government Policy and Legal Changes In general, the current policy of the Government of Indonesia regarding coal mining industry is oriented on the market. However, the Government of Indonesia, foreign governments and local governments from time to time might issue new policies and regulations that might affect the mining operation. The Government policy that might affect the Companys business includes policy related to mining activities, taxes and the environment.

3. Material Accounting Policies

The Company prepares consolidated financial reports in accordance with Financial Accounting Standards generally accepted in Indonesia. Basic measurements of the Companys consolidated financial statements is the concept of historical cost, except for certain accounts which are prepared based on other measurements, as described in accounting policy of each account. Inventory Inventory is stated based on the lower of cost and net realizable value. The inventory cost is determined by the Moving Average Methods. Mining inventory cost consists of raw materials, manpower, depreciation and the allocation of overhead costs associated with mining activities. The allowance for inventory obsolescence and the allowance for inventory impairment are established to adjust the value of inventories to net realizable value. Net realizable value is the estimated selling price in the ordinary business minus the estimated costs of completion and estimated costs required to make the sale. Fixed Assets Fixed assets except for land, are stated based on the acquisition cost, but excluding the daily maintenance cost, minus accumulated depreciation and accumulated impairment losses, if any. Land is not depreciated and is stated based on the acquisition cost minus accumulated impairment, if any. The initial acquisition cost of fixed assets includes the acquisition price including import duties and purchase taxes that should not be credited and the costs attributable directly to bring assets to the desired location and condition in accordance with the determined intended use. Expenses incurred after the fixed assets being used, such as repair and maintenance expenses, would be charged to the consolidated statement of income as incurred. If the expenses cause increase in future economic benefits from the use of the fixed assets which might exceed their normal performance, then the expenses are capitalized as additional acquisition cost of fixed assets. Depreciation is calculated based on the straight-line method over the useful lives of the assets as follows: Year Building 5 - 20 Machineries and heavy equipment 4 - 8 Vehicles 4 - 8 Furniture and office equipment 4