0.15 Adaro Energy 2008 Annual Report English
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Exploring Initiatives for Future Growth
Following a review of how to best grow the company despite the drastic changes brought about by the 2008 economic crisis, Adaro Energy decided to continue with the plan to further integrate and
improve its coal supply chain to create long term and sustainable value.
Adaro Energy is focused on its core business of coal mining and marketing and will continue on with the plan of further integration and eficiency and producing ever larger volumes; the 5 year target
is to produce 80Mt of coal. To improve eficiency Adaro Energy plans to build a mine mouth power plant and an overland conveyor. After acquiring a mining contractor in 2002, sealing the 75km haul
road in 2005, de-bottle necking the Barito River in 2008, Adaro Energy is ready to implement the next phase of further integration and eficiency improvements.
After assessing several options, the plan is to acquire an afiliated barging and ship loading company. The deal will be done openly and at a fair arm’s length price. It is strategically important to have pit
to port integration, which can lower barge and crane rates, reduce demurrage, and create other eficiencies and synergies.
Due to the infrastructure improvements, Adaro Energy’s growth is not expected to be limited by infrastructure for 2009 and 2010. The Company can ramp up by acquiring additional mining and
hauling equipment.
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Strategic Development Projects PT Makmur Sejahtera Wisesa MSW Power Plant – Powering the Conveyor
During 2008, MSW made progress in terms of achieving inancial closure in September for a US122 million syndicated 12 year loan from the International Financial Corporation IFC of the
World Bank. No draw downs were made on the facility in 2008.
To be funded by way of project inance, the total estimated project costs are estimated at up to US162.5 million, including interest during construction, EPC, switchyard, insurance, contingency,
water supply and other associated costs. MSW is exploring ways in which to lower the project costs given the current economic conditions.
In 2008, MSW selected PT Punj Lloyd Indonesia and Punj Lloyd Pte Ltd Singapore as the Engineering, Procurement and Construction EPC contractors. Siemens Industrial Turbomachinery
S.R.O, Czech Republic has been selected to provide the steam turbine generators.
Given the dificulties created by the inancial crisis, in the fourth quarter of 2008 MSW and Adaro Energy began to review the viability of the project. In March 2009, MSW and Adaro Energy decided
to proceed with the project.
The power plant has other sources of income and uses, such as providing power to the local surrounding communities and providing power to other potential improvements at Adaro’s mining
site.
In 2008, MSW spent US10 million on the mine mouth power plant project, funded by the equity injection provided by Adaro Energy’s cash lows. In 2009, the plan is to spend up to US52.5 million,
substantially all funded by the IFC loan.
Kelanis – Tutupan Transportation System - Building Capacity Along the Haul Road to Improve Eficiency
A key part of the plan to double production by 2013 is to increase the transportation capacity from the mine site to the Kelanis River terminal. Currently Adaro Energy, via its wholly-owned mining
company Adaro Indonesia, has plans to build a 68 km transport system, most likely a multi-stage conveyor, with adjacent crushing plant, stacking system and barge loaders with total capacity of
6,000t per hour 40Mt per year.
At the end of 2008, Adaro Energy’s current road capacity to Kelanis was about 60 million tonnes per year, with 45 million tonnes of road transportation capacity. Upon completion of the conveyor,
Adaro Energy will have 2 alternative modes of transportation with combined capacity of more than 80 million tonnes per year. Adaro Energy has the option of boosting production by adding additional
and more powerful trucks along the existing haul road. However, the main goal of the overland conveyor is not about production growth, but about cost reduction. A key advantage of the new
transportation system is that it could reduce operating costs by approximately US2 per tonne compared to trucking.
In 2008, the project was at the design phase with different alternatives being considered. It is possible the project will be executed in two phases, with construction of a conveyor half way along
the distance of the haul road to Kelanis, followed by the second stage, which would be either to build an additional conveyor for the remainder of the distance, build a channel or use the existing
haul road. The company has been conducting negotiations with different EPC contractors and equipment suppliers.
The Kelanis River Facility recently added an additional crusher to
expand capacity to around 55Mt.
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Director of Operations, Chia Ah Hoo said: “It is absolutely essential that we completely integrate from pit to port. Without controlling a portion
of our coal mining and land transportation we could not have achieved the volume of production we achieved last year. With asset prices falling, now is the time to invest and achieve greater control
of our coal supply chain.”
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Due to the dificulties created by the dramatic reduction in access to capital caused by the global inancial crisis, aspects of the project were postponed until January 2009, so an overall review
could be conducted on the cost structures and beneits of the overland conveyor. The project is targeted for completion in 2011. During the review, work continued on acquiring necessary land, on
inalizing project design and selecting the EPC.
Before the crisis, the total project cost was estimated at US350 million. However, due the economic crisis and lower prices, and due to possible revisions to the project, the total project cost will be
lowered signiicantly.
Adaro Energy requires an overland conveyor to improve eficiency and different alternative scenarios were studied. Once the plans have been inalized, Adaro Energy will inform the market
accordingly. In 2008, Adaro Energy spent around US500,000 on the overland conveyor project, funded by
internal cash lows.
Barito Channel – Dredging a New Channel to Get Rid of a Bottleneck On October 23, 2008, Adaro Energy announced it had successfully completed a trial-run on a new
channel that was dredged at the mouth of the Barito River, near Banjarmasin, South Kalimatan. A crucial step in Adaro Energy’s eficiency program and overall expansion plans, the dredging
commenced full operations, on time and on budget, on January 1, 2009. The most important aspect of opening the new channel is that annual capacity will increase to over 200 million tonnes from 60
million tonnes. This additional capacity will help Adaro Energy realize its plans to increase annual production to 80 million tonnes. The dredging of the new channel and the ongoing maintenance
and water toll operation, will be carried out by Adaro Energy’s new subsidiary, PT Sarana Daya Mandiri “SDM”.
Director of Corporate Affairs and Corporate Secretary of Adaro Energy, Andre J. Mamuaya said: “The most important aspect of opening the new channel is that annual capacity will increase to
over 200 million tonnes from 60 million tonnes. This additional capacity will help us realize our expansion plans of doubling annual production in the next ive years from 40 million tonnes to 80
million tonnes.”
This dredging project undertaken by PT SDM is a unique alliance of a privately funded joint venture of privately held mining companies and different sections of central and provincial governments.
The new channel will be available for public use and would not have been possible without the contributions and support of the local and central government.
Prior to dredging, the existing channel was only traversable by loaded barges on the high tide once a day during a tide window of about eight hours. High siltation rates and an under-funded
maintenance dredging program resulted in dificult navigation conditions in the channel. In order to increase barging eficiency and capability, at the beginning of 2008, PT Sarana Daya Mandiri
PT SDM began a project to dredge a deeper and straighter channel. The actual dredging was conducted by Van Oord, an international dredging and marine contracting company from The
Netherlands. The channel shall be maintained by a reputable dredging company. The travel time required to pass through the Barito channel has been reduced to 3 hours from
around 6.5 hours. The channel may now be used 24 hours day, 365 days a year. Dredging a straight passage through the channel will increase safety as barges will no longer be required to navigate
through two dangerous turns.
By using the new channel, Adaro Energy and other users will no longer have to use to two tugs or “tug assist”, to pull barges, which range in size from 8,000 – 14,000 tonnes, through the shallow
waters at the mouth of the Barito River. By only using one tug, as travel time is greatly reduced, and due to shorter barging cycle time Adaro Energy expects to incur fuel and tug cost savings.
Dredging the mouth of the Barito River.
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The US42 million cost of the dredging was inanced by a loan provided to PT SDM by Adaro Energy. This loan will be repaid by revenues generated by users of the new channel, including
Adaro Indonesia, who must pay a toll of US0.30ton.
In a related party transaction, Adaro Energy acquired 51 in PT SDM from PT Rahman Abdijaya. Three non-related smaller mining companies own the remaining 49. The acquisition, which was
disclosed in Adaro Energy’s IPO Prospectus, was completed for the nominal price of Rp 128 million around US12,000. A good example of the controlling shareholders support for Adaro Energy, the
SDM stake was acquired in third quarter of 2009 as part of implementing Adaro Energy’s integrated business model.
In 2008, Adaro Energy spent US42 million on the Barito River dredging project, funded by internal cash lows. Adaro Energy may seek immediate repayment of some of the 42 million it loaned to
SDM by having SDM reinance the loan with a lending institution.
IBT Fuel Terminal – Guaranteeing Supplies of Lower Cost Fuel The IBT Fuel Terminal project’s main objective is to provide a guaranteed fuel supply as well as
lower fuel costs for Adaro Indonesia’s operations by increasing shipment size. During 2008, work continued regarding the commercial aspects of operating the fuel terminal and tug assist activities.
The purpose of the project is also to develop liquid bulk based trafic at Mekar Putih Port at Pulau Laut and thus will increase the income stream and activity growth of IBT. The total project cost is
expected to be around US40 million.
The project consists of two major components, a BOOT Build-Own-Operate-Transfer agreement between IBT and PT Shell Indonesia on a fuel storage facility with a capacity of sixty thousand
tonnes and a modiication to the existing jetty facility and piping for fuel loading and unloading, to allow the capacity to berth tankers with capacities ranging from 2,000 dwt up to 48,000 dwt. The
IBT Fuel Terminal is designed and capable for the receipt, storage, and bunkering of fuel with an estimated throughput of 720,000 kilolitres per year.
Shell selected Punj Lloyd Pte Ltd Singapore as its EPC contractor to construct the fuel tanks, and the EPC contractor surveyed the site at IBT. IBT selected the Inti-Duta Consortium to construct the
new jetty at IBT, and certain items were tendered.
In the fourth quarter, it was determined that all investment costs for jetty modiication will be self- inanced and the fuel jetty construction contract was awarded. Completion is expected in August
2009. Shell reported preparation of the fuel storage tank construction was on target. In 2008, Adaro Energy spent US1.2 million on the IBT Fuel Terminal, to modify the existing jetty
facility and piping, funded by internal cash lows. Adaro Energy plans to spend US12 million in 2009 also from internal cash lows.
Kelanis River Terminal – Boosting Capacity of the Final Processing Facility During 2008, Adaro Indonesia began the installation of a new crushing system to boost capacity at
Kelanis. In March 2009, with the installation complete the annual capacity had increased from 45 million tonnes to 55 million tonnes, at a cost of US10 million.
There are no further capital expenditures planned for 2009 at Kelanis.
Acquisition of an Afiliated Barging and Ship Loading Company - To Strengthen the Coal Supply Chain
After studying several options, in 2009 Adaro Energy intends to acquire an afiliated coal barging and transshipment company. Negotiations began at the beginning of 2009, and a deal was expected
before then end of the irst half of the year.
The Project Development team meet to debate strategy.
Barging down the Barito River must be conducted skillfully to avoid
disruption the local communities and environment.
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General Director Sandiaga S. Uno said: “With this potential acquisition, we can deliver on our stated strategy to create value and to improve
our business by further integration and to strengthen our coal supply chain. With this acquisition Adaro will have better control of the supply chain and less counter party risk.”
The move is part of Adaro Energy’s ongoing efforts to implement its long stated business plan of further integration, the next phase of which is improving barging and ship loading, the two areas
of the coal supply chain that Adaro does not currently control. The intention to acquire an afiliated barging and shiploading company was previously disclosed in Adaro Energy’s IPO Prospectus.
The beneits of acquiring control of a well run barging and ship loading contractor include cost savings in the form of reduced demurrage and other eficiencies. This is especially true when future
barging volumes come up for tender in the future. Better control allows Adaro Energy to improve reliability and on time delivery. Upon analysis of comparable deals and current market conditions
it is better to acquire an existing and operating company, rather than start a new barging and ship loading company.
As well as creating value from further integration and better eficiency, in making a decision to invest, management considers various factors including cash lows, and expected return on investment.
With regards to this acquisition plan Adaro Energy appointed independent parties to assist in providing third party reports and opinions on the acquisition as required by the capital market and
stock exchange authorities.
Capital Expenditures
In 2008, Adaro Energy spent US255 million on capital expenditures, an increase of 155 in US over the amount spent in 2007.
The breakdown of 2008 capital expenditures is as follows: US115 million equipment purchases by Adaro Energy’s mining contractor, SIS, US60 million Cakung land acquisition, US42 million
dredging Barito Channel, US10 million MSW mine mouth power plant, US15 million road maintenance and others, US13 million Kelanis river port.
Adaro Energy has planned capital expenditures in 2009 of US251 million down slightly from the US255 million spent in 2008. All of the capital expenditures are expected to be funded out of
existing cash holdings, operating cash and existing debt facilities.
The breakdown of 2009 capital expenditures is as follows: US60 million equipment purchases by Adaro Energy’s mining contractor, SIS, US52.5 million MSW mine mouth power plant,
US20 million land acquisition, US20 million road maintenance, US10 million Kelanis river port, US10 million Barito Channel maintenance, and US78 million acquisition of barging
company.
SIS will normally target around US50-60 million on equipment purchases. Adaro Energy’s other three mining contractors have their own capital expenditure plans.
As well, Adaro Energy may begin to make capital expenditures in 2009 on the overland conveyor.
Adrian Lembong, General Manager - Business Development
• Prior to joining Adaro he was employed with Sudchemie AG, a German based manufacturer of specialty minerals.
• He started as a process engineer in 1998 handling projects in Germany, Indonesia and Mexico before assuming the position of site manager of the production site in Indonesia.
• Ultimately he was responsible for the Marketing and Technical Application in the Asia Paciic Region for Sudchemie AG.
Barge loading the Kelanis River Facility, with a capacity of 55Mt, one
of the largest river terminals in the world.
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Shareholder Information Investor Relations
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Volume Price
Stock Price Movement During 2008
Rp
100,000,000 200,000,000
300,000,000 400,000,000
500,000,000 600,000,000
700,000,000 800,000,000
200 400
600 800
1,000 1,200
1,400 1,600
1,800
Jul ‘08 Aug ‘08
Sep ‘08 Oct ‘08
Nov ‘08 Dec ‘08
Shareholders
According to the shareholders list as of December 30, 2008, as prepared by the Share Registrar PT Ficomindo Buana Registrar, the shareholders structure and shareholders holding more than 5
ownership were as follows:
Shareholders Structure as of December 30, 2008 Shareholder
of Shares Ownership
Domestic - Limited Liability Company
15,536,655,691 48.57
- Individual
5,448,687,536 17.03
- Pension Fund
38,834,500 0.12
- Foundation
2,163,000 0.01
SUB-TOTAL 21,026,340,727