3Q10 - Quarterly Activities Report

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1 For further information please contact: Mr. Andre J. Mamuaya, Director of Corporate Affairs and Corporate Secretary Mr. Cameron Tough, Head of Investor Relations Tel: (6221) Fax: (6221) Q10 - Quarterly Activities Report For the Three Months Ending September 30th, 2010 Jakarta, October 28 th, 2010 Our Key Messages: Our 3Q10 and 9M10 results were adversely affected by unusually heavy rainfall. While the returns can be great, coal mining can also be a risky, long term, capital intensive and long term sector. Despite this short term volatility, we remain positive on our longer term growth plans, driven by the expectations of increasing demand for power, and coal to fuel that power, especially in Asia. With pricing determined by the market, we continue to focus on building long-term, low cost assets, to create sustainable shareholder value. Summary of 3Q10: The volume of rain at the Tutupan pit averaged 238 mm per month, which was over 2.5 times more than the 5 year average for the third quarter. The average number of rain days per month of 15 days was more than double the five year average. Although our 2010 full year target remains 45 million tonnes, and we will do our best to achieve it, due to the unprecedented rainfall we have revised our guidance to million tonnes of production. Until 3Q10, we have never had a third quarter in which production volume was lower than the two quarters that precede it. Production in third quarter tends to be above average, however due to the unusual and unseasonably bad weather, production decreased in 3Q10 to million tonnes, which was lower than the million tonnes of 1Q10 and the million tonnes of 2Q10. While production decreased 2% compared to 3Q09, it increased 12% in 9M10 to million tonnes. While output level looks acceptable, at 95% of the plan, by the end of the normally dry third quarter, production should be in excess of the plan. We put the Overland Conveyor (OLC), being built to improve the efficiency (not capacity) of coal transportation to our Kelanis river port, on hold. We advanced plans to increase and improve overburden removal at the Tutupan mine. Planning for the Out Of Pit Crusher and Conveyor (OPCC) made progress. With the 1

2 feasibility work nearing completion, the EPC contractor for this project will soon be appointed. Work continued on the 2X30 MW mine-mouth power plant, which will power the new conveyors and other sectors of the operation. Once complete, the power plant will bring costs savings, less dependency on oil and more reliability. Envirocoal-Wara received good acceptance and robust demand from both the domestic and international markets. Adaro agreed to take a stake in an international consortium with international, blue chip, power companies that will soon bid on a large domestic IPP project. Please cameron.tough@ptadaro.com should you require any additional information. 2

3 ADARO ENERGY - QUARTERLY OPERATIONS PERFORMANCE SNAPSHOT 3

4 OPERATIONS In 3Q10, Adaro Energy s production volume decreased 2% to million tonnes, or lower than the two quarters that precede it, due to the unprecedented volume of rainfall and number of raindays, which hampered pit dewatering efforts. Despite the poor conditions output increased 12% to million tonnes in 9M10. The issue concerning the rain is not about how Adaro did compared to last year, but rather how the unusual rain affected Adaro s performance compared to the plan. Third quarter is normally drier and production is typically above average (i.e. higher than the two preceding quarters) but this is not the case in At the end of 9M10, as the company prepares to enter the coming rainy season, production should be in excess of the plan, whereas Adaro s production was 95% of the plan. PT Adaro Energy Tbk Units 3Q09 3Q10 % Change Production Mt % Sales Mt % Units 9M09 9M10 % Change Production Mt *) 12% Sales Mt **) 12% *) Include coal production from Envirocoal-Wara of 1.46 Mt **) Include the third party coal sales sold by Coaltrade of 0.49 Mt and Envirocoal-Wara of 0.89 Mt Adaro expects flat to moderate growth from the mature Tutupan pit over the next few years as the company ramps up to 80 million tonnes. Adaro continues to target 30 million tonnes of Envirocoal-Wara and 50 million tonnes of Envirocoal-Tutupan by Next year Adaro Energy aims to produce million tonnes of coal, including 4-5 million tonnes of Envirocoal-Wara. Adaro was not the only company affected by the weather. Indonesian coal production for 2010 was reforecast on September 2010 by the Indonesian Coal Mining Association to 90% of earlier estimates. The mining conditions will likely continue to be challenging for the remainder of the year as Indonesia enters the normal November February wet season. After beginning shipments of Envirocoal-Wara in 2Q10, Adaro continued to receive strong interest from existing customers throughout 3Q10, from countries such as India, China, Indonesia and South Korea. Even with production of Envirocoal-Wara doing well, at 1.46 million tonnes of the 2 million tonnes target for 2010, reaching total coal production of 45 million tonnes will be difficult to achieve this year. Mining and Hauling PT Pamapersada Nusantara ( PAMA ) was responsible for 38% of Adaro Indonesia s coal production volumes. PT Bukit Makmur Mandiri Utama ( BUMA ) and PT Rahman Abdijaya ( RAJ ) were responsible for 18% and 13% respectively. Adaro Energy s subsidiary PT Saptaindra Sejati ( SIS ) conducted 29% of the total. PT Rante Mutiara Insani ( RMI ) is assisting in the development of the Envirocoal-Wara pit and contributed 2% of Adaro Indonesia s coal production. 4

5 Overburden Removal Overburden removal was 85% of the plan due to the record high rainfall and number of rain days during 9M10, especially 3Q10. The average overburden removal per day was 633 kbcm, 632 kbcm and 574 kbcm in July, August and September respectively. Coal Mining Despite the challenging wet conditions Adaro s contractors delivered a combined 94% of the plan. The production from Envirocoal-Wara was largely unaffected as it is in the initial stages of development and has a low overburden stripping ratio. Coal Mining: PT Adaro Indonesia Units 3Q09 3Q10 % Change Overburden Mbcm % Coal Transported Mt % Coal Sold Mt % Strip Ratio Bcm/t Units 9M09 9M10 % Change Overburden Mbcm % Coal Transported Mt % Coal Sold Mt % Strip Ratio Bcm/t *) *) Only for Tutupan. The strip ratio for Envirocoal-Wara is 2.67 bcm/t Barging and Ship Loading The unprecedented level of rainfall at the mining operation lowered the tonnages and lengthened cycle times of all barging contractors, especially in the third quarter, as can be seen in the decline in output from the floating cranes and self geared vessels. Due to strong demand tonnage increased at IBT with transhipment rising 36% to 1.32 Mt during 3Q10. In order to meet Adaro s domestic obligation (barged directly to the customer), Adaro s barging tonnages increased 12% to 3.17 Mt. As it is a brand new, low strip ratio pit, the barging and loading of Envirocoal-Wara was unaffected due to uninterrupted supply coming from the mine. Units 3Q09 3Q10 % Change Floating Cranes Mt % Self Geared Mt % IBT Mt % Barges Mt % Total Mt % 5

6 Units 9M09 9M10 % Change Floating Cranes Mt % Self Geared Mt % IBT Mt % Barges Mt % Total Mt % Unseasonable and Unusually Heavy Rainfall All regions across Indonesia have been experiencing abnormal weather this year as stated by an official from the Meteorology, Climatology and Geophysics Agency on September 16 th, The rainy season normally starts in the fourth quarter and continues to the first quarter of the following year. This year however, it is as though the rainy season never really ended. The third quarter is supposed to be the driest quarter of the year and favorable for coal mining. Instead, as the table of rainfall data below indicates, the rainfall in 9M10 and in 3Q10 reached historical highs. Monthly 5-year Average vs. 5-yrs (%) 2010 vs (%) January - Rain (mm) (93) Rain days February - Rain (mm) (100) (165) Rain days March - Rain (mm) Rain days April - Rain (mm) Rain days May - Rain (mm) (50) (71) Rain days June - Rain (mm) Rain days July - Rain (mm) Rain days August - Rain (mm) Rain days September - Rain (mm) Rain days TOTAL Rain 1,885 1,966 2, Rain days Note: Rainfall in mm and rain days the the Tutupan mining area The rainfall volume and number of rain days in the third quarter were higher than last year and the five year average. In the third quarter the volume of rain averaged 238 mm per month, which was over 2.5 times more than the 5 year average for the third quarter. The average number of rain days per month of 15 days was more than double the five year average. This continues a trend of unusual rain that began in 1Q10 and 2Q10, noticeably January, March, April and June, when the average monthly volume of rain and average monthly number of rain days exceeded the 5 year averages. 6

7 This extended rainy season caused pit drainage sumps to overfill and kept the floor coal seams scheduled to be mined substantially under water even with full time pumping. In July, August and September Adaro pumped 7.58 Mm 3, 5.85 Mm 3, and 4.26 Mm 3 of water from the mine, respectively. This is equivalent in volume to 7,076 Olympic sized swimming pools but was still not enough to sufficiently lower water levels. The rain unexpectedly caused a buildup of mud in the drainage sumps which require more sophisticated slurry pumps. The dredge system Adaro ordered last quarter to clean mud from the pits and increase pumping performance arrived in October. Once the system is operational, it will take a few weeks to lower the mud and water levels in the sumps sufficiently to allow the exposed coal to be mined. Pit dewatering is the main priority as we are entering the wetter period of the year to ensure water pumping keeps on top of the runoff volumes. Vessel Waiting Times Increased Due to low level of coal inventories and difficulty in removing overburden, the average waiting time per vessel increased considerably during third quarter. The average number of days a customer s vessel had to wait in July, August and September was 8, 17, and 12 days respectively. The average waiting time during normal conditions is less than 3 days. As a result, Adaro incurred a significant amount of demurrage charges in the third quarter. Adaro is in ongoing contact with its customers to reduce the average waiting time at the Taboneo anchorage. Shipments were pushed back, but the queue began to shorten by the end of 3Q10. Coal Mining Contractor: PT Saptaindra Sejati SIS is 100% owned by Adaro Energy, is Adaro s second largest contractor and is Indonesia s third largest mining contractor. Like Adaro s other contractors, SIS performance was affected by the poor weather conditions at Adaro and in Indonesia. During 3Q10, SIS total overburden removal decreased 6% to Mbcm and coal getting decreased 24% to 4.12 Mt. SIS achieved 84% of its 9M10 overburden plan. In terms of coal, SIS was Adaro s top performer reaching 108% of its targeted production levels as of 9M10. The impact of the heavy unusual rain at Adaro s site can be seen by the small 2% increase in overburden removal for Adaro in 9M10 to Mbcm. In 3Q10, overburden removal increased 5%, despite the heavy rains, due to the arrival of additional new heavy equipment. Units 3Q09 3Q10 % Change Overburden Removal Mbcm % Adaro Mbcm % Others Mbcm % Coal Getting Mt % Adaro Mt % Others Mt % 7

8 Units 9M09 9M10 % Change Overburden Removal Mbcm % Adaro Mbcm % Others Mbcm % Coal Getting Mt % Adaro Mt % Others Mt % Barging and Ship Loading: Orchard Maritime Logistics Ltd, MBP and HBI In 3Q10, total coal transported and loaded decreased 20% and 30%, respectively, due mainly to the poor weather and related production decreases at Adaro s mining operations. However, due to strong coal demand, on a nine month basis, the ship loading and barging activities increased. Adaro continued to be the main user of the services of Adaro s barging and ship loading contractors and the largest volume increases are attributed to Adaro s demand. Units 3Q09 3Q10 % Change Total Coal Transported Mt % Adaro Mt % Others Mt % Total Coal Loaded Mt % Adaro Mt % Others Mt Units 9M09 9M10 % Change Total Coal Transported Mt % Adaro Mt % Others Mt % Total Coal Loaded Mt % Adaro Mt % Others Mt % Coal Terminal: PT Indonesia Bulk Terminal In 9M10, the total coal shipped from IBT rose 69% to 4.99 Mt compared to the same period last year, due to higher demand. IBT continues to focus on its third party coal handling and fuel services business. Third party coal handling increased 152% in 9M10, to a certain degree caused by supply constraints at Adaro caused by the rain. IBT continued to perform well in 3Q10 by increasing the number of ships loaded 52% to 29. Units 3Q09 3Q10 % Change Total Coal Shipped Mt % Adaro/Coaltrade Mt % Third party Mt % No of vessels loaded % 8

9 Units 9M09 9M10 % Change Total Coal Shipped Mt % Adaro/Coaltrade Mt % Third party Mt % No of vessels loaded % Coal Marketing: Coaltrade Services International Pte Ltd Due to supply constraints caused by the unseasonable rain, coal purchased from Adaro dropped 66% in 3Q10, although due to strong demand was up 29% during 9M10. As Coaltrade attempted to fill Adaro orders delayed by the heavy rains, total third party coal sold by Coaltrade more than doubled to 0.33 Mt during 3Q10 and rose 117% to 0.49 Mt during 9M10. Units 3Q09 3Q10 % Change Total coal sales Mt % Coal purchased from Adaro Mt % Others Mt % Units 9M09 9M10 % Change Total coal sales Mt % Coal purchased from Adaro Mt % Others Mt % 9

10 SAFETY AND ENVIRONMENT Safety During 3Q10, there were 3 LTI (Loss Time Injury) and the LTIFR (Loss Time Injury Frequency Rate) of 0.4 was lower compared to the same period last year. The quarterly safety meetings, during which contractors send representative directors to the site, have improved safety performance, with the 9M10 LTIFR coming in 20% below the plan. 9M09 9M10 Actual Actual Plan LTI LTIFR Land Rehabilitation Adaro rehabilitated 61 hectares during the quarter with total rehabilitation to the end of 3Q10 of 1,387 hectares. Adaro s key environmental initiatives include: Review available technology for an early warning system for safety dams, settlement ponds and discharge points that reports water level, ph, turbidity, TSS, conductivity and other water quality parameters in real time. Review systems for the thickening of mud slurries to aid disposal. Improve planning systems to better prioritize equipment used for the construction of water management infrastructure. 3Q10 Project to Date Rehabilitation (ha) 61 1,387 Land Disturbed - Mine (ha) 239 2,505 Land Disturbed - Other (ha) 232 4,314 Net Land Disturbed (ha) 400 5,432 10

11 PROJECT DEVELOPMENT Improving Integration and Efficiency of the Coal Supply Chain: Conveyor Systems In terms of increasing capacity at Adaro s 18 year old, very large, Tutupan pit, one of the key challenges and major input costs is overburden hauling and handling, which is looking more difficult than originally anticipated. Overburden removal will become more expensive, both for contractors and Adaro, as the pit gets deeper and hauling distances increase. As ensuring the production growth of Tutupan is a higher priority than increasing coal hauling efficiency, Adaro has advanced plans to increase and improve overburden removal at the Tutupan mine. Plans to construct what is known as an Out Of Pit Crusher and Conveyor (OPCC) made progress during 3Q10. With feasibility work nearing completion, Adaro will soon announce the EPC contractor for this project. With an expected cost of US$250 US$300 million, the OPCC is estimated to deliver similar or better economic benefits as the Overland Conveyor (OLC). Adaro expects the OPCC will be operational by Meanwhile, the OLC was put on hold. 2 X 30 MW Mine-mouth Power Plant Adaro s 2X30 MW mine-mouth power plant will power the new conveyors and the entire mining operation, bringing costs savings, less dependency on oil and more reliability. The plant will be owned and operated by Adaro s subsidiary, MSW, and is expected to commence in During 3Q10, MSW spent US$8.7 million. As at the end of the quarter, MSW had spent US$54 million on the project. The plant will be fueled by approximately 300,000 tonnes of Envirocoal-Wara per year. Shell Inaugurates the Pulau Laut Fuel Terminal in South Kalimantan Shell, in co-operation with Indonesia Bulk Terminal officially opened the Pulau Laut Fuel Terminal in South Kalimantan on August 27 th, IBT s new fuel terminal is a recent example of continual efforts to further integrate and improve Adaro s coal supply chain. For Adaro Indonesia, the fuel terminal will provide a guaranteed and lower cost fuel supply. For IBT, the fuel terminal will help increase third party traffic and users of IBT s facilities. 11

12 Following the Inauguration of the Pulau Laut Fuel Terminal, August 27 th, 2010 From left to right: Darwin Silalahi (Country Chairman and President Director PT Shell Indonesia), Adrian Lembong (Director of IBT), Chia Ah Hoo (President Director of IBT), Tan Chong Meng (Executive Vice President B2B & Lubricants), Tubagus Haryono (Head of BPH Migas) and Mark William (Director Shell downstream and a member of Shell Executive Committee) BUSINESS DEVELOPMENT IndoMet Coal Project ( ICP ) with BHP Billiton After commencing in May 2010, further study to identify development options across the seven Coal Contracts of Work (CCoWs) of the IndoMet Coal Project continued during 3q10. Effective on June 11 th, 2010, three of Adaro Energy s directors were appointed to the existing Boards of each of the 7 concession companies. President Director Mr. Garibaldi Thohir was appointed a Commissioner, while Director of Operations Mr. Chia Ah Hoo and Chief Legal Officer Mr. Syah Indra Aman were appointed Directors. The ICP, which is 25% owned by Adaro Energy, will inform the market of the results of the study phase at the appropriate time. Moving Further Downstream: Pit to Power Having just completed pit to port vertical integration in May 2009, Adaro Energy is looking into two IPP (Independent Power Producer) projects as part of its growth strategy to complete the vertical integration of its coal supply chain from pit to power. Moving further downstream into the power sector will provide good returns, steady sources of reliable cash flow and create significant base demand for Envirocoal-Wara. Adaro agreed to take a stake in an international consortium with international, blue chip, power companies that will soon bid on a large domestic IPP project. Adaro may also bid on a smaller IPP project in South Kalimantan, together with another blue chip international company. 12

13 Coal Enhancement As the Tutupan mine s future production growth will be constrained, with only moderate levels of growth, Adaro s plan to reach 80 million tonnes is somewhat dependent upon the Envirocoal-Wara deposit. Wara is a coal of lower heat value and higher moisture, although still high quality, thermal coal. Adaro recognizes if the moisture could be permanently removed, the market for Wara coal and other similar low rank coals would be increased. During 3Q10, Adaro Energy continued to research the best technology and methods to enhance, or more accurately, dry the coal. Coal Bed Methane During 3Q10, Adaro Energy further considered the feasibility of developing a coal bed methane facility at the mining concession area and spoke with several key players in this sector. While perhaps not for commercial sale, the CBM could be used to fuel a portion of the trucking fleet, improve efficiency and sustainability and reduce Adaro Energy s dependency on oil. 13

14 CORPORATE DEVELOPMENT Adaro Institute In 3Q10, Adaro Energy approved plans to establish a learning center named the Adaro Institute with a mission to develop talented people and produce high calibre professionals and leaders/managers. To help Adaro s business development plans, the institute will improve the skills and capabilities of the rapidly growing work force by providing competency based development curriculum and career opportunities. Adaro recognizes attracting and retaining the top talent can be a challenge as we look to grow to 80 million tonnes and continue to create shareholder value from Indonesian coal. The institute, which will be located in Jakarta as well as near the mining operations in South Kalimantan, will offer courses and certified training programs in a multitude of disciplines related to the business of coal mining. Primaniyarta Award for Best Performing Exporters Adaro Indonesia received the Primaniyarta award for the best performing exporter from the Ministry of Trade. The award was presented by Indonesia s Vice President Boediono on October 13 th, Adaro received a similar award in President Director Boy Thohir accepts the Primaniyarta award 2010 from Indonesia s Vice President Boediono KSN Awards 2010 Adaro Indonesia received the KSN (Social National Solidarity) Award 2010 from the Ministry of Social Affairs, Mr. Salim Segaf Al Jufri and Vice President of Republic Indonesia, Mr. Boediono on September 30 th, 2010 in several categories: Platinum: Community Empowerment Program at Dahai village, Balangan district, South Kalimantan. Gold: Family Empowerment Program for maternal newborn and child at Warukin village, Balangan district, South Kalimantan. Gold: Social Empowerment Program and Rural Community Economic Development at Masingai village, Tabalong district, South Kalimantan. Gold: Micro financing Program in Rubber Utilization at Tamiyang village, Tabalong district, South Kalimantan. Silver: Small and Medium Enterprises Program - UKM for setting up workshop. 14

15 GM Operations, Priyadi accepts the KSN Platinum award from Indonesia s Vice President Boediono Aditama Award 2010 for Environmental Management Excellence Adaro Indonesia received the Aditama award 2010 for environmental management excellence in the coal sector. The award was presented by Director General of Mineral Coal and Geothermal - ESDM, Bambang Setiawan on September 30th, Director of Corporate Affairs and Corporate Secretary, Andre Mamuaya accepts the Aditama award 2010 from Director General of Mineral Coal and Geothermal ESDM, Bambang Setiawan. Tabalong Islamic Center Adaro Indonesia through Yayasan Adaro Bangun Negeri ( YABN ), a non-profit foundation established in early 2010 to focus on implementing Corporate Social Responsibility programs, shall facilitate the construction of the Tabalong Islamic Center. The Islamic Center will consist of a mosque, libraries, offices, training rooms, banking and other facilities to further support the Islamic ministry and intellectual development of the Tabalong community. This project is expected to be completed by 2013 with an estimated cost of Rp50 billion. President Director Boy Thohir laying the first stone for the construction of the Tabalong Islamic Center 15

16 Morgan Mellish Fund Adaro donated US$1,500 to the Morgan Mellish Fund, a scholarship to train Indonesian journalists in business and economics, which was launched by Jakarta Foreign Correspondents Club ( JFCC ). Morgan Mellish, an Australian journalist who won the Walkey award in 2006, was one of five Australians and 16 Indonesians who were killed when the plane they were flying in crashed at Yogyakarta airport in March 2007 following the visit of former Foreign Minister of Australia, Alexander Downer. 16