Adaro Energy’s strength is anchored on our robust business model: a vertically integrated coal supply chain “from pit to port to power,” with subsidiaries involved in almost all aspects of our operations.
Adaro Energy currently has almost 30 operational-level subsidiary companies, housed under six divisions that are vertically integrated from the start of the coal supply chain to the end: Mining Assets, Mining Services, Logistics, Marketing, Power and Land Asset Management.
Around half of our subsidiaries are currently operating as revenue-generating entities (the others are in development and exploratory modes) at various stages of the coal supply chain, where they operate alongside and to varying extents in competition with third-party contractors employed by Adaro.
Having at least one of our subsidiaries involved in each segment of the supply chain gives Adaro substantial control over the chain, allowing us to reduce costs, improve reliability, and boost operational efficiency.
In this challenging coal price environment, we will continue to focus on capital preservation, cost efficiency and deleveraging. The challenging conditions further encourage us to develop our non-coal mining businesses, and to boost their contributions to Adaro, to smooth out revenues and returns and offset uncontrollable declines in cyclical coal prices.
We want to have a business with a considerable contribution from power and other non-coal mining businesses. We will have three engines of growth: coal mining, mining services and logistics, and power.
Our vertical integration is focused on our long-established South Kalimantan Coal Co-operation Agreement (CCA) area, owned and operated by PT Adaro Indonesia, which is housed under the Mining Assets unit. Adaro Indonesia’s mining in South Kalimantan have historically accounted for the bulk of our revenue (90% in 2015).
At the CCA site, Adaro Indonesia and several subsidiaries under Mining Services alongside third-party contractors handle work from mining and overburden removal activities to building and operating a conveyor system, haul road and barge-loading river port.
After the coal is mined and transferred to barges, subsidiaries under Logistics Services take care of transportation, handling our river and marine logistics activities in South Kalimantan and taking the coal to our offshore anchorage for trans-shipping or to our coastal storage terminal.
The final part of our vertical integration is Power. With the goal of delivering positive energy to help fuel Indonesia’s growth, Adaro Power aims to participate in various power generation projects and become a major contributor to the country’s electricity generation sector, using coal from our own concessions. We expect our Power division to play a key role as we continue to seek growth without taking unnecessary risks.
We intend that this vertically integrated model will be replicated in recent acquisitions we have made in other areas of Indonesia (which account for most of our subsidiaries that are still in development mode).
Our subsidiaries are also positioned as independent profit centers, and if it is determined that taking our subsidiaries public would create shareholder value, we may list them on a public exchange in the future.
See the flowchart above for a detailed explanation of Adaro Energy’s subsidiary structure.
The Benefits of Vertical Integration
As our business model gives us better control over our costs and risks, we are able to offer a better reliability of supply to our customers by reducing counterparty risk and the likelihood of disruptions to our operations and expansion plans. This in turn improves the marketability of our coal.
Having better control over our costs also means we are at the bottom end of the global cost curve. In addition, being located in Indonesia is a strategic advantage as it gives us close proximity to emerging economies in the Southeast Asia region, India and China.This allows us to supply coal to our primary markets in Asia at lower freight costs compared to coal producers in other countries such as Australia and South Africa.