We are now more convinced than ever we made the right choice to move downstream into power ... The outlook suggests our "three engines of growth" approach to value creation will deliver sustainable value for many years to come.
Dear esteemed shareholders,
In 2019, our consistent efforts and focus on improving our capital structure, operational excellence, productivity, and efficiency have proven to be the right effective succeed in delivering solid results. We delivered on our 2019 operational and financial targets despite headwinds in the coal market as a result of volume growth and continued cost control. Our business model has once again showed its resiliency to weather the coal cycles and supported our solid profitability.
Industry Backdrop: Cyclical Downturn
Coal is cyclical. We are encouraged with the fact that the underlying demand for coal remained strong and there were no demand destruction. The seaborne thermal coal trade increased beyond 1 billion tonnes in 2019 and coal accounted for almost 40% of electricity generation globally. Seaborne trade of metallurgical coal also increased slightly to 310 million tonnes.
Asia spearheaded the growth in demand for both commodities, and despite the short term headwinds we believe the long-term outlook remains positive and we are excited on future growth prospects. Emerging countries in Southeast Asia and South Asia will continue to turn to coal as electricity source due to its affordability and availability. We also expect increasing industrialization and urbanization in those regions as a result of their economic growth, which will require infrastructure support and higher steel consumption per capita – and thus higher metallurgical coal consumption.
As 2020 unfolded with the unexpected global pandemic, slower global economy as a result of sluggish industrial and business activities is predicted to add oil to the fire on the already pressured coal market. To weather this storm, we will continue to improve operational excellence and efficiency, ensure discipline in spending, and maintain solid balance sheet while at the same time making sure of the health and safety of our 23,000 employees, so that once the dust settles and industrial activities pick up we are ready to capture the momentum.
Solid Performance Despite Continued Headwinds
Within the challenging environment, we were able to surpass our coal production target and recorded 58 million tonnes of coal production last year – a record achievement for Adaro Energy – as a result of strong operations, strong output from our contractors, and favorable weather condition throughout the year. We are pleased to report that AE achieved this productivity improvement without any fatality. Delivering leading health, safety and environment performance is essential to our business success. We will continue to improve our safety performance through the implementation of a group-wide safety program called Adaro Zero Accident Mindset AZAM at every business unit to strengthen the safety culture in Adaro Group and minimize human error that may cause unwanted occupational health and safety hazard.
We achieved the top end of our operational EBITDA target and recorded operational EBITDA of US$1.2 billion and core earnings of US$635 million, demonstrating the quality performance of our core business and operational excellence. Despite the decline in profitability, we still achieved solid margins.
We have a solid balance sheet with strong liquidity position to prepare us in facing the industry cycles. We recognized one-time non-operational losses and impairment in 2019, which will further strengthen our balance sheet position as we reduce under-performing assets. Our free cash flow in 2019 continued to be strong at US$566 million.
We continued to be strategic in deploying our capital expenditure (capex). Net capex in 2019 was US$489 million, mainly for purchase and replacement of heavy equipment and development of Adaro MetCoal Companies (AMC). The total capex spent was within our 2019 capital expenditure guidance of US$450 – US$600 million.
Stronger Capital Structure with Bond Issuance
We recognize that 2019 was a challenging year and once again we are grateful for the support that the investment community has shown us. In the fourth quarter of 2019, our subsidiary PT Adaro Indonesia successfully issued a US$750 million bond which received BBB- and Ba1 ratings from Fitch Ratings and Moody’s, respectively, both with stable outlook. It was Adaro’s first bond to receive an investment grade rating and we received overwhelming response from the market.
The bond will enable us to further strengthen our financial position and capital structure. We believe the extended maturity and repayment profile will provide us with more flexibility to execute our growth strategy. Investors’ responses and interests on this bond demonstrate their confidence on Adaro’s business model despite industry and macro-economic headwinds.
Consistent Dividend Distribution for Shareholders
We maintain the commitment to distribute dividend to bshareholders and paid a total of US$200 million of cash dividend in 2019, or 48% of our 2018 net income. We continue to remain disciplined to ensure the balance between the money reinvested to capitalize growth opportunities and the returns distributed to shareholders.
Commitment to “Green Initiatives”
With regards to sustainability, we always look to deliver beyond compliance and have several green initiatives in place. We believe that it is our objective to balance our responsibilities to economic development, environmental protection and social enrichment in our operational activities, i.e. the triple bottom line of people, planet and profit.
Our ESG efforts at PT Adaro Indonesia received the highest recognition “Gold PROPER Award” from the Ministry of Environment and Forestry for the second time. The Gold PROPER Award is regarded as the highest standard in Indonesian environmental management and has been presented to companies with recognized exemplary compliance to sustainable environmental management practices.
We have implemented energy management system at our largest subsidiaries: PT Adaro Indonesia, PT Saptaindra Sejati and PT Makmur Sejahtera Wisesa. The energy management program targets to reduce energy consumption by 3% from our energy baseline. Our largest coal mining subsidiary, PT Adaro Indonesia, has also received acknowledgement from independent third-party, TUV Nord German, for its energy management program.
Since the beginning of our operations, the Adaro Group has always strived to apply good and proper mining practices to ensure safety and environmental sustainability. We believe that high-quality sustainability programs support longterm value creation.
Implementation of Good Corporate Governance (GCG)
Commitment to uphold the principles of transparency, accountability, responsibility, independence and fairness to protect the interests of all stakeholders is fundamental in how we conduct our business. Our approach to governance is to go beyond compliance. Adaro Energy’s standard operating procedures are aligned with good corporate governance best practices and we conduct periodic reviews and evaluations.
The good corporate governance principles must be embodied in Adaro Energy’s strategies, philosophies, purposes and values for the company to maintain proper and balanced businesses. Therefore, we have in place a code of conduct as a reference of how to behave in the work place as well as the self-assessment mechanism and orientation program for our BoC and BoD’ members.
Changes to the Board of Directors’ Composition
In 2019, there was no change in the composition of the Board of Directors.
PT Tanjung Power Indonesia, our subsidiary that owns the 2x100 MW power plant in Tabalong, South Kalimantan, successfully commenced commercial operation in 2019. This achievement underscores Adaro Power’s commitment in supporting the government’s program to improve electrification ratio, especially in Kalimantan grid. Meanwhile, construction progress at PT Bhimasena Power Indonesia’s 2x1,000 MW power plant in Batang, Central Java has reached 91.8% at the end of 2019. Power is an important part of our future and we continue to work with potential partners to explore opportunities in power generation from coal and other energy sources such as gas and renewables to deliver positive contributions to the nation.
Focus and Nimble
We are anticipating headwinds to continue in 2020 and thus we are preparing ourselves not only with the right business strategies but also with good execution. We are encouraging our internal leaders and executives to be able to make a timely and solid decision making with calculated risk. Untimely decision making may disrupt business process and will have significant impact to our business.
To continuously improve operational excellence in all aspect of our business lines, we are implementing Adaro Management Systems (AMS) to ensure our excellence in quality, costs, and productivity. We are making sure that we are able to identify problems and its mitigations, we are eliminating waste to be more efficient and productive; and we are implementing a culture of Plan Do Check and Act (PDCA) to create an effective problem solving mechanism. Lastly, we always emphasize the importance of being efficient. We must be able to work with less people, work harder and smarter as well as work with speed.
Further, as far as coal market is concerned, we remain confident on the positive long-term outlook and are excited on future growth prospects for both thermal and metallurgical coal spearheaded by Southeast Asia and South Asia regions. Economic growth and the need for affordable energy source to fuel it will support thermal coal demand.
Urbanization and Industrialization that come with economic growth will require infrastructure and will increase steel consumption per capita which in turn will drive the demand for metallurgical coal. Our coal assets are strategically located to be the key supplier to the regions due to proximity and matching coal requirements. Our main product, Envirocoal, will continue to play a significant role in the region’s energy mix due to its low-pollutant content.
We cannot predict the future, but we know that coal is cyclical and that vertical integration brings many benefits. Our business model is proven to be resilient and nothing about this cyclical downturn has derailed our strategy to develop our eight business pillars. At times like these, our non-coal mining businesses provide solid and stable earnings base. Our eight business pillars: Adaro mining, services, logistics, power, land, water, foundation and capital, will allow us to capture future opportunities in both coal and non-coal businesses and we will continue to execute our strategy for long-term growth in each of these business pillars.
2020 Financial and Operational Guidance
We anticipate a challenging coal market in 2020 and therefore are cautiously optimistic. We expect flat to lower production volume of 54 Mt to 58 Mt. Expecting subdued coal prices, we anticipate by adjusting our strip ratio guidance to 4.30x, lower y-o-y to help us in controlling cost. We are doing so without harming our long term coal reserves as we are still in-line with our life of mine strip ratio and were able to remove enough overburden in 2019. We are guiding operational EBITDA of US$900 million – US$1.2 billion and capex of US$300 – US$400 million. The capex spending will be equally split between coal mining and non-coal mining pillars. Within this environment, we remain focused on generating superior margins.
Thank You and Appreciation to Stakeholders
We enter 2020 prepared for the opportunities and challenges ahead. We have a unique vertically integrated business model that sets us apart and has been tested to withstand coal cycles.
As we further develop our business and excellence, we shall continue our commitment to empowering Indonesia by providing sufficient supply of energy and contribute to the nation’s welfare. We wish to thank all of our stakeholders for their continuous support, from our dedicated key shareholders, to our communities, to our loyal customers, to our governments and regulators, to our suppliers and contractors, to our public investors, but especially to our loyal and hard-working employees. None of our achievements in 2019 would have been possible had we not enjoyed the privilege of the support mentioned.
Together with our stakeholders, we will continue to deliver positive energy for many years to come.
On behalf of the Board of Directors,