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Letter from The Directors


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,

The coal industry experienced a remarkable year in 2017. The improvement in coal price that we saw in 2016 extended to 2017, mainly driven by sustained supply discipline in key coal producing countries and steady demand. Continued supply reform in China and overall shortage in coal supply had resulted in a supply side that struggled to meet the stronger than expected coal demand during the year. The coal market has positively moved toward supply-and-demand rebalancing, and this constructive development in the coal market is exciting us all in Adaro Energy.

While coal is a commodity of a cyclical industry, the improvement in the market this time around feels different. Given its size, China plays a significant influence over the directions of the coal industry and China’s earnest move in reforming its domestic coal industry has created positive impacts on the seaborne thermal coal market. On the other hand, operations and capital accesses are still constrained. We also saw stronger than expected coal demand in 2017, which has led to coal price hitting a level never before seen since 2012.

Amidst all the excitement in the coal market, Adaro Energy remains focused on delivering results and executing strategic plans. In 2017, the company managed to deliver its financial guidance, achieving unprecedented financial performance in its history, and achieved net cash position for the first time since its IPO. Development plans in both coal mining and non-coal mining businesses were executed as intended. The company has been evolving, from once a single site coal mine, to now being an integrated coal and energy producer. While coal remains in the DNA of the company, the non-coal mining part of the business continues to grow, with 20% contribution to Adaro Energy’s operational EBITDA in 2017. The business model has been further strengthened by operating eight business pillars in coal mining, energy and infrastructure as the company’s main engines of growth utilizing the resources and potentials possessed by the Adaro Group.

25 Years of Empowering Excellence: Introducing Adaro Energy’s Eight Business Pillars

Over the past 25 years, we have laid the foundations to continuously improve returns and create value. Adaro Energy’s results in 2017 showed resilient performance delivered through strong cost discipline and operational excellence within the more supportive coal sector. However, running operations as big as Adaro Energy’s is not without challenges. We had to cope with wet weather throughout 2017, which reduced the effective hours of production equipment, raised geotechnical risk in the mining and overburden disposal areas, and increased the volume of mine water that had to be treated. We managed to overcome these challenges to maintain reliable supply to customers by strengthening control and monitoring on all aspects of mining operations and evaluating all mine planning parameters.

We also faced challenges in building the markets for our new coal products, i.e. low CV thermal coal and semi-soft cokin coal. To overcome this, we invested considerable time and efforts to educate potential customers on how to get the most value out of these products, including sending our coal specialists to explain the technical process to them.

We agree that change is inevitable and even necessary to excel. We need to be nimble as well as consistent with our underlying business strategies. The key is to adapt to the always changing environment, to not fall into complacency with all the achievements attained, and to keep making meaningful innovations in the way to achieve our vision of becoming a leading Indonesian mining and energy group.

We took the momentum of the Adaro Group’s 25 years of operations to further strengthen our business fundamentals and introduce eight business pillars in the sectors of mining, energy and infrastructure. These pillars are Adaro Mining, Adaro Services, Adaro Logistics, Adaro Power, Adaro Land, Adaro Water, Adaro Foundation and Adaro Capital, and they will allow the Adaro Group to capitalize on today’s positive momentum as well as capturing future opportunities for both coal and non-coal businesses. The non-coal mining pillars will continue to expand, providing protection in all phases of the commodity cycle and will be one of the important contributors to long-term value creation.

Encouraging Coal Market Fundamentals

The turning point in the coal market that we saw in 2016 extended into 2017. The supply side reform in China and other constrains in several coal producing countries led to a supply tightness. Some of the constrains faced by the industry during the year included bad weather conditions, limited heavy equipment availability, limited funding access, and operational challenges as most miners are still catching up on the damage left behind at their operations by the shortcuts taken during the severe downturn several years ago. On the other hand, the demand for coal – which had steadily increased – experienced a stronger than expected growth in 2017, which led to coal price hitting a level never before seen since 2012.

Our underlying thesis remain that the long-term fundamentals for coal is intact and we expect that coal demand will gradually improve. In Indonesia, coal remains a dominant element of the energy mix. Indonesia’s 35,000 MW electrification program which will predominantly be coal-based will create a significant addition in the domestic coal requirements in the medium term. Indonesia and other Southeast Asian countries are set to be the key demand drivers for coal going forward. Other coal importing countries such as Japan, South Korea, Taiwan, and Hong Kong continue to show strong appetite. And even though there are uncertainties surrounding China and India, demand from the two countries remains significant as of today.

The Adaro Group is in a good position to capitalize on this momentum in the coal market as it has further diversified its coal product portfolio, which now ranges from sub-bituminous thermal coal suitable for power generation to high grade metallurgical coal, an essential component in steel-making. This wider range of products gives the Adaro Group more flexibility and opens more doors of marketing opportunities in the coal market.

To strengthen the groups’ position in the metallurgical coal market, in March 2018, AE executed its strategic plan to grow inorganically by completing the acquisition of Kestrel coal mine from Rio Tinto. This achievement marks its first successful venture outside of Indonesia and diversifies and strengthens AE’s core coal mining business. It is our aspiration that when Indonesia becomes an industrial country, AE is equipped with one of the basic requirements that is metallurgical coal, thus can provide its full support for the advancement of the nation.

Healthy Financial Position

Adaro Energy achieved the best and unprecedented financial performance and position in 2017. The improvement of the coal market boosted a 35% increase in average selling price last year. Although operations were challenged by the prolonged heavy rains and the strip ratio and production targets were not achieved, Adaro Energy continues to maintain its long term coal reserves.

The company’s profitability improved significantly last year, and we beat our 2017 operational EBITDA guidance of US$900million – US$1billion, posting US$1.3billion of operational EBITDA, a 47% increase y-o-y. Again, we would like to emphasize as well that Adaro Energy is no longer just about coal mining. Despite it being a major contributor, the non-coal mining businesses also made a strong contribution of approximately 20% out of total EBITDA.

Core earnings rose 62% to US$646 million in 2017, showing the resilient performance of Adaro Energy’s core business. The company’s financial position was much stronger last year as we achieved net cash position with an ample liquidity of US$1.5 billion.

In 2017, Adaro Energy generated free cash flow of US$782 million on the back of robust operational EBITDA and strategic capital spending. The company used its solid liquidity to strengthen the balance sheet and deliver returns to the shareholders. Meanwhile, capital spending at US$229 million was in line with guidance, expended mainly for coking coal asset development, heavy equipment replacement and regular maintenance.

Further, The Japan Credit Rating Agency, Ltd reiterated their BBB- rating for PT Adaro Indonesia, with an upgraded outlook from stable to positive. This demonstrates the structural strength of Adaro Energy’s vertically integrated business model and continual development of non-coal businesses along the Adaro Group’s integrated supply chain, combined with the sustained improvement of its financial position.

Commitment to Deliver Returns to Shareholders Each Year

We maintain the commitment to distribute dividend to shareholders while remain disciplined to ensure the balance between the money reinvested to capitalize growth opportunities and the returns distributed to shareholders. Adaro Energy distributed US$101.1 million of cash dividend for financial year 2016 including an interim cash dividend of US$60.8 million paid in January 2017 and a final cash dividend of US$40.3 paid in May 2017.

Strong Dedication to “Green Initiatives”

Since the beginning of its 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 long-term value creation. Our underlying sustainability objective is to balance between the “triple bottom line” of people, planet and profit and the focus areas of the group’s environmental programs which include, among others, land, air, water and biodiversity.

As far as green initiatives are concerned, we always look to deliver beyond compliance. The environmental management activities that the group is doing include pioneering in processing waste water from mining activities into clean potable water and pioneering as the only coal mining company to date that owns a biodiesel plant. In addition, we are also proud to say that the Adaro Group is also a pioneer in the conservation of Bekantan monkey by setting a protection area in the Paringin rehabilitation area.

The Adaro Group is gradually and consistently moving forward in the efforts to reduce reliance in diesel fuel. We are venturing on initiatives in renewable power generations particularly solar power to power the group’s operations in both Kalimantan and Sumatera.

Further, in line with the Indonesian government’s program to enhance the country’s clean-water supply, the group is expanding operations to Indonesia’s water treatment sector. Adaro Water has acquired two water processing plants in Gresik and Banjarbaru to support our venture in the business. The clean water production capacity of these two plants combined is currently 900 liters per second.

Progress in Power

In the beginning of 2017, PT Tanjung Power Indonesia (TPI) reached financial close for its 2x100 MW coal-fired power plant project in Tabalong Regency, South Kalimantan. TPI is owned by a consortium of PT Adaro Power and PT EWP Indonesia (a subsidiary of Korea East-West Power Co. Ltd.) The successful financial close of this project underscores Adaro Energy’s strong commitment to be a major contributor in ensuring the success of the 35,000 MW program. Adaro Energy is focused on executing its plan to increase access to electricity in supporting Indonesia’s growth.

Engineering, procurement and construction activities at PT Bhimasena Power Indonesia (BPI) and TPI reached 34.6% and 85.68%, respectively, at the end of 2017. The projects are progressing as planned and are on track to start operations in 2019 for TPI and 2020 for BPI.

BPI’s 2x1,000 MW power plant will be one of the largest IPPs in Asia and the first coal-fired power plant project to use the environmentally friendly ultra-supercritical (USC) technology in Indonesia. This technology allows lower fuel consumption per kilowatt hour (kWh) and reduces specific CO2 emissions. Further, it also provides more than 10% higher thermal efficiency compared to subcritical technology.

TPI’s 2x100 MW power plant will use the circulating fluidized bed (CFB) technology which removes sulfur dioxide from flue gas by limestone injection and reduces nitrous oxide emissions due to its low combustion temperature. It also uses bag filter to eliminate ash emissions.

The Adaro Group’s power projects will contribute significantly to the social and economic development of Indonesia, particularly in their respective operational areas, through job creation and numerous social development programs to create shared value between the group and the community.

Continuous Contribution to the Nation

We understand that community empowerment plays a key role in building and maintaining good relationship between our company and all stakeholders. Community development programs are part of the Adaro Group’s core strategy, and we believe the group’s commitment and strong focus on setting a high standard in this area are among the key success factors behind our growth.

Our community development effort focuses on five main areas namely education, economic development, health, environmental enhancement and socio-cultural enrichment. We engage with the community based on the philosophy to inspire, connect and engage people in a holistic approach to empowerment.

We are also deeply honored as Adaro Indonesia (AI) was named a golden taxpayer from the period of 1 January 2018 to 31 December 2019. This shows our full compliance in regard to tax payments and obligations to the country. In addition, AI also received an award as one of the biggest tax payers in Indonesia. In principal, we consistently support the government’s programs in energy supply, infrastructure, and electrification and are committed to empower the communities and to environmental protection as part of our positive contributions to Indonesia in addition to the royalty and tax contribution of US$346 million and US$428 million for the year.

Changes to the Directors’ Composition

In 2017, there were no changes to the composition of the Board of Directors.

Corporate Governance and Beyond

One of the key success factors to our business is the commitment to uphold the principles of transparency, accountability, responsibility, independence and fairness to protect the interests of all stakeholders.

Our approach to governance is to go beyond compliance. We believe good corporate governance supports long-term value creation. 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.

We make sure that AE’s standard operating procedures are aligned with good corporate governance best practices and conduct periodic reviews and evaluations. We believe that consistent adherence to best practices will significantly help in value creation and the achievement of the company vision.

Encouraging Outlook

We have entered 2018 with strong optimism as we were ready to capture the opportunities offered by the excellent market momentum, for sustaining the company’s growth and continuing to deliver positive contributions to Indonesia.

In 2018, we expect more stability in the coal market as fundamentals will remain strong. We target an increase in our coal production output, mainly from Balangan Coal Companies, Adaro MetCoal Companies and one of our assets in South Sumatera and thus guiding for production of 54 to 56 Mt. We also estimate better average selling price this year.

We are hoping the weather in Indonesia will start to normalize and thus we are adjusting our mining activities by planning a blended strip ratio of 4.9x in 2018, which include strip ratio for our coking coal deposit. As we expect higher strip ratio and anticipate higher fuel price this year, we are projecting higher cash cost for 2018. Therefore, we are guiding US$1.3 billion to US$1.5 billion of operational EBITDA in 2018.

We will be a bit aggressive but remain strategic on capital expenditure this year as we commit to approximately US$750 million to US$900 million of capital spending, mainly for heavy equipment additions and replacements as well as development of our coking coal project.

Thank you to our stakeholders

As we further develop our business and excellence, we shall continue being committed to empowering Indonesia by providing sufficient supply of energy and contribute to the nation’s education and 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, we thank you for your continued support and trust. None of our achievements in 2017 would have been possible had we not enjoyed the privilege of the support mentioned.

We are devoted to building a great company. Each one of us is passionate about Adaro and thoroughly convinced of its bright future. Together with our stakeholders, we will continue to deliver positive energy for many years to come.

On behalf of the Board of Directors,

Garibaldi Thohir

President Director & Chief Executive Officer

Last modified on April 24, 2018, 9:54 am | 9644