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,
Following a number of years of downturn and uncertainties, the coal market conditions improved in the second half of 2016 on the back of China’s domestic supply reform. Combined with adverse weather in some coal producing areas and outages of several nuclear facilities, the coal market tightened and seaborne coal prices for benchmark coal type, went from US$47/t in January to US$114/t in November, before settling at the US$80/t level at the end of 2016. China has the policy tools to control how the coal market works and their actions boosted the short term outlook for coal with better price stability expected in 2017.
Despite market volatility, 2016 was a good year for PT Adaro Energy Tbk (AE) as we achieved our guidance and accomplished signi cant milestones. These milestones included the nancial close for two of our coal- red power plant projects and the acquisition of control of a metallurgical coal deposit in Central and East Kalimantan. In addition,
we started a strategic partnership with EGAT International Company Limited of Thailand (EGATi) through a rights issue from PT Adaro Indonesia (AI).
These developments further strengthened our foundation for sustainable growth from the Indonesian coal and energy sector and provide a competitive position for the longer term. We believe that AE is at the right time and at the right place to continue the momentum.
Focus on Indonesia
Supporting Indonesia and taking part in the development of Indonesia has always been our objective. The country has remarkable growth potential, which requires support from adequate infrastructure. Indonesia’s economy achieved a 5% growth in 2016, and an 89% electri cation ratio. The Government plans to increase the country’s electri cation ratio to 99.7% in 2025 which will require a collective effort and collaboration between the Government, state companies and private entities.
Through our three pillars of growth, there are opportunities for us to support Indonesia. We can be involved directly in building power plants and ensuring suf cient coal supply for power plants and steel plants over the longer term.
We saw an increase in coal demand in 2016 from Southeast Asian countries, including Indonesia, where coal consumption increased to approximately 95 Mt, compared to 85 Mt in 2015. The 35 GW electri cation program of the Government will continue to be the main driver of domestic coal demand. Our neighboring countriesintheSouthEastAsiaregionwillalsohave coal demand growth in the years to come.
Three pillars of growth provide stability
We continue to develop our three pillars of growth; coal mining assets, mining services and logistics, and the power business. This vertically integrated business model allows us to be strategically involved in each segment of the coal supply chain and creates sustainable value. This model has proven to be resilient as we were able to maintain our performance and operational excellence during the recent coal price downturn. The EBITDA contribution from our non-coal mining business remained strong and accounted for 31% of EBITDA in 2016. The non-coal mining pillars are expected to continue growing and contribute to our pro tability and value while also providing a stable earnings base to offset the cycles of the coal mining business.
Establishing our business foothold in power
The Adaro Group achieved nancial close for two power projects; PT Bhimasena Power Indonesia reached nancial close for its 2x1,000 MW power plant in Batang Regency, Central Java on June 6th, 2016. PT Tanjung Power Indonesia reached nancial close for its 2x100 MW power plant in Tabalong Regency, South Kalimantan in January 2017.
The successful nancing close of these projects underscores our commitment to be a major contributor in Indonesia’s 35 GW power program. This further strengthens our development of a power business t for the future that creates synergies with our coal business. We are now focused on executing these projects to increase access to electricity for Indonesia’s growth.
Diversifying our coal mining assets
We have a variety of coal mining assets and have expanded our portfolio of coal products. AI and Balangan Coal Companies concessions are currently the main driver for coal production, and we continue with preparing mine readiness for the other coal assets.
A milestone in 2016 for our coal mining pillar was the acquisition of the remaining 75% of the Indomet Coal Project, now known as Adaro MetCoal Companies (AMC) owned by BHP Billiton. Adaro Group took over the seven concessions owned by BHP Minerals Holdings Pty, Ltd. and BHP Minerals Asia Paci c Pty, Ltd. for US$120 million. Production has started from the Haju mine which produced 220,000 tonnes in 2016, its rst operating year, and has a production target of 1 – 1.5 Mt in 2017.
The deposit of AMC is one of the best undeveloped metallurgical coal deposits worldwide. We believe that this acquisition will provide Adaro Group with a valuable growth option in a new commodity, metallurgical coal, as the area contains resources able to support increased production and revenue in a sustainable market over a considerable period of time. We are set to capitalize our coal mining assets to support Indonesia’s development.
Another highlight for this pillar in 2016 was the formation of a strategic partnership between AI and EGATi. AI issued 57,857 new shares or 11.53% of the issued and paid- up capital, and the shares from this rights issue were purchased by EGATi. Net proceeds of US$325 million will be used to strengthen AI’s nancial position. This strategic partnership will provide opportunities in long term coal supply cooperation.
Mining services and Logistics
Our mining services company, PT Saptaindra Sejati (SIS), and our barging and ship-loading company, PT Maritim Barito Perkasa, have been performing well. Most of their volume is currently from AI and Balangan Coal Companies though they are also catering for third party customers and generating third party revenue.
One highlight from this pillar of growth in 2016 was SIS’s purchase of the vehicles, heavy equipment and other equipment of PT Rahman Abdijaya. This was done in anticipation of SIS’ customers’ requirements for additional capacity of coal hauling and overburden removal. The value of the transaction was approximately Rp876 billion.
Strong 2016 results, delivered on guidance
We delivered another year of solid nancial performance amidst volatility in the coal market. Even though we have not yet fully bene ted from the coal price recovery in the second half of the 2016, our pro tability was strong, coupled with solid liquidity and a good free cash ow. Adaro Group produced 52.6 Mt of coal in 2016 and achieved our production target, and though our average selling price was down 8% compared with 2015, we were able to maintain a strong operational EBITDA margin of 35% due to ef ciency measures, a lower strip ratio and a lower than expected fuel price.
Our operational EBITDA increased 22% to US$893 million year-on-year, above our guidance of US$450 million to US$700 million. This was due, in part, to a continued focus on cost discipline and ef ciency. Our core earnings remained strong at US$398 million, re ecting the strength of our after-tax earnings. We maintained a good liquidity of US$1,157 million, providing exibility and support against volatile coal market conditions.
Commitment to consistently provide returns to our shareholders
Our resilient nancial performance has enabled us to provide returns to our shareholders. We continued to pay dividendsthroughthecyclicaldownturnandwillcontinue to do so. We paid US$75 million in dividends to our shareholders in 2016 and an interim dividend payment for 2016 of US$60.7 million, on January 13, 2017.
Changes to the Board of Directors’ composition
In 2016, there were no changes to the composition of the Board of Directors.
One of the key success factors for our business is that we are committed to upholding the principles of transparency, accountability, responsibility, independence and fairness to protect the interests of all stakeholders.
We are making sure that our standard operating procedures are aligned with good corporate governance best practices. We conduct periodic reviews and evaluations. We believe that consistent adherence to best practices will help signi cantly in value creation. It also helps us to achieve our vision to be a leading Indonesian mining and energy group.
We now have everything in place to create signi cant future value. The outlook suggests our three pillars approach to value creation will deliver sustainable value for many years to come. We have seen thermal coal prices lifted by the impact of the Chinese supply policy. While supply response happened last year, global demand is estimated to be relatively stable this year. However, we are con dent of the potential demand growth in Indonesia and other South East Asian countries.
In 2017, we are guiding the market for production of 52 Mt to 54 Mt. We are adjusting our mining activities for an overall strip ratio of 4.85x. Due to the higher strip ratio and anticipation of higher fuel prices, we are guiding a higher coal cash cost per tonne for 2017. We estimate a better average selling price for the yearandthusweareguidinganimprovedoperational EBITDA of US$900 million – US$1,100 million. We will make strategic and selective commitments on capitalspending.Weareguidingcapitalexpenditure of US$200 million – US$250 million in 2017, including regular maintenance and mining readiness for our existing thermal coal assets, development cost of our metallurgical coal asset as well as replacement and regular maintenance of heavy equipment.
Thank you to our stakeholders
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 2016 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 the Adaro Group and are 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
President Director & Chief Executive Officer