“Understanding and mitigating risk to protect and enhance the shareholders’ investment.”
Coal price volatility and environmental challenges against coal usage resulted in risks to the coal industry’s growth. The strategy of developing Adaro Group’s business model by integrating three pillars of growth: coal mining, mining services and logistics, and power, becomes a ‘natural hedge’ to address the coal price risk. An increase of coal price will benefit the first engine (coal mining) while a decrease of coal price could benefit the third engine (power). The strategy also provides a measure of control on the coal supply chain.
The coal price decline in recent years provided the company with an opportunity to increase its coal reserves by acquiring PT Semesta Centramas, PT Laskar Semesta Alam, PT Paramitha Cipta Sentosa (Balangan Coal Companies) and the IndoMet Coal Project so that the customers’ requirements can be better protected.
As of December 2017, the Adaro Group had a total of 98 Risk Champions spread in all subsidiaries. Each subsidiary and division had at least two Risk Champions who had attended a two-day Enterprise Risk Management training. They are responsible for facilitating risk assessment process, aligning risk profiles with annual plans and budgets, and discussing the matters in the associated management meeting, to ensure the mitigation of key risks in their respective organization.
At the corporate level, the summary of consolidated risk profile for the Adaro Group is as follows:
As of December 2017, there are nine types of risks which were categorized as key risks, with risk level of critical and high. Two out of these were newly added into the key risk category, i.e. human resources risk and facilities & infrastructure risk, while coal reserves risk and community relations risk level decreased from high to moderate.
Compared to the previous year, the number of key risks remains the same, i.e. a total of nine risk types, while the other 20 types of risks which were at moderate and low levels were monitored and treated properly.
As shown in the following table, there are 9 types of risks that are critical and high level. These risks are our major focus, while the other 20 types of risk are of a moderate and low level.
Risks in our focus
Risks in our focus:
Industrial risk level in 2017 decreased from critical to high. The decline was attributable to the improving coal price from US$ 62.29 per tonne in 2016 to US$ 85.91 per tonne in 2017 (average benchmark price).
The import variables of China and India are the main triggers of the positive sentiment on coal prices. On the other hand, the low production of major coal suppliers has caused supply to lag behind demand growth.
The risk of future coal price volatility is still quite high. China’s policies must be monitored closely by every global coal producer.
The opportunities in the coal industry in the long run may shift due to the stronger competition from the alternative energy sources resulted from environmental challenges on the use of coal. Therefore, the Adaro Group has added its business pillars from three business pillars to eight business pillars, consisting of mining, mining services, land, water, logistics, power, capital and foundation.
Project failures include among others delays of project completion, project costs overrun and project completion with quality below specifications.
The Adaro Group’s key projects in 2017 consist of:
- 2 x 1,000 MW Power Plant Project
- 2 x 100 MW Power Plant Project
- Lampunut Mining Infrastructure Construction Project
- Tapian Timur Project
The power plant projects of 2x1,000 MW and 2x100 MW as well as the Lampunut mining infrastructure construction project are on track. Close monitoring is in place to ensure that the projects meet the determined budget, time and specifications.
By the end of 2017, the progress of the 2 x 1,000 MW and the 2 x 100 MW steam power plant projects had reached 34.6% and 85.7%, respectively.
The expansion of PT Adaro Indonesia’s mining area or the “Tapian Timur Project” is slightly behind schedule, but the cost implication is still within the budget. The Joint Tender Committee of Adaro Indonesia and Pertamina EP has appointed HSE specialist consultant to ensure that every project execution fully complies with all applicable requirements. Close supervision and coordination are undertaken consistently to ensure that the project will be completed according to plan.
3. Joint Venture Investment
Investment risk is the risk associated with the success in generating return from the company’s investments.
Some of AE’s joint venture subsidiaries have not contributed investment returns, i.e. PT Mustika Indah Permai, PT Bukit Enim Energy and PT Bhakti Energi Persada. Coal production at PT Mustika Indah Permai will commence in 2018 with a volume target of 1.5 million tonnes.
AE plans to build a 2x100 MW steam power plant in East Kalimantan under a partnership with PT Indonesia Power, a subsidiary of PLN. The project will consume the coal produced by PT Bhakti Energi Persada.
4. Regulatory changes
Changes in laws and regulations can affect the company’s ability to complete important transactions, enforce contracts or implement specific strategies and activities.
PT Adaro Indonesia (AI) has signed an amendment to the Coal Contract of Works (CCoW) with the government in early 2018. The contract amendment is a requirement of Law No. 4 of 2009 on Mineral and Coal Mining. Discussions on the amendment had taken place between AI and the government in 2014 and agreements had been reached, as stated in the memorandum of understanding on contract amendments.
The regulations that are of concerns to the Adaro Group in 2017 include:
- The Minister of Trade’s ministerial regulation no. 82 of 2017 on the provisions for the use of sea transportation and national insurance for coal exports and imports
- The Minister of Energy and Mineral Resources’ ministerial regulation no. 7 of 2017 and the ministerial regulation no. 44 of 2017 on coal pricing index (HBA), which determines that coal pricing is set every 3 months
- The Minister of Energy and Mineral Resources’ ministerial regulation no. 34 of 2017, which relates to the prohibition for related companies to serve as the contractors of a concession holder
- CCoW of some AMC’s concessions which will expire in 2017 – CCoWs of Lahai and Maruwai have been active (production operations), while the CcoWs of five other concessions are still suspended
- The Minister of Energy and Mineral Resources’ ministerial regulation no. 10 of 2017 and 49 of 2017 on the articles in power purchase agreement associated with the provisions of natural force majeure for PLN grids and government force majeure event
- The Minister of Energy and Mineral Resources’ ministerial regulation no. 12 of 2017 on new and renewable energy rates that can be lower than the normal rates, which has been revised with ministerial regulation no. 43 of 2017
- The Minister of Energy and Mineral Resources’ ministerial regulation no. 19 of 2017 concerning utilization of coal for power generation and purchase and exess power, especially the provisions relating to electricity price from mine-mouth power plant below the national production cost (75%)
The approaches made by the Adaro Group to address the above matters are as follows:
- Approach the Ministry of Trade through APBI to propose for the postponement of the implementation of the Minister of Trade’s regulation no. 82 / 2017;
- Approach the Ministry of Energy and Mineral Resources both directly and through associations (APBI, APLSI, ASPINDO) to bring about a win-win solution out of the new Ministry of Energy and Mineral Resources’ regulations;
- Continuously seek new projects or acquire existing independent power producers with better terms and conditions and attractive economic internal rate of return;
- Use the Adaro Group’s mining assets to capture every opportunity coming out of new regulations regarding mine-mouth power plant.
5. Coal reserves
The availability of coal reserves is important to meet both domestic and foreign customers’ needs. In order to maintain long term availability of adequate reserves, we have acquired the coal mines of Balangan Coal Companies and IndoMet Coal Project (now AMC). These have started production and complement our organic growth.
For detailed information on coal reserves please see page number 76.
6. Business interruption
Material damage to key facilities and infrastructure such as bridges, hauling roads, coal handling terminals or obstructions in the river channels may prevent the performance of operational activities for a long time.
In 2017, AE has identified crisis events in several subsidiaries. The Adaro Group has completed and drilled one Crisis Management Plan, while the rest of the Crisis Management Plans are still being finalized and will be drilled.
AE’s Crisis Management Team will ensure that the outstanding Crisis Management Plans and the associated drills will be finalized before the end of 2018 by all subsidiaries.
The Adaro Group also has insurance coverage for business interruptions which are caused by the damage to critical facilities.
7. Legal and regulatory compliance
There are ministerial, regional and other types of regulations that must be complied with by the company. Non-compliance of the regulations could lead to sanctions, legal costs, and other adverse effects, as well as reputational loss.
Each of AE’s subsidiaries must ensure that its activities fully comply with the relevant laws and regulations.
AE has a Legal and Compliance team to support subsidiaries in complying with the applicable regulations.
8. Facilities and Infrastructure
Risk of Facilities and Infrastructure in 2017 increased from moderate to high. To support Adaro MetCoal Companies’ coal mining operations, enhancement of facilities and infrastructure has been a key priority after the acquisition of IndoMet Coal from BHP. The Coal Handling and Processing Plant (CHPP) and road construction at Lampunut is targeted to be completed in 3rd quarter 2019 to support Maruwai first coal production.
Other key infrastructure includes bridges, hauling roads, coal storage facilities, fuel jetty and the Barito river channel.
9. Community relations
Community relations issues are an aspect common to all mining companies. It is related to the support of the local community and Government to the company’s operations so that the company’s operations run smoothly.
For more detailed explanation, see page 200 in our Creating Shared Value section of this report.
10. Human Resources
In 2017, the Human Resources risk level increased to high in 2017. This is due to the succession plans and staffing plans.
To ensure the availability of skilled mining professionals, in 2017, the Adaro Group implemented the Adaro Mining Professional Program (AMPP) by recruiting new graduates from top universities to be developed into mining professionals with strong technical expertise. This program focuses on strengthening the managerial skills and leadership qualities of employees at the department head level. AE also prepares future leadership by creating a succession plan mapping.
11. Health, Safety and Environment
AE must provide a work environment that has a good level of health, safety and environment for both the employees and the surrounding communities. AE strives to achieve zero harm status for occupational safety and health and minimizes the environmental impact of the operations.
In 2017, AE has conducted evaluation on operator fitness index, particularly for the operators of PT Sapta Indra Sejati, in connection with the fatigue management program. In addition, AE has also issued a technical guideline called “the Management of Health Problems in the Workplace”.
In managing environmental risks, AE carried out, among others, the preparation of addenda to environmental impact assessment, solid waste management, mine closure plans and reclamation plans.
Effectiveness of Risk Management Implementation
Below are the main principles of risk management set out in our risk management policy:
understood before making key business decisions.
integrated into the management cycle of the company and embedded in planning processes, at both the operational and strategic level.
3. Being part of decision making
used in selecting appropriate decisions by taking into account the information on the risk exposure of every option.
managed to address uncertainty, put control mechanism, maximize opportunity and minimize negative impact.
5. Systematic, structured and timely
applied in a systematic, structured and timely manner across the Adaro Group to ensure efficient and reliable results.
6. Based on the best available information
managed using the best available relevant information with the awareness that some key information cannot be obtained.
7. Inclusive and transparent
engaging internal and external stakeholders in each step of risk management process and being transparent about all mitigation actions and the progress
8. Reassessed periodically
re-assessed periodically to identify whether there are new risks and risks that are no longer relevant.
communicated with the relevant stakeholders in order to obtain appropriate responses so that risks can be mitigated effectively.
Based on the explanation presented in this section, it can be concluded that has implemented effective risk management that conforms to the company’s principles of risk management.