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Letter from The Directors

Dear Esteemed Shareholders,

The coal industry closed the year 2021 with a strong end. The recovery of global economy from the COVID-19 pandemic had driven the demand for electricity, hence the demand for coal. As the year progressed, the supply side struggled to meet the high increase in demand, thus creating an imbalance we saw in the second half of the year.

While the coal industry is cyclical in nature, 2021 still brought a good surprise as we saw a significant turn- around in the market, which was spurred by reopening of economies. Various dynamics affected the coal market, from weather related issues to logistics issues in traditional exporting countries, which created a big imbalance in the market that drove up prices of all types of coal and indicated resurgent global demand and widespread supply challenges.

The stronger than expected coal demand in 2021 led to coal price hitting historical highs. While the favorable market conditions supported our performance in 2021, our efforts to control costs and maintain operational performance should not be overlooked. We recorded 52.70 Mt of coal production, generated strong cash flows and closed the year with a cash balance of US$1.8 billion.

AEI is in a strong position, and it is against this backdrop that we are making transformative changes. We successfully listed one of our subsidiaries, PT Adaro Minerals Indonesia Tbk (AMI), on the Indonesian Stock Exchange (IDX) on January 3, 2022 and it became the first company to list on the IDX in 2022. The listing was very warmly welcomed by the market and we are excited with AMI’s future growth prospects.

We continue to look to developing and diversifying our businesses beyond coal. We recognize the growing concern over that the environmental, social and governance (ESG) factors, as investors and stakeholders are increasingly concerned with the climate crisis and ESG factors. Therefore, we made the first step to get involve in aluminum smelter business at Indonesia’s green industrial park, part of our commitment to transform our businesses into a more sustainable venture through greener initiatives.

Amid all the excitements in the coal market, PT Adaro Energy Indonesia Tbk (AEI) remains focused on delivering results and executing strategic plans. Our consistency and focus in improving our capital structure, operational excellence, productivity, and efficiency have enabled us to weather any conditions and still deliver solid results. We delivered on our 2021 operational and financial targets not only due to a more favorable market, but also due to our cost discipline. Our business model has once again showed its resilience to weather coal cycles, which supported our solid profitability.

The COVID–19 pandemic has been an unprecedented, extraordinary challenge that requires us to make extraordinary measures to survive. The health and safety of our people and of the communities that support our businesses were paramount to ensure that our operations would run continuously. During the year, we kicked-off several COVID-19 vaccination programs for the employees and the communities.

With regard to safety performance, we regretfully experienced three fatalities and nine lost-time injury (LTI) incidents throughout the Adaro Group’s operations, resulting in a lost-time injury frequency rate (LTIFR) of 0.12 in 2021 and severity rate (SR) of 176.86 with total man- hours worked of 102,966,988 during the year. We will continue to strengthen the implementation of our Adaro Zero Accident Mindset (AZAM) program to improve our safety culture and thus safety performance across the Adaro Group.


Coal market coming back stronger

The surge in coal prices last year changed the perspective on the role of coal in energy mix for the better. Our underlying thesis remains that the long- term fundamentals for coal are intact, and coal is still the most reliable and efficient energy source for electricity generation. Countries need to balance its energy mix and coal needs to stay to ensure sufficient energy supply to sustain the economy.

In light of the prolonged COVID-19 pandemic, we saw limited supply as miners were cautious and conservative in setting their operational targets. The pandemic, substantial underinvestment in coal supply capacity, low inventory levels, in addition to weather related issues and logistical issues have created the perfect storm in which the balance of supply and the unanticipated demand surge pushed prices to an unprecedented level.

China, for example, saw demands for electricity and coal rose sharply over the past year. Meanwhile, domestic coal production slowed down due to stringent safety measures in the country’s mining industry. The strong economic recovery against the backdrop of safety measures led to domestic coal production to lag rising demand, which then spurred China’s appetite for imported coal.

In general, the increase in economic activities due to fiscal and monetary stimulus and generally looser COVID-19 restrictions, combined with supply shortages in global seaborne market, have caused coal prices to surge. We saw fundamental of coal market improving last year whereby global demand for coal rose and this condition has continued in early 2022.

We expect the positive market to continue in 2022 along with the global economic recovery. We still believe that the long-term outlook will remain positive, and we are excited on our future growth prospects. Emerging countries in Southeast Asia and South Asia will keep relying on coal due to its affordability and availability. We also expect the boon from increasing industrialization and urbanization in those regions as a result of economic growth.


Unprecedented profitability achievement

Despite the operational challenges due to the prolonged COVID-19 disruptions, we recorded the best and unprecedented financial performance in 2021, which brought us to a strong base to move forward. The stronger coal market pushed our average selling price to increase by 70% last year. With an integrated business model and strong cost control, we maintain our reputation as a reliable supplier and aspire to achieve even stronger results.

We achieved a strong financial position and beat our 2021 EBITDA target by recording a 138% increase in operational EBITDA to US$2,104 million, or higher than our revised operational EBITDA guidance, which was set at US$1.75 billion to US$1.90 billion. The core earnings of US$1,256 million showed the strong performance of our core business. We also generated US$1,270 million of free cash flows in 2021, a 102% increase y-o-y. Aided by strong cash generation of US$1.8 billion, we ended the year with a net cash position in FY2021. With our strong performance, our contribution to the Government of Indonesia through royalties and income tax expenses increased to US$893 million.

In terms of operational achievements, we recorded strip ratio of 4.1x, or lower than our target, due to the bad weather. However, it is an increase of 8% compared to 2020 strip ratio. Our production of 52.7 Mt was in line with our guidance. A combination of higher strip ratio, overburden removal volume, higher fuel price, and longer distance had increased our coal cash cost by 16% y-o-y.


Growth beyond coal – strategic involvement in green economy

Now with this strong financial position, the questions is what are we going to do with the cash flows generated? And how should we spend the cash productively? We believe our financial strength can provide a strong foundation upon which we have announced our intention to grow beyond coal. We understand that green economy will grow dominance going forward. We must therefore capitalize on this green economy opportunity that has brought itself to the door.

Indonesia has abundant resources of minerals and renewable green opportunities, and this means great opportunities for us to expand our businesses. To process these minerals into something for the world to consume will require a massive amount of energy, which may come from various sources such as renewables, gas and even coal. Our investors are already aware that the Adaro Group holds one of the biggest metallurgical coal mining assets in the world. To further stake our commitment in the green economy, we have also announced our intention to build an aluminum smelter.

Adaro is therefore well positioned to be a leader in this industry. One, because we are first and foremost a mining company, and two, we are also an energy company. In addition to these, we have the resources, financial capabilities, expertise, and credentials required in this endeavor, which will fit greatly with our business strategy.


Aluminum smelter business

The Adaro Group has been committed to transforming the businesses through green initiatives in the long term. To that end, in December 2021, we signed a Letter of Intention to Invest for building an aluminum smelter at the world largest green industrial park in Indonesia being developed by PT Kalimantan Industrial Park Indonesia, to support the government’s industrial down streaming program.

Through this investment, we will contribute to the country’s efforts to lower imports of aluminum, to create processing activities and add value to alumina, as well as to increase tax revenue. We also hope that having an aluminum industry in North Kalimantan will attract more investments and create job opportunities for the Indonesian people. We believe this is a significant start of the journey to have a more balanced and sustainable revenue and business model for the Adaro Group.


Integrated business model remains the key

The cyclical nature of our industry further reiterates the importance of being a low-cost producer. In this industry, we are a price taker, and price movement is unpredictable. Therefore, the focus is always on what we can do to better control our cost.

Our performance reflects the resiliency of our integrated business model, and is the result of the consistent focus on efficiency and operational excellence throughout the business. We strategically integrate the coal supply chain from pit to port through our subsidiaries. In each part of the chain, we work with third-party contractors to ensure safe, reliable, and efficient operations. Further integration to include power generation will provide us with not only captive demand for our coal but also stable revenue stream and profitability.

This strategy has been proven to be effective during the peak and trough of the industry. It has enabled cost leadership for us in both thermal and metallurgical coal. Our coal assets have very competitive cost, in the first quartile of both thermal and metallurgical cost curve. We also have one of the highest operational EBITDA margins in the sector, reaching 53% of operational EBITDA margin in 2021.


Shareholders’ returns

We will never be where we are now without the support of our shareholders. Providing return to shareholders is one of our objectives, and when our profitability permits, we shall provide better returns to our shareholders. We evaluate capital allocation periodically and ensure that we fulfill the requirements of our operations and debt service.

Since our IPO in 2008, we have paid approximately US$1.7 billion in dividend with average payout ratio of 46%. The positive market environment in 2021 put us in a position to realize immediate value for shareholders. We paid US$147 million dividend for FY20, or 99.92% payout ratio. Further, we have also distributed interim dividend for FY21 amounting US$350 million paid on January 14, 2022. Starting from September 2021, we have also initiated our first share buyback program to further enhance shareholders’ returns.


Corporate governance, social responsibility, environment and sustainability

As a good corporate citizen, we are committed to uphold and implement the principles of good corporate governance in how we conduct our business. Upholding the principles of transparency, accountability, responsibility, independence, and fairness are crucial to protect the interests of all stakeholders. Our approach to governance is to go beyond compliance. Our standard operating procedures are aligned with good corporate governance best practices, and we conduct periodic reviews and evaluations to ensure that it is always up to date.

The good corporate governance must be embodied in Adaro Energy Indonesia’s strategies, philosophies, purposes, and values for the company to prosper. Therefore, we have in place a code of conduct as a reference on how to behave in the workplace as well as the self-assessment mechanism and orientation program for our BoC and BoD’ members. Across our businesses we are committed to uphold ethics and compliance, and we have a whistleblowing system in place to allow the reporting of misconducts directly to BoD.

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. 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 long-term value creation.

The ESG efforts at PT Adaro Indonesia have gained the highest recognition “Gold PROPER Award” from the Ministry of Environment and Forestry for the fourth time in 2021. The Gold PROPER Award is regarded as the highest standard in Indonesian environmental rehabilitation 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, which aimed to provide systematic approach for identifying and manage energy use and energy performance. We have made some progress in regards to the efficient use of energy whereby some of our operations are now solar powered, which have helped to reduce our diesel consumption as well as carbon emission. Even though we have not set any specific targets on, for example, reduction of carbon emission intensity, or the contribution from coal to our top line, we are developing an ESG roadmap, and I believe we are on the right path to having these goals in place. We are planning carefully and consolidating internally to formulate the right strategy for the Adaro Group. We are also taking feedback and input from relevant stakeholders on these issues. All of our ESG efforts have also resulted in the upgrade of our MSCI ESG Ratings to BBB, from previously BB. According to MSCI, the upgrade was driven by significant improvements in our environmental management practices – from adoption of initiatives such as designating no-disturbance areas and developing land for species conservation to address biodiversity-related risks. MSCI’s have also lowered the risk assessment for Adaro based on their updated water stress data which also contributed to the upgrade.


Changes in the Board of Directors’ composition

In 2021, no changes were made to the composition of the Board of Directors. However, in our Extraordinary General Meeting of Shareholders (EGMS) held on February 9, 2022, the shareholders approved the appointment of Mr. Michael William P. Soeryadjaya as AEI’s Director. We believe that the experience and credentials of Mr. Michael William P. Soeryadjaya will further improve AEI’s management team.


Strengthening foundation for the next level

To achieve our vision, and to be a successful and sustainable company, we need to ensure that our team consistently adheres to the Adaro Values of Integrity, Meritocracy, Openness, Respect and Excellence. I would like to highlight on the importance of one of our values, integrity which is the first criteria we use to determine potential leaders in the Adaro Group. I always remind everyone at Adaro to maintain their integrity and to report any violation against integrity that they find.

Building a company that will last is comparable to running a marathon, not a sprint. Human capital is of utmost importance. We have a winning team process and philosophy in place to ensure regeneration and maintain solid development plan. To achieve our target, it is fundamental that we pay close attention to the process, to ensure that we do it in the most efficient way. To be able to sustain, we need to manage and continue improve “process”.


2022 business outlook

We anticipate that global economic recovery will positively affect our industry in 2022. Hence, we increase our production target aggressively from 52.70 Mt in 2021 to 58-60 Mt in 2022 to leverage on the positive industry outlook. We are confident we can achieve this guidance since we have assets that are ready to be ramped up like Balangan Coal Companies, PT Mustika Indah Permai (MIP), and our metallurgical coal assets under PT Adaro Minerals Indonesia Tbk and Kestrel.

We are aiming for strip ratio of 4.1x in line with our mining plan and sequence. Our capex guidance for 2022 is US$300–US$450mn, which includes regular maintenance and growth capex. Our guidance for operational EBITDA in 2022 is US$1.9 billion–US$2.2 billion on the back of higher production volume and strong global coal prices.


Thank you and appreciation

Finally, I would like to take this opportunity to thank all our stakeholders who have continued to support our activities – our dedicated key shareholders, our communities, our loyal customers, our governments and regulators, our suppliers and contractors, our public investors, and especially our loyal and hard-working employees. None of our achievements in 2021 would have been possible had we not enjoyed the support from them. Together with our stakeholders, we will continue to shape our sustainable future through diversification.

On behalf of the Board of Directors,

Garibaldi Thohir

President Director & Chief Executive Officer

Last modified on June 13, 2022, 10:48 am | 53246