Adaro signs option deals to control Bhakti Energi Persada

By Alexander Ginting

IDX-listed coal mining giant PT Adaro Energy Tbk has signed two option agreements on May 28, 2012 with East Kalimantan coal mining group PT Bhakti Energi (BEP) that will give the company full control of the management, operations, and all the funding of BEP from the date of the signing of the options.

Option One provides Adaro the option to lend up to US$500 million to acquire 51% equity in BEP over a period of three years. Adaro can make a decision to convert the loan into equity at the end of the three year period.

Option Two also has a three year maturity and was signed with PT Persada Capital Investama (PCI), PT Triputra Investindo Arya (TIA) and the descendants of the late Winarto. PCI and TIA each have a 30.787% stake in BEP and combined with the 18.216% Winarto family stake, own 79.8% of the equity of BEP. Option Two provides Adaro a right to acquire shares held by the controlling shareholders of BEP (together holding 79.8% shares in BEP) in exchange for 2,381.7 million shares of Adaro Energy. Both Options are only options for Adaro Energy and not its obligations.

PCI and TIA are owned by two of Adaro Energy?s five key shareholders, Benny Subianto and Teddy Rachmat. In June 2011, in an unrelated transaction, Adaro Energy acquired 10.22% of BEP for $66 million from third party minority holders

BEP, which was established in 2002, owns seven low grade thermal coal licenses in the District of Muara Wahau, East Kutai Regency, East Kalimantan. BEP also owns two transport businesses in East Kalimantan, which own the hauling road that will be used to transport BEP?s coal to the seashore. The seven concessions form one very large contiguous thermal coal deposit. SRK Consulting (Australasia) Pty Ltd estimated BEP?s concessions to have JORC compliant total resources of 9.53 billion tonnes.

BEP, which is one of the largest undeveloped deposits of low-rank thermal coal in East Kalimantan, is located approximately 250 kilometers north of Balikpapan and 125 km from the coast. BEPs coal seams are thick and can be mined using a low strip ratio, which averages for mine life below 0.5 bank cubic meters of overburden per tonne of coal. Because of the simple geology and the easy mining conditions it will be possible to operate BEP?s mines at a very low cost.

President Director Garibaldi Thohir, said: ?we are delighted with the BEP Options we have signed. We feel BEP has excellent potential to help us achieve our main goal of generating substantial sustainable long-term value from Indonesian coal. We worked for two years to negotiate a deal that is structured in a unique way to minimize risk to Adaro. While we are excited with the BEP opportunity, we must also emphasize that we will use our best judgment before injecting any funds to develop the asset.?

Key success factors such as market readiness, receiving required permits from the government, land availability, social and community support, and completing engineering and geological studies must first be in place before any large capital expenditures will be deployed, Thohir said.

Low capex infrastructure, big production volumes

BEP has seven concessions some of which are in exploration stage and others in exploitation stage that are licensed to mine for 20 to 30 years with the potential to extend twice for 10 years each. The mines are largely undeveloped except for exploration activities.

The coal will be mined, crushed at the mine, transported along an approximately 130 kilometer privately held roadway to the coast of East Kalimantan, loaded onto barges and then loaded onto customers vessels. BEP?s coal will likely be sold FOB vessel, Adaro said.

Total initial capital expenditure on the above to commence commercial production within the next three years is up to $300 million. In the long run, there are plans to develop a conveyor belt and other infrastructures, it added.

Many studies have been conducted in the past to demonstrate the BEP coal deposits are technically and economically feasible. Preliminary analysis suggests the BEP mines could achieve a combined 50 million tonnes per year around the year 2024, assuming suitable coal market demand. The current development plan is to bring the BEP concessions to production in 2014. From one million tonnes of production in year one, volumes are expected to climb to 8 million tonnes by year three and grow to 50 million tonnes by year 12 of operation, Adaro said.

Coal Tonnage within BEP Concessions as Estimated by Marston

Company Name	Area (ha)	Total (Mt)
PT Telen Eco Coal (TEC)	6,844	987
PT Persada Multi Bara (PMB)	4,950	3,176
PT Khazana Bumi Kaliman (KBK)	5,066	950
PT Bumi Kaliman Sejahtera (BKS)	4,921	1,650
PT Bumi Murau Coal (BMC)	5,012	1,973
PT Tri Panuntun Persada	-	-
PT Birawa Pandu Selaras (BPS)	2,575	305
TOTAL		9,040

Note: Marston?s estimate of insitu coal tonnages to a radii of 2,000 meters from accepted points of observation. Marston adjusted the coal density using the Preston‐Sanders method to account for moisture.

Quality of BEP?s Coal

Parameter	Value
Total Moisture (% gar)	46.9
Inherent Moisture (% adb)	14.5
Ash (% adb)	4.4
Volatile Matter (% adb)	42.0
Fixed Carbon (% adb)	39.1
Total Sulphur (% adb)	0.1
Calorific Value (kcal/kg gar)	3,379
Calorific Value (kcal/kg adb)	5,434

*from the Marston report of 2010. Marston?s estimates of the in situ coal quality for aggregated BEP Concession Areas based on a radii of 2,000 meters from accepted points of observation.

Editing by David Mustakim