Adaro to start S. Sumatra coal mine production by year-end

By Alexander Ginting

Indonesia-listed giant coal miner PT Adaro Energy Tbk said on Thursday that it will start production from its 75 percent?owned South Sumatra mine PT Mustika Indah Permai (MIP) by year-end with the ultimate aim of producing 10 million tons per annum (mtpa) following completion of reserves report.

As of December 15th, 2011, MIP has estimated total JORC-compliant coal resources of 286.4 MT of which 272.6 MT are the estimated JORC-compliant coal reserves. The report was prepared by Marston, a Golder Associates company and international mining consultant located in Saint Louis, Missouri, USA.

The MIP concession area contains three main coal seams and two minor seams which range from 1.6 meter to 17 meters in thickness. The JORC study identified elevated sodium in ash content in some seams usually increasing with depth. Marston believes the presence of multiple thick seams with varying levels of sodium in ash contents, the ability to blend product coal from different seams and the overall average level of sodium in ash for the coal reserves at 3% will result in a marketable coal product.

The current reserves are sufficient to sustain a mine operating at a production level of 10 MT per annum for 26 years after allowing for a 3 year production ramp up and 1 year ramp down, the company said.

PT Mustika Indah Permai JORC Compliant Coal Resources (In Situ Millions of Tonnes)
Total MMT	Measured MMT	Indicated MMT	Inferred MMT	Total Moisture %	Inherent Moisture % (ADB)	Ash % (GAR)	Volatile Matter % (GAR)	Fixed Carbon % (GAR)	Total Sulfur % (GAR)	Calorific Value (kcal/kg) (GAR)
286.4	249.7	36.3	0.4	33.9	22.2	5.5	31.1	29.5	0.4	4,345

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PT Mustika Indah Permai JORC Compliant Coal Reserves Mineable by Open Pit Methods(Millions of ROM Tonnes)
Total MMT	Proven MMT	Probable MMT	Total Moisture	Inherent Moisture % (ADB)	Ash % (GAR)	Volatile Matter % (GAR)	Fixed Carbon % (GAR)	Total Sulfur (%) (GAR)	Calorific Value (kcal/kg) (GAR)
272.6	237.9	34.7	34.1	22.2	6.0	31.1	28.8	0.4	4,281

Notes to Tables
ADB=Air Dried Moisture Basis
GAR=Gross As Received Moisture Basis
ROM=Run of Mine
MMT=Millions of Metric Tons

Production ramp up, capex and transportation route

Adaro Energy plans to produce coal at MIP, using an open pit mining method, by the end of 2012. Coal production will be ramped up to three to 4 mtpa per year by 2014 and to 10 mtpa five years from the time operations commence. MIP will utilize Adaro Energy?s mining and hauling contractor, PT Saptaindra Sejati (SIS) to mine and transport the coal.

Capital expenditures at MIP, excluding heavy equipment, are estimated at approximately US$50 million split almost evenly over 2012 and 2013, and shall be funded by the cash holdings of Adaro Energy.

MIP?s property is located in Lahat regency and is within close proximity to critical infrastructure such as the state highway and railway. SIS will truck the coal from near the mine site to PT Servo Meda Sejahtera?s (SMS) barge loader on the Musi River via a dedicated private coal haul road operated by SMS.

The coal will be barged down the Musi River for transshipment on to offshore vessels or barged direct to customers in the region. Adaro has already acquired a 35% interest in SMS.

Development work, including pre-stripping and mine development, continues at the site and along the transportation corridor, as well as social and environmental studies, the company said.

MIP has an attractive cost structure and a low strip ratio of 2.8 bank cubic meters per ton (BCM/T). The largest cost item will be for transportation due to the inland location of the mine, approximately 141 kilometers to the Musi River port and from there, 220 kilometers down the Musi River to an open anchorage near Palembang.

Marketing

MIP coal has a higher heat value than Adaro Indonesia?s Wara product called E4000. ?So despite the longer transportation distance, and considering the low development expenditures, Adaro Energy expects similar operating margins and returns as those generated by Wara,? the company said.

In 2010, Adaro Energy?s main cash producing subsidiary, PT Adaro Indonesia, began selling a lower heat value coal product called E4000, from its Wara mine. E4000 has been well received by power stations in the Asian region. ?Ultima? is the brand name of MIP?s 4,200 KCal/kg (GAR) product coal. Ultima is a relatively low sulfur and low ash coal.

At 4,200 Kcal/Kg, Ultima targets a different audience than E4000.

?Adaro believes Ultima, which will be produced with the same high standards of reliability and quality that Adaro has become known for, will also be well received by end users in Asian coal markets,? it said.

?MIP is continuing to build orders for Ultima for 2012 and beyond. MIP is in discussions to sell Ultima to end users in Indonesia, China, India, Taiwan, Thailand, The Philippines and Vietnam.?

?Together with our other South Sumatra investments, SMS and PT Bukit Enim Energi (BEE), we are building long term, low cost assets to achieve our vision to become a leading Indonesian mining and energy group,? Adaro Energy?s President Director Garibaldi Thohir said.

Legal issue

On August 19th, 2011, Adaro Energy?s subsidiary PT Alam Tri Abadi (ATA) signed a share purchase agreement to acquire a 75% stake of MIP from Elite Rich Investment Limited for $222.5 million despite protest from state coal mining firm PT Bukit Asam Tbk, which argued that it was the rightful owner of the concession.

?Prior to acquiring MIP, Adaro Energy conducted legal due diligence of MIP?s tenure and found MIP?s Mining License (IUP) was obtained through a lawful process. Since the time of the MIP acquisition, the Supreme Court of the Republic of Indonesia has completed Judicial Reviews of the claim filed by the plaintiff which contested the legality of the MIP IUP through state administrative and civil court proceedings. The Judicial Reviews of the Supreme Court were granted on October 10, 2011 and November 10, 2011 respectively and found against the plaintiff. The Judicial Reviews are final and binding, thereby confirming that MIP?s IUP was obtained through a lawful process.? the company said.

Adaro Energy?s South Sumatra strategy

Adaro Energy views South Sumatra as a highly strategic growth area owing to the province?s proximity to the large power market of Java and its large coal resources and reserves. Adaro Energy?s plan in South Sumatra is to replicate the successful business model it has used in South Kalimantan, by owning high quality coal assets and developing a vertically integrated coal supply chain.

Adaro Energy?s Vice President Director, Ario Rachmat said: ?Our investments in South Sumatra are part of the drive to diversify and increase our reserves so as to create sustainable value from Indonesian coal. By diversifying locations, coal products and license maturities, we reduce risk, improve reliability and improve sustainability. We shall grow our business organically but also through acquisitions. Our aim is to create long term value from Indonesian coal, by building a bigger and better Adaro Energy.?

MIP was the first of three investments Adaro Energy successfully completed during the second half of 2011, which together form the backbone of Adaro?s strategy to create long term value in South Sumatra and itself is part of the broader strategy of diversification into multiple locations and product ranges.

On October 10th, 2011, Adaro Energy acquired a 35% interest in SMS for Rp200 billion. SMS owns a dedicated hauling road and a dedicated coal port to provide integrated coal logistic services to coal mining companies in South Sumatra, including MIP.

On October 14th, 2011, Adaro Energy acquired an additional 46% interest in PT BEE for $46 million, which increased its interest to 61.04%. BEE is a coal mining company developing a greenfield project in the Muara Enim regency, South Sumatra. BEE holds an IUP granted in March 2011 for a period of twenty years that covers an area of approximately 11,130 hectares.

The key advantages of the investments in South Sumatra are they provide Adaro Energy entry into the South Sumatra coal industry, the coal qualities are relatively good and the projects are in close proximity to good land transportation, in particular the SMS dedicated hauling road, ?MIP, BEE and SMS are investments that, together with organic growth, will help Adaro Energy achieve 80 million tonnes of coal production per year in the medium term.? it said.

Editing by David Mustakim