Risk Management

Mining is a risky business. It is a capital intensive, long term, slow yielding business that requires specialized knowledge, experience and has significant hurdles and obstacles that must be overcome. The business is highly regulated, makes a significant impact on the environment and local communities, and is continually subject and potentially adversely affected by the volatility in commodity markets in terms of costs and revenues. Adaro Energy is well aware and continually monitors the risks facing its business. It is a constant and critical task that must be carried out at every level and every corner of the operation. It is partly dueto the long term, conservative and risk averse approach to running our business that has allowed us to increase production every year without fail since operations first began back in 1992.

Adaro’s risk management procedures identify, measure, monitor and manage basic risks in order to safeguard long term business continuity.

In order to safeguard steady and continuous revenues, when possible, we use long-term sales contracts with our customers, as well as, to ensure predictable costs, long-term contracts with our service providers.

Market Risk
Adaro’s market risk relates principally to fluctuations in commodity prices, exchange rates and interest rates.

Commodity Price Risk
Adaro faces commodity price risk because coal is a commodity product bought and sold on the world coal markets. Prices for Envirocoal are based on global coal prices, which tend to be highly cyclical and subject to significant fluctuations. As a commodity product, global coal prices are principally dependent on the supply and demand dynamics of coal in the world export market. Adaro does not engage in trading coal contracts and has not entered into coal pricing arrangements to hedge its exposure to fluctuations in the price of coal but may do so in the future.

Fuel Price Risk
Adaro also faces commodity price risk relating to its purchases of fuel necessary to run its operations. An increase in fuel price may cause Adaro’s gross profit to decrease. On a selective basis, Adaro enters into fuel hedging contracts for its fuel requirements. These hedging contracts are periodically entered into for the required supplies for the next three to six months.

Foreign Exchange Risk
All of Adaro’s export sales and a significant portion of its domestic sales are priced, invoiced and paid in U.S. dollars with the remainder primarily paid in Rupiah. Adaro’s cost of sales and operating expenses are denominated and paid substantially in U.S. dollars with the remainder primarily paid in Rupiah.

Interest Rate Risk
Adaro entered into an interest rate swap contract with DBS Bank Ltd. on March 19, 2008. The transaction underlying this contract is the Syndicated Loan. Pursuant to this contract, DBS Bank Ltd. receives payments of quarterly fixed rate and pays to Adaro a floating interest rate of US$-LIBOR. This contract will become due on December 7, 2012. Adaro intends to hedge all of its floating interest rate exposure with hedging contracts.

Supply Chain and Operational Risk
Supply chain risk, including the areas of safety health and environment are maintained through regular reviews of the business processes and risk assessments on the supply chain and operations. Operational Risks are identified and mitigated either with Standard Operating Procedures that are subject to regular reviews via PDCA (Plan, Do, Check, Action), managed through contracts or covered under insurance policies.