Adaro Energy’s strength is anchored on our robust business model: a vertically integrated coal supply chain “from pit to port to power,” with subsidiaries involved in almost all aspects of our operations.
PT Adaro Energy Tbk (AE) is an integrated coal mining and energy company listed on the Indonesia Stock Exchange. It held an Initial Public Offering (IPO) on 16 July 2008 by raising Rp 12.3 trillion (US$1.3 billion), earning a position as one of the largest IPOs in Indonesia. As of the end of 2017, AE’s market capitalization was US$4.4 billion, putting it among the highest in the country’s mining sector.
AE is pursuing a vision to be a leading Indonesian mining and energy group by continuously expanding and improving its coal mining and non-coal mining operations to create a solid and complete range of its integrated pit to power supply chain. It has subsidiaries serving each part of the supply chain, each of which is treated similarly to the third-party contractors. This approach gives AE full control over the costs and operations on the entire chain and creates a level playing field for its subsidiaries and external contractors to achieve the highest productivity through fair competition. Each stage of the coal supply chain also presents opportunities for each subsidiary to create value by properly carrying out operational activities and utilizing the group’s distinctive strengths and capabilities, while the operations provide job opportunities and income for the surrounding communities and the government.
The company’s vertically integrated business model has been proven to be resilient in navigating through the cyclical nature of coal, with non-coal mining businesses providing a solid earnings base to buffer coal volatility. Over the years, the contribution from non-coal mining businesses to AE’s EBITDA has continued to increase and in 2017 reached approximately 20%.
AE aims to increase the share of non-coal mining in its Operational EBITDA and thus continues to develop businesses in the energy, utilities and supporting infrastructure sectors. The momentum of the Adaro Group’s 25th anniversary of operations in 2017 was used to further establish, reinvent and strengthen the group’s footholds in the coal mining, energy, utilities and supporting infrastructure sectors under eight business pillars. By diversifying its business pillars beyond coal mining, AE will be able to secure stable earnings base and offset the volatility of the coal sector.
The Adaro Group’s Eight Business Pillars
AE is well aware of the cyclical nature of the coal industry, the volatility that ensues and its impact to AE’s business, so diversifying beyond coal mining is not only a viable, but also a wise decision to take. Over the years, AE has been adding business units and currently operates under eight pillars generally classified into coal mining and non-coal mining. Within each pillar, AE’s subsidiaries perform as independent profit centers and strive to keep expanding third-party business besides serving the Adaro Group. After these subsidiaries develop more established operations, and if it is determined that taking these subsidiaries public will create shareholders’ value, AE may list them on a public exchange.
Our vertical integration is focused on our long-established South Kalimantan Coal Co-operation Agreement (CCA) area, owned and operated by PT Adaro Indonesia, which is housed under the Mining Assets unit. Adaro Indonesia’s mining in South Kalimantan have historically accounted for the bulk of our revenue (90% in 2015).
At the CCA site, Adaro Indonesia and several subsidiaries under Mining Services alongside third-party contractors handle work from mining and overburden removal activities to building and operating a conveyor system, haul road and barge-loading river port.
After the coal is mined and transferred to barges, subsidiaries under Logistics Services take care of transportation, handling our river and marine logistics activities in South Kalimantan and taking the coal to our offshore anchorage for trans-shipping or to our coastal storage terminal.
The final part of our vertical integration is Power. With the goal of delivering positive energy to help fuel Indonesia’s growth, Adaro Power aims to participate in various power generation projects and become a major contributor to the country’s electricity generation sector, using coal from our own concessions. We expect our Power division to play a key role as we continue to seek growth without taking unnecessary risks.
We intend that this vertically integrated model will be replicated in recent acquisitions we have made in other areas of Indonesia (which account for most of our subsidiaries that are still in development mode).
Our subsidiaries are also positioned as independent profit centers, and if it is determined that taking our subsidiaries public would create shareholder value, we may list them on a public exchange in the future.
See the flowchart above for a detailed explanation of Adaro Energy’s subsidiary structure.
The Benefits of Vertical Integration
As our business model gives us better control over our costs and risks, we are able to offer a better reliability of supply to our customers by reducing counterparty risk and the likelihood of disruptions to our operations and expansion plans. This in turn improves the marketability of our coal.
Having better control over our costs also means we are at the bottom end of the global cost curve. In addition, being located in Indonesia is a strategic advantage as it gives us close proximity to emerging economies in the Southeast Asia region, India and China.This allows us to supply coal to our primary markets in Asia at lower freight costs compared to coal producers in other countries such as Australia and South Africa.