Barito Channel - Dredging a New Channel to Get Rid of a Bottleneck

On October 23, 2008, Adaro Energy announced it had successfully completed a trial-run on a new channel that was dredged at the mouth of the Barito River, near Banjarmasin, South Kalimatan. A crucial step in Adaro Energy's efficiency program and overall expansion plans, the dredging commenced full operations, on time and on budget, on January 1, 2009. The most important aspect of opening the new channel is that annual capacity will increase to over 200 million tonnes from 60 million tonnes. This additional capacity will help Adaro Energy realize its plans to increase annual production to 80 million tonnes. The dredging of the new channel and the ongoing maintenance and water toll operation, will be carried out by Adaro Energy's new subsidiary, PT Sarana Daya Mandiri ("SDM").

This dredging project undertaken by PT SDM is a unique alliance of a privately funded joint venture of privately held mining companies and different sections of central and provincial governments. The new channel will be available for public use and would not have been possible without the contributions and support of the local and central government.

Prior to dredging, the existing channel was only traversable by loaded barges on the high tide once a day during a tide window of about eight hours. High siltation rates and an under-funded maintenance dredging program resulted in difficult navigation conditions in the channel. In order to increase barging efficiency and capability, at the beginning of 2008, PT Sarana Daya Mandiri (PT SDM) began a project to dredge a deeper and straighter channel. The actual dredging was conducted by Van Oord, an international dredging and marine contracting company from The Netherlands. The channel shall be maintained by a reputable dredging company.

The travel time required to pass through the Barito channel has been reduced to 3 hours from around 6.5 hours. The channel may now be used 24 hours day, 365 days a year. Dredging a straight passage through the channel will increase safety as barges will no longer be required to navigate through two dangerous turns.

By using the new channel, Adaro Energy and other users will no longer have to use to two tugs (or "tug assist"), to pull barges, which range in size from 8,000 - 14,000 tonnes, through the shallow waters at the mouth of the Barito River. By only using one tug, as travel time is greatly reduced, and due to shorter barging cycle time Adaro Energy expects to incur fuel and tug cost savings.

The US$42 million cost of the dredging was financed by a loan provided to PT SDM by Adaro Energy. This loan will be repaid by revenues generated by users of the new channel, including Adaro Indonesia, who must pay a toll of US$0.30/ton.

In a related party transaction, Adaro Energy acquired 51% in PT SDM from PT Rahman Abdijaya. Three non-related smaller mining companies own the remaining 49%. The acquisition, which was disclosed in Adaro Energy's IPO Prospectus, was completed for the nominal price of Rp 128 million (around $US12,000). A good example of the controlling shareholders support for Adaro Energy, the SDM stake was acquired in third quarter of 2009 as part of impleme

Kelanis River Terminal - Boosting Capacity of the Final Processing Facility

During 2008, Adaro Indonesia began the installation of a new crushing system to boost capacity at Kelanis. In March 2009, with the installation complete the annual capacity had increased from 45 million tonnes to 55 million tonnes, at a cost of US$10 million.

There are no further capital expenditures planned for 2009 at Kelanis.

Acquisition of an Affiliated Barging and Ship Loading Company - To Strengthen the Coal Supply Chain

Adaro Energy acquired 74.16% of Orchard Maritime Pte Ltd ("OML"), a Singapore-based barging and ship loading company, for US$78.55 million. With the acquisition of OML, Adaro Energy will own a part of each of the critical pieces of its coal supply chain, which will reduce costs, lower risks, increase flexibility of production, increase control of transportation, and improve reliability.

The acquisition was made by PT Jasapower Indonesia ("JPI"), which is 99.99% owned by Adaro Energy's wholly-owned subsidiary PT Alam Tri Abadi. The acquisition was closed on April 30th, 2009.

The 74.16% controlling stake was sold by a consortium of previous shareholders of OML as follows: 18% from Saratoga Capital (Singapore) Pte. Ltd., 18% from BRS Investments Pte. Ltd. and 7.2% from Recapital Maritime Holdings Ltd. As part of the transaction, JPI also acquired 30.96% in OML by acquiring 86% in Coronado Holdings Pte. Ltd which owns 36% of OML.

By bringing OML into the group, Adaro Energy can benefit from cost savings bassociated with better control over demurrage and utilization of spare barging and transshipment capacity for third party business.

Adaro does not have a buffer stockpile at the Taboneo anchorage with the closest being the stockpile at the Kelanis barge loading facility. Adaro therefore uses its barge fleet as a floating storage to help buffer normal monthly fluctuations in hipment tonnages, which helps to minimize demurrage. However, by having a controlled entity that would be able to react promptly to market conditions, Adaro Energy can create cost savings.

The absence of control over barging and transshipment during the first half of 2008 undermined the efforts to control demurrage charges in the face of unprecedented bad weather.

Adaro will continue to tender out for a percentage of this tonnage however having access to internal costs of a barging and transshipment company will help Adaro minimize its rates going forward with potential cost savings.

Read for our press release here.