Our industry constantly faces up and down cycles, and having been running the business in this industry for almost three decades, we have experienced our fair share of down cycles. however, the recent downturn brought about by the COVID-19 pandemic was on a different scale. COVID-19 has created a multidimensional crisis and pushed global GDP to decline by 4.3% in 2020, with many even impacted more severely.
In this crisis, we set the health and safety of our people as number one priority. We acted quickly. We adjusted our operations and work processes. Although we had to compromise some conveniences, throughout the pandemic, we managed to continue operational activities without disruption and did not compromise our obligations to the stakeholders and customers.
Sustainability and ESG initiatives
We recognize that environmental, social and governance (ESG) factors are increasingly important. We strive to adhere to the standards required by our regulators and will continue to improve our ESG performance and disclosure to help stakeholders better understand the efforts and initiatives we take on the ESG front. As a starter, along with this annual report, we are publishing a sustainability report prepared in accordance with the GRI standards.
AE’s rating at MSCI has been upgraded from B to BB, due to the company’s significant improvement in corporate governance practices, notably with an increase in board size with the appointment of another independent Commissioner in 2019. AE has also met the MSCI ESG research criteria for an Audit Committee industry expert.
To further improve ESG performance, we are developing the Adaro Group sustainability roadmap and I believe we are on the right pathway to having these goals in place. At the moment, we are planning carefully and consolidating internally to formulate the right strategies. We are also taking feedbacks and inputs from relevant stakeholders on these matters.
Our ESG efforts at PT Adaro Indonesia have received the highest recognition “Gold PROPER Award” from the Ministry of Environment and Forestry for the third time. The Gold PROPER Award is regarded as the highest standard in Indonesian environmental rehabilitation management and has only been awarded to companies with recognized exemplary compliance to sustainable environmental management practices.
Since the first operations, the Adaro Group has always strived to apply good and proper mining practices to ensure safety and environmental sustainability. We believe that high-quality sustainability programs support long-term value creation. Our long-term and on-going commitment to energy management and greenhouse gas emission is outlined in the Adaro Group Energy and Greenhouse Gas Policy statement, which requires each company in the Adaro Group to implement an integrated Energy and Greenhouse Gas Management system. The implementation of energy management system at our largest subsidiaries reduced our scope 1 GHG emission by 22% in 2020.
One of the ways we compensate for environmental residual risks from our mining operations is through watershed rehabilitation. successful watershed rehabilitation is very important to improve environmental function, especially the function of forests. We are actively involved in watershed rehabilitation and in 2020, PT Adaro Indonesia handed over a portion of watershed area that it rehabilitated to the Ministry of Environment and Forestry.
Through the Adaro Land pillar, we are developing forest areas for ecosystem restoration and absorption of carbon. Our subsidiary, PT Hutan Amanah Lestari (HAL) holds licenses for utilization of carbon absorption and/or carbon storage, which allows HAL to develop carbon absorption and carbon trading business. Another subsidiary, PT Alam Sukses Lestari (ASL) holds a license to use timber product – ecosystem restoration in natural forest, which allows restoration of forest ecosystem to achieve balanced biodiversity. These initiatives are still in the early stage, but we continue to make progress with the goal to conduct carbon trading immediately.
Responding to the unprecedented challenge
The COVID-19 pandemic is an unprecedented, extraordinary challenge requiring us to take extraordinary measures to survive. since we were determined to protect our people and the communities that support our business, we had developed our detailed Crisis Management Plan (CMP) for Contagious Disease Outbreak even before indonesia confirmed its first COVID-19 case. This plan outlines specific steps to effectively respond to an outbreak if it happens. We did all we could to protect all workers and minimize the impacts on operational activities.
We also formed a COVID-19 taskforce for the handling and control of COVID-19 in the Adaro Group, led by one of our directors. The taskforce consists of three sub-task forces, namely, prevention and contact tracing, medical support and testing, and field hospital. This taskforce issued a Board of Directors’ circular on the group’s policy for COVID-19 prevention and handling, which has been updated following changes in government policies and world’s health best practices. This taskforce closely monitors the situation at all of our operational areas and holds regular virtual meetings to determine the necessary actions based on government regulations. Although, unfortunately, there have been instances of COVID-19 among our workers, our operations are generally safe. More detailed explanation about how we handle COVID-19 is presented on page 209.
The coal industry was badly affected by COVID-19. As the pandemic worsened, countries around the world implemented lockdowns and movement controls to limit the transmissions. While necessary, these actions put a strain on economic activities and power demand – which subsequently pushed down global coal demand.
Prices of both thermal and metallurgical coal were considerably lower year-over-year (y-o-y). The average of Newcastle price for benchmark coal dropped 24% y-o-y to US$58.60 per tonne, while the average of Premium Low Vol hard Coking Coal (hCC) price in 2020 declined by 30% y-o-y to US$125 per tonne. The rapid fall in coal demand and coal prices required us to respond quickly, by reprioritizing capital expenditure, taking aggressive cost efficiency measures, and preserving cash.
Despite the headwinds, we delivered our 2020 operational and financial targets through continued cost control and conservative approach to financial position. The consistency and focus on improving capital structure, operational excellence, productivity, and efficiency have enabled us to weather the difficult conditions and deliver solid results. Our integrated business model has once again showed resilience to weather coal cycles and supported our profitability.
Resilient, integrated business model allows for operational excellence
Our performance in 2020 shows the strength and resilience of our integrated business model, a result of the focus on efficiency and operational excellence throughout the business. This business model allows control over each part of the coal supply chain and enables us to respond quickly to market developments. The difficult 2020 had forced us to lower operational and financial targets due to the market condition. We delivered on our revised production guidance and produced 54.53 Mt, 6% lower y-o-y. Our coal sales volume of 54.14 Mt was 9% lower y-o-y.
The targets were achieved without any fatality. We believe that delivering exemplary health, safety and environment performance is essential to our business success and will continue to improve it through the implementation of a group-wide safety program called Adaro Zero Accident Mindset (AZAM) at every business unit to strengthen the safety culture in Adaro Group and minimize human error that may cause unwanted occupational health and safety hazard.
Strong free cash flow generation and solid financial position
Our conservative approach in managing business and finances resulted in solid liquidity and financial position. We were strategic with cost and capital spending and able to increase free cash flows by 11% y-o-y to US$630 million. We continue to strengthen and maintain healthy balance sheet and our net debt declined 55% y-o-y to Us$167 million. We generated operational EBiTDA of US$883 million, 27% lower y-o-y, and maintained strong operational EBiTDA margin of 35%. We recorded lower strip ratio of 3.84x because wet weather condition hampered overburden removal activities. A combination of lower strip ratio, low diesel fuel price, and efficiency measures enabled us to lower our coal cash cost by 21% y-o-y.
Envirocoal – unique coal product with superior quality
Our main coal product, Envirocoal, is internationally trademarked and has been used globally, including in locations where environmental restrictions are stringently controlled. Envirocoal is renowned for its ultra-low sulphur, ash and nitrogen content – which provides excellent economic and technical benefits to our customers as the low-pollutant content enables them to meet stringent emission standards and to lower their operating costs.
The ultra-low ash content of Envirocoal reduces ash disposal costs, as well as maintenance costs of equipment along the coal path due to the lessened impact of ash. Envirocoal’s ultra-low sulphur content enables it to be used to meet environmental regulations without relying on high-cost desulphurization equipment. The quality of our coal, along with the reliable supply that we offer, have enabled us to develop long-term relationships with our customers.
Significant contribution from non-coal mining businesses
To protect the income from coal cycles and coal price volatility, we plan to grow non-coal mining businesses and increase their revenue contribution. Our integrated business model allows us to control our coal supply chain as we are strategically involved in each part by having independent subsidiaries working together with third party contractors. Pit-to-port integration and then further downstream to power business have enabled us to maintain profitability. The non-coal mining pillars, including the supporting business pillars, continue to offer stability and protection against coal cycles, and contributed approximately 44% to our 2020 operational EBITDA.
PT Tanjung Power Indonesia, our 2x100MW power plant, operated smoothly in 2020 and contributed Us$11.8 million to our earnings. At the end of December 2020, construction progress of PT Bhimasena Power Indonesia’s 2x1000 MW power plant with ultra-supercritical boiler technology had reached 94.7%. The start of operations of this power plant is currently estimated at the end of 2021.
Consistent dividend distribution for shareholders
We maintain commitment to distribute dividend to shareholders and paid a total of US$250 million of cash dividend in 2020, or 62% of our 2019 net income. We ensure the balance between the money reinvested to capitalize growth opportunities and the returns distributed to shareholders.
Due to the difficult condition in 2020, we decided not to pay interim dividend in January 2021 because the headwinds have pressured our profitability. During this period of uncertainty, we need to be more prudent and maintain sufficient liquidity to support operations in order to deliver better shareholders’ value going forward.
Implementation of Good Corporate Governance
We are committed to upholding the Good Corporate Governance principles of transparency, accountability, responsibility, independence and fairness in how we conduct the business to protect the interests of all stakeholders. These principles must be embodied in AE’s strategies, philosophies, purposes and values to maintain proper and balanced businesses. We have a code of conduct to guide us on how to behave in the work place as well as the self- assessment mechanism and orientation program for our Board of Commissioners and Board of Directors members.
AE’s standard operating procedures are aligned with good corporate governance best practices and we conduct periodic reviews and evaluations to ensure compliance. We received iDX’s acknowledgement for the Listed Companies category, which gained significant improvement in 2019 ACGs assessment (“significantly improved PLCs”), based on the assessment on 100 Listed Companies based on the ASEAN Corporate Governance Scorecard criteria.
Changes of the Board of Directors’ composition
in 2020, there were no changes in the composition of the Board of Directors.
Stay strong and move forward
2020 was a difficult year for us, but we need to stay strong and move forward. The pandemic has changed and disrupted the way we do business. Digital transformation is no longer an option. One of the things that we have achieved through digital transformation is to streamline our business process – and there will be more to come.
Despite positive expectation of post COVID-19 recovery in 2021, uncertainties remain in our industry. This requires us to plan, prioritize and execute strategies prudently and swiftly. As we do not have control over coal prices, I would like to, again, highlight the importance of efficiency and aggressive cost cutting. And not to forget our people. We need to continue developing our human capital and ensuring their health and safety throughout this pandemic.
2021 financial and operational guidance
Although we expect global economic recovery to have positive impact on the industry, we remain careful.Therefore we have set a cautiously optimistic target for 2021. We expect coal production in 2021 to be flat to slightly lower y-o-y and target coal production of 52-54 Mt. strip ratio guidance of 4.8x is higher y-o-y as we follow our mining sequence and has to remove more overburden [for horizontal expansion]. We will continue to be disciplined in our capex spending and our capex guidance for 2021 is US$200 million–US$300 million. This capex target includes regular maintenance and growth capex. Our guidance for operational EBiTDA in 2021 is US$750 million–US$900 million.
Even if there will be challenges in the short-term, we believe that the long-term outlook for coal remains positive and its growth prospects are still promising. Emerging countries in southeast Asia and south Asia will continue to rely on coal as a reliable source for baseload electricity due to its affordability and availability. We also expect that the increasing industrialization and urbanization in those regions – as a result of their economic growth – will require infrastructure support and higher steel consumption per capita, thus higher metallurgical coal consumption.
Thank you and appreciation to stakeholders
The pandemic is not over yet, but we think that we are now better prepared. One thing for sure is that coal is cyclical and there will still be a lot of uncertainties in 2021. Our business model is resilient and ready to deal with uncertainties. Even though it may take longer, the economy will gradually recover in 2021 and the coming years.
We wish to thank all of our stakeholders for their continuous support, from our dedicated key shareholders, to our communities, to our loyal customers, to our governments and regulators, to our suppliers and contractors, to our public investors, but especially to our loyal and hard-working employees. None of our achievements in 2020 would have been possible had we not enjoyed the privilege of the support mentioned.
Together with our stakeholders, we will continue to deliver positive energy for many years to come.
On behalf of the Board of Directors,