Adaro digs deep as coal industry gets more ugly

David Tendian, CFO of the Indonesian coal miner, tells FinanceAsia he does not fear the political transition in terms of mining taxes.

Joko “Jokowi” Widodo, Indonesia’s president-elect, might represent a new dawn for the country in terms of improving infrastructure and tackling corruption but even he can’t control the coal price.

The country, the world’s largest exporter of the fuel, is being hit harder than most by an industry slump that has seen the price drop from $138 in 2011 to $68, its lowest level since September 2009.

“Today, I must say it’s an ugly situation. For any coal producer it is very very difficult,” David Tendian, chief financial officer of Adaro Energy, told FinanceAsia in an interview at the firm’s Jakarta headquarters.

Adaro Energy, Indonesia’s largest listed coal miner and energy group, has been hit along with the rest of the industry; reporting a 31% drop in first-half net profit and a 5% drop in its average selling price.

However, the group has performed better than most, with revenues rising 7% and its ebitda margin, at 30%, the best in the industry. Production at Adaro, and industry-wide, has been increased to help offset the falling prices.

Adding spice to the downturn is the government’s squeeze on the mining industry, which has seen it introduce punitive taxes on certain raw material exports, which has angered foreign groups such as Newmont Mining and Freeport McMoRan. It is also attempting to raise royalty payments from smaller coal miners.

With Widodo promising to spend Rp6,500 trillion ($543 billion) on infrastructure, which will be partly funded by a cut in fuel subsidies, the need for more revenue in the government coffers is clear.

However, Adaro Energy does not see the political transition as something to be feared in terms of a potential further drain on income.

“They [the government] know which sector brings them the money to help foreign reserves. In the end I think they will be logical because a simple philosophy is, why would you kill the goose that lays the golden eggs?” Tendian said.

For golden eggs, read 13.5% in royalties and a 45% income tax paid annually by large coal miners such as Adaro Indonesia to the government, higher than other mineral miners. A plan to raise royalties from smaller coal miners to 13.5% has been delayed due to the industry turmoil.

The turmoil has raised questions of whether there is any way back but Tendian believes the situation is a natural correction and would have occured earlier had it not been for China’s growth story.

“If you look at the coal price just after the crisis [$67.64 in September 2009], today that is where it is [$68.94]. So, from early 2009 to 2011, when the price hit about $138, it was an aberration due to the extra very large liquidity China pumped in,” Tendian said. “That’s the country that saved the global economy; let’s not forget that. If they didn’t do that, the world is probably a different place today.”

The logic follows that, now China is receding and draining liquidity, the coal price has fallen back to where it should have been after the crisis.

Tendian believes, unsurprisingly, that it is a correction rather than a freefall and that Asia’s growth story and the outlook for energy in the region go hand in hand.

“In this part of the world, electricity is still considered a luxury. We’re still experiencing blackouts. Asia-Pacific is still very short of power. All the banks still believe in the Asia-Pacific economic growth story. If you believe in it, the long-term view of power needs is still intact,” he said.

And there is evidence for this.

Adaro Energy raised a $1 billion loan in August, attracting $9.2 billion in commitments from 14 international banks. “That was beyond my wildest dreams. I did not expect to receive that,” Tendian said. It will use the proceeds to refinance, particularly a global bond that is callable in October.

David Tendian, Adaro Energy

Part of the reason Adaro Energy has managed to weather the downturn so far better than most is what it calls its conservative approach. It cut costs, repaid debt ($400 million this year alone including some early repayments) and did not over-reach during the commodity boom; and it has attempted to diversify.

Adaro Energy’s customers are broad based: 22% in Indonesia, 16% in India, 13% in China and 10% in Japan. Korea, Spain, Hong Kong and Malaysia make up the significant others.

As such the group focused on three main areas: capital preservation, cost cutting and deleveraging.

“When the tide is high, everybody looks good. When the tide is gone, then you will see who is swimming naked. During the high tide we don’t look sexy because we’re conservative but the difficult time displays the reality,” Tendian said.

There had been expectations that consolidation would sweep the industry, with the poorest performers eaten up by bigger fish; a scenario Tendian says is unrealistic.

And there are signs at least some miners have been successful in tackling the slump. Buki Asam, a state-controlled coal miner that under went a broad cost-cutting programme, last month reported a 33% rise in first-half net profit. 

Ultimately, any business is about supply and demand, and Tendian throws in another word - expectation.

When the coal price hit about $190 in 2008, he said, supply and demand was roughly balanced. In today’s price – $68 – it is also balanced. “What drives the price? It is the expectation. China will slow, the world will follow; therefore low expectation.”

However, with government making noises that the country needs to diversify its energy industry and lessen its reliance on commodity exports, other challenges remain.

China’s growth story, for example, has turned into a story of how far and how fast the downturn occurs, which looks set to lower commodity prices further.

“We cannot afford to have China in crisis, whether we like it or not … We will not defy gravity. Gravity laws also apply to us. If the coal price continues to be depressed, of course we will be negatively impacted.”

¬ Haymarket Media Limited. All rights reserved.
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