Indonesia Coal Industry Update 2016

Indonesia Coal Industry Update 2016 JOGMEC Coal Investment Seminar Tokyo, 27 January 2016

CONTENTS 1 Indonesia Coal Industry 2 Coal as Key to Increase Electrification Ratio 3 Future Energy Mix

CONTENTS 1 Indonesia Coal Industry 2 Coal as Key to Increase Electrification Ratio 3 Future Energy Mix

Coal Contribution to Indonesia Economy Trillion Rp. 500 450 400 350 300 GDP from Non Oil & Gas Mining 4.3% 4.4% 4.5% 4.4% 5.4% 5.2% 4.9% 5.6% 5.3% 4.8% 6.0% 5.5% 5.0% 4.5% Billion US$ 30 25 20 Coal Export 11.9% 11.7% 13.8% 13.4% 13.4% 11.8% 16.0% 14.0% 12.0% 10.0% 250 200 150 100 50 0 3.1% 65 105 131 160 195 254 333 398 462 483 480 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 4.0% 3.5% 3.0% 2.5% 2.0% 15 10 5 0 3.8% 5.1% 6.0% 5.8% 2.7 4.3 6.1 6.7 7.6% 13.8 10.5 18.5 27.2 26.2 24.5 20.8 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 8.0% 6.0% 4.0% 2.0% 0.0% PDB Tambang Non-Migas % dari Total PDB Export batubara (US$ Billion) % dari Total Ekspor Other then being the most economical source of energy for electricity, coal mining industry plays an important role in supporting Indonesia s economy Sources: Badan Pusat Statistik

Historical Indonesian Coal Production 2009 Oct 2015 500 450 400 350 300 250 200 150 100 50 0 254 275 198 56 210 353 287 412 345 474 458 402 382 322.5 65 66 67 72 76 62 2009 2010 2011 2012 2013 2014 2015 Production (Million Tons) as Per October 2015 215 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Export (Million Tons) as Per October 2015 Domestic Sales (Million Tons) as Per October 2015 Average of Coal Price based on HBA USD/MT as Per December 2015 Sources: Directorate General Mineral & Coal, MEMR

Estimated Domestic Coal Consumption - 2016 2016 DMO Composition (%) 2% 1% 0% 2% 12% 2% Domestic Consumption (MT) Coal fired power plant 82 Metallurgy 2 Fertilizer 2 81% Cement 12 Textile 2 Coal fired power plant Fertilizer Textile Briquette Metallurgy Cement Paper Paper 1 Briquette 0 TOTAL 101 Currently, Indonesia is still dependent on coal exports as domestic consumption can only absorb a small portion of total coal production. Sources: Directorate General Mineral & Coal, MEMR

01 Jan 2011 01 Apr 2011 01 Jul 2011 01 Oct 2011 01 Jan 2012 01 Apr 2012 01 Jul 2012 01 Oct 2012 01 Jan 2013 01 Apr 2013 01 Jul 2013 01 Oct 2013 01 Jan 2014 01 Apr 2014 01 Jul 2014 01 Oct 2014 01 Jan 2015 01 Apr 2015 01 Jul 2015 01 Oct 2015 Depressed Coal Price has affected CAPEX Coal Mining Company 140 120 100 80 60 40 NEWC Evolution 2011 Jan 2016 (6,322 GAR) Jan 2011 US$130/ton Jan 2016 US$49/ton in billion USD 2.5 2 1.5 1 0.5 CAPEX Coal Mining Listed Co Last 5 Years 1.83 1.93 0.93 Total CAPEX: US$5.6 bln 0.52 0.40 20 0 2011 2012 2013 2014 Ann. 2015 Global Coal Index NEWC declined by 62% from the highest level US$130/ton in January 2011 to US$49/ton di January 2016 CAPEX of publicly listed coal mining company has been down significantly by 80% since 2012 as a result of significant lower coal price Most of the Companies cutting back on expansion and exploration. Low investment made will result no new reserves identified over last three years Total accumulated CAPEX for the last 5 years reach US$5.6 bn *source: Bloomberg, internal analysis Companies included: ABMM, ADRO, ARII, BORN, BRAU, BSSR, BUMI, BYAN, GEMS, GTBO, HRUM, INDY, ITMG, KKGI, MBAP, PTBA, TKGA, TOBA

APBI-ICMA INTERNAL SURVEY Coal Price Forecast CapEx Policy 39% 18% 43% Decrease Increase Flat 21% 10% Increase Decrease Flat 69% Employee Rationalization Production Volume Policy 24% 24% 51% Not rationalizing <10% >10% 45% 26% 29% Increase Decrease Flat *Survey result as of May 6 th, 2015

CHALLENGES: GOVERNMENT POLICIES Non-tax state revenue from land use of forest areas 1. Significant rate increase 2. Upfront payment upon permit approval instead of upon usage Letter of Credit requirement for export activities 1. Additional costs during distressed coal market condition 2. Potential cash flow management disruption 3. Creating confusion due to lack of technical guidelines Plan of limiting coal shipment from 14 designated ports 1. Additional costs related to logistics and infrastructure use 2. Ports designation may not be transparent Royalty increase plan 1. Increasing unemployment because of mine closures 2. Not necessarily increasing government revenue 3. Potential disruption in government s 35 GW plan Requirement of Rupiah as the only currency for domestic transactions 1. Supplies and contractor rates are already in US$ 2. Potential hedging costs

CONTENTS 1 2 3 Indonesia Coal Industry Coal as Key to Increase Indonesia Electrification Ratio Future Energy Mix

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 TWh Current Economic and Electricity Condition Indonesia Economic & Electricity Growth Installed Capacity vs Electricity Needs 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 129.0 134.2 147.3 158.0 174.0 CAGR 7.3% 187.5 197.3 6.0% 4.6% 6.2% 6.5% 6.3% 5.7% 5.1% 2008 2009 2010 2011 2012 2013* 2014** 250 200 150 100 50 0 GW 300 250 200 150 100 50 0 TWh 1,200 1,000 800 600 400 200 0 GDP Growth (%) Electricity Sales (TWh) Existing Capacity (GW) Peak Load (GW) Additional Power Needs (GW) Electricity Needs (TWh) Economic growth needs to be supported by sufficient Electrification Ratio (ER) Installed Capacity in Indonesia is always below the energy demand Sources: PLN, IEA World Energy Outlook 2014 (for ER), Badan Pusat Statistik, RUPTL 2015, MEMR Presentation Sept 2014 **Estimated by PLN & BPS

Indonesia Electricity Overview Power plant investments must be focused towards developing Coal-fired and Gas-fired Power Plants Installed Capacity* 43 GW - 5 10 15 20 25 Energy Source Costs (per KWh) Coal-fired Gas-fired Hydro Diesel 4 GW 3 GW 13 GW 22 GW 3,500 3,000 2,500 2,000 1,500 1,000 500 0 0.3 0.25 0.2 0.15 0.1 0.05 0 Others 1 GW * Per December 2014, excluding rental from 3 rd party sources ~4 GW Cost (Rp/KWh) * Exchange rate Rp 13,500/USD Cost (US$/KWh)* Coal and gas are the largest sources of energy for electricity generation with highest total installed capacity and at the most economical price Coal is still the cheapest and most abundant energy source for power generation Sources: RUPTL 2015-2024, Buku Statistik PLN 2014

in GW Growing Power Demand As government pushes for infrastructure & industrial development, low electricity consumption and installed capacity levels create significant increase in electricity demand ASEAN Electrification Ratio Comparable Target 2019: >95% Projected Growth in Peak Load Peak Load (in GW) 70 60 50 40 30 20 10 0 64 60 55 51 48 45 41 38 2015 2016 2017 2018 2019 2020 2021 2022 Government aims to achieve >95% electrification rate by 2019, hence PLN Programs such as Fast Track and IPP are enforced to attract Private Sector to enter into Electricity Sector Sources: PLN Investor Presentation May 2015, RUPTL 2015-2024, MEMR, World Bank

Power Generation Overview Indonesia projected additional 50-60 GW until 2024 to achieve electrification ratio of >95% PLN IPP Projected Installed Capacity 104 GW 90 GW 44 33 47 GW 32 GW 8 6 57 60 26 39 2010 2014 2019 2024 To accelerate the needs of Electricity, Government of Indonesia initiated 35 GW Program from 2015-2019 and to follow up on several delayed projects from FTP 1 & 2 to increase Electrification Ratio to >95% PLN Size: 18 GW Transmission: 50k kms Substation: 743 loc. IPP Size: 25 GW Transmission: 360 kms Sources: PLN Investor Presentation 2015, RUPTL 2015-2024

GOVERNMENT 35 GW PROGRAM 35 GW Power Project 57% 34% 9% Coal Fired Power Plant Gas & Steam Power Others ~20 GW ~12GW ~3GW PLN 2 GW IPP 18 GW Project Costs US$28 35 bln DEBT (Proj. Financing) US$20 25 bln EQUITY US$8 11 bln Sources: RUPTL 2015-2024, APBI CEO Gathering Administration under President Jokowi has committed to add 35 GW power to existing installed capacity of 47 GW (until Dec 2014) 55-60% of total 35 GW power projects will come from coal-fired power plants and require significant participation from private (IPP) *source: Total Internal project calculations; cost to RUPTL be borne 2015-2024 by private sector / IPP : US$ 28 35 bln

35 GW Program Open Participation of Private Sector Capacity Project Cost Max Potential Revenue p.a. Max EBITDA p.a.** Total IPP Projects 35.59 GW US$ 68.5 Bn US$ 18.3 Bn US$ 8.2-9.2 Bn Soon to be Tendered IPP Projects 11.04 GW US$ 19.3 Bn US$ 5.5 Bn US$ 2.5-2.7 Bn Tendered IPP Projects 16.92 GW US$ 31.1 Bn US$ 8.1 bn US$ 3.6-4.1 Bn Existing IPP Projects* 7.63 GW US$ 18.1 Bn US$ 4.7 Bn US$ 2.1-2.4 Bn *Per Dec 2014, using the same assumptions as new IPP Projects ** EBITDA = 45-50% of Revenues IPP market of 36 GW is projected to be approximately US$ 70 billion market opportunity Out of 70 GW, ~60% will come from coal-based Wide-open opportunities to becoming main player in non-coal energy segment Sources: RUPTL 2015-2024, PLN Market Sounding 2015, US EIA Report 2013, internal data analysis, APLSI

35 GW Electricity Program and Industrial Development Will Increase Electricity Demand dan Domestic Coal Consumption As the government pushes infrastructure and industrial development, the demand for electricity will increase and subsequently domestic coal consumption for electricity generation will increase. Assuming 5%-6% economic growth in 2015-2017, and 7% onward, coal consumption for electricity will increase by 10% CAGR in 2015-2024.

Forecast Indonesia Coal Production 500 450 400 350 300 250 200 150 100 50 0 474 458 412 382 353 APBI s Forecasts 349 332 332 332 280 254 402 382 154 345 295 248 214 199 287 215 198 178 56 65 66 67 72 76 87 101 118 133 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E Export (MT) Domestic (MT) Production (MT) Forecasts Comparison 2015A 2016E 2017E 2018E 2019E NEWC Price (US$/ton) 59 46 41 41 41 Production (MT) APBI 382 349 332 332 332 IDN Govt RPJMN 382 419 413 406 400 Analyst I (Nov 2015) 382 350 340 335 330 Analyst II (Jun 2015) 382 402 394 389 393 Sources: Various analyst reports 2015, Global Coal, Dir. Gen of Mineral & Coal MEMR Presentation Nov. 2015, Bloomberg, internal analysis

Coal Requirements post Realization of 35 GW Coal Requirement Next 5 years Coal Reserves As of 1 January 2013 Capacity Coal Cons p.a Coal Type Reserves (billion ton) Low 9.5 Domestic Existing Coal Fired PP (30 Sept 2014) Estimated Under 35 GW 22 MW 20 MW 76 mln ~75 mln Medium 20.1 High 1.8 Total 31.4 Total 42 MW ~150 mln NEWC Price 1 Jan 2013 Now US$ 94/MT US$ 52/MT Export 300 350 mln ton Reserve 31 bln MT -25 ~ 30 % Total 456 506 mln ton WITH COAL PRICE KEEP GOING DOWN, THE AMOUNT OF RESERVE WE HAVE IS GETTING SMALLER. Sources: Bloomberg, APBI internal calculation, Handbook of Energy and statistics of Indonesia 2014

CONTENTS 1 Indonesia Coal Industry 2 Coal as Key to Increase Electrification Ratio 3 Future Energy Mix

ENERGY MIX LANDSCAPE Geothe rmal 3% Hydro 8% Gas 27% Oil 12% 2014 Government Initial Energy Mix Target Coal 50% New and Renewable Energy 22% Gas 16% 2025 Coal 61% New and Renewable Energy 16% Gas 18% 2050 Coal 66% By 2025, Indonesia plans to no longer use oil as power generation source and convert to other renewable energy sources Renewable energy such as solar and hydro power technology is rapidly developing, resulting in falling cost curves and more competitive investment costs Renewables as energy source were initially planned to rise from ~11% in 2014 to ~ 22% in 2025 Sources: PLN Investor Presentation, May 2015; Indonesia s National Energy Council s Energy Outlook 2014; RUPTL 2015-2024

CONCLUSION Continued decreasing coal demand from China still causes market oversupply and therefore, further weakens coal prices, which affects production outputs of Indonesian miners From 2014 to 2015, domestic coal demands increased 14% y-o-y from 76 MT to 87 MT and is expected to continue to increase. Though currently, Indonesia still needs to rely on exports as domestic usage of coal only absorbs a small portion of total Indonesia production The 35 GW Program provides investment opportunities and is expected to revive the coal industry through their high installed capacity projections of coal fired power plants. In 2019, Indonesian domestic consumption of coal is expected to more than double 2015 consumption and overpass exports In addition to utilizing the country s cheapest energy source (coal), the government also increases opportunities towards growing renewable energy portion for power generation sources