Day 1 Presentations MACQUARIE

Indonesia Commodities Conference 2014

Jakarta: 23-24 September

THIS DOCUMENT WAS PREPARED BY SALES & TRADING PERSONNEL OF MACQUARIE AND IS NOT RESEARCH. REFER TO DISCLAIMER FOR IMPORTANT DISCLOSURES. THIS DOCUMENT WAS PREPARED BY SALES & TRADING PERSONNEL OF MACQUARIE AND IS NOT RESEARCH. REFER TO DISCLAIMER FOR IMPORTANT DISCLOSURES.

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1STRICTLY CONFIDENTIAL

FIXED INCOME AND CURRENCIES

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Nizam Idris, Head Strategist, Fixed Income & Currencies

([email protected])

September 2014

THIS DOCUMENT WAS PREPARED BY SALES& TRADING PERSONNEL OF MACQUARIE AND IS NOT RESEARCH. REFER TO DISCLAIMER FOR IMPORTANT DISCLOSURES

THIS DOCUMENT WAS PREPARED BY SALES & TRADING PERSONNEL OF MACQUARIE AND IS NOT RESEARCH. REFER TO DISCLAIMER FOR IMPORTANT DISCLOSURES.

Astute Policy Gambit Needed To Unlock Potential

!Indonesia remains well regarded as a country with massive long term potential andseems set to match the big EM economies such as the BRIC group of countries

!But positive demographics need to be matched with the right policy mix

!The recently concluded election results presents a platform for change:– The market has moved to price in reform; stocks are no longer cheap, bonds hostage to USD views


– The market has moved to price in reform; stocks are no longer cheap, bonds hostage to USD views

– What matters in the short to medium term is the policy delivery

!Whereas the market was keen to give President-elect Jokowi the benefit of the doubtwhen the global market is awash with cheap liquidity, rise in the costs of funds mayforce investors to be more discerning in its investment decision. Fundamentals matter

!We see near term pressure on the IDR to emerge as the Fed normalises interestrates even as the new government may struggle to find its feet. On the latter, the fuelsubsidy cuts Jokowi sought may be taken as the first test for the new administration


Economic Growth: Indonesia vs the rest of the world

! Indonesia’s GDP growth is slowing but until recently the trend has been impressive

Real GDP growth of Indonesia vs the rest of the world (y/y %)

ID CN IN BR RU US EU JP


Source: Bloomberg, Macquarie

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14


Demographics: Long term positive for Indonesia

!Demographic trend is favorable for Indonesia

Addition to Working Age Population (15-64), millions, by 2035E

Age Dependency Ratio

100million

India China


Source: UN Population database, Macquarie Research, September 2014 Source: UN Population database, Macquarie Research, September 2014

207

38

13 125 1 0 -5 -10 -11 -12 -14 -60

-40

-20

0

20

40

60

80

100

Indi

a

Indo

nesi

a

Bra

zil

US

A

Mal

aysi

a

UK

Sin

gapo

re

Kor

ea (

Rep

ublic

)

Ger

man

y

Wes

tern

Eur

ope

Japa

n

Rus

sia

Chi

na

30%

40%

50%

60%

70%

80%

90%

100%

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

India ChinaJapan USAIndonesia


Middle Class Surge: Long term positive for Indonesia

! Large numbers set to enter the Middle class

Lower class accounts for Bulk of the Population

In Total Income terms, Indonesia is both a rising Middle class and exploding

Aspirational class opportunityAspirational

class US$ bn


Source: Global Demographics, Macquarie Research, September 2014 Source: Global Demographics, Macquarie Research, September 2014

Lower class 91%

Middle class7%

class 2%

Lower class (household income of US$0–20,000)Middle class (household income of US$20,000-50,000)Aspirational class (household income >US$50,000)

380

12889

412

163136

2%

5%

9%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

50

100

150

200

250

300

350

400

450

Lower class Middle class Aspirational class

2014 Total Income 2019 Total Income 2014-19 CAGR


Potential for Indonesia to develop the manufacturing sector

!Reform to develop the manufacturing sector would be a massive step towards creating jobs for the growinglabour force and youth population

Manufacturing share in GDP Manufacturing wage gap widening


Source: CEIC,Macquarie Research, September 2014 Source: CEIC, Macquarie Research, September 2014

24%

25%

26%

27%

28%

29%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

% of total

0

1000

2000

3000

4000

5000

6000

7000

8000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Indonesia ChinaUS$


Even Homer is interested ... But Indonesia is at a crossroads


Source: The Economist, 20Source: The Economist, 20Source: The Economist, 20Source: The Economist, 20thththth Century FoxCentury FoxCentury FoxCentury Fox


Short Term Distraction Clouding The Path

!USD strengthen could be sustained based on:– Growth leadership; US current account and fiscal deficits are shrinking suggesting improving balance

sheets– Short end rates is being normalised to prepare for an eventual Fed rate hike in early-2015

!Market volatility is likely to pick up, hurting Sharpe Ratios and threatening withdrawals of funds currently parked in ASEAN assets

!How much Indonesia’s fundamentals have improved since the taper tantrum in 2013


!How much Indonesia’s fundamentals have improved since the taper tantrum in 2013 will be scrutinised. We think as of now, there hasn’t been enough improvements in Indonesia’s twin deficits

!Local politics have however given foreign investors fresh optimism on Indonesia!But President-elect Jokowi may not have the luxury of time; gathering more support in

the DPR, the Cabinet make-up and fuel subsidy policy are crucial in reassuring the market that reform is still on the cards

For discussion purpose only


Almost time for Fed to hike rates

US consumer credit has been leading the inflation

US consumer confidence continue to pick up

3.514Consumer credit (y/y %) CPI (y/y %, rhs)

10140US Consumer Conf Index US Real Retail Sales (y/y %, rhs)

!While US inflation remains relative subdued, arguing against rapid rate hikes, US consumers are back!Fed’s Yellen admits that the extent of the economy’s output gap may be overestimated (Jackson HoleSymposium, Aug 22). Wage pressure could rise earlier than expected


Source: Multlp.com, Shiller website Source: Bloomberg, Macquarie


0

0.5

1

1.5

2

2.5

3

3.5

-6

-4

-2

0

2

4

6

8

10

12

14

Jan-01 Oct-02 Jul-04 Apr-06 Jan-08 Oct-09 Jul-11 Apr-13

Consumer credit (y/y %) CPI (y/y %, rhs)

-10

-8

-6

-4

-2

0

2

4

6

8

10

0

20

40

60

80

100

120

140

Jan-01 Oct-02 Jul-04 Apr-06 Jan-08 Oct-09 Jul-11 Apr-13

US Consumer Conf Index US Real Retail Sales (y/y %, rhs)


Valuations begin to matter

!When funds are no longer free, valuations matter!This is where we think market volatility could emerge at least on a knee jerk; both stocks and bonds are nolonger cheap

Shiller P/E for S&P 500 High yield bonds vs S&P500 total return

50 Shiller PEUS HY Total return US S&P500 Total return


Source: Multlp.com, Shiller website, Macquarie Source: Bloomberg, Macquarie


0

5

10

15

20

25

30

35

40

45

50

04 09 13 18 23 27 32 37 41 46 51 55 60 65 69 74 79 83 88 93 97 02 07 11

1SD above meanMean

80

130

180

230

280

330

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

US HY Total return US S&P500 Total return


Will Indonesia be able to withstand USD strength

!Will there be a repeat of taper tantrum?

USDIDR spot Indonesian government bond 10y yield

2313000


Source: Bloomberg, Macquarie Source: Bloomberg, Macquarie

5

7

9

11

13

15

17

19

21

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

IDGB 10y

8000

8500

9000

9500

10000

10500

11000

11500

12000

12500

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

USDIDR


Foreign Positioning In Local Bonds

Foreign holdings of outstanding government bonds (%)

Real yield has improved in Indonesia

!Real bond yields could anchor these investments onshore, but only Indonesia’s real yieldshave improved meaningfully!Foreign funds remain heavily positioned in Indonesian government securities


government bonds (%)

Source: CEIC, Bloomberg, Macquarie Source: Bloomberg, Macquarie For discussion purpose only

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

KR ID MY TH

Jun-2014

Dec-08

% foreign holdings of outstanding govt bonds

-4

-3

-2

-1

0

1

2

3

4

Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14

ID MY SG TH PH


Foreign funds are still heavily invested in Indonesian assets

Cumulative fund flows into Indonesia since 2013

Indonesia 10y bond total return – FX return was an incentive to hold IDGB

!Foreign portfolio funds are heavily invested in Indonesian assets!These could be at risk when the Fed normalises interest rates!Valuation and FX movements could play a big part in determining how these investors behave

Capital return FX return Interest return16000


Source: CEIC, Macquarie Source: Bloomberg, Macquarie


4

6

8

10

12

14

16

18

20

22

-100

-80

-60

-40

-20

0

20

40

60

80

100

Aug-14Aug-13Jul-12Jul-11Jun-10Jun-09Jun-08

Capital return FX return Interest returnTotal return ID 10y (rhs)

-4000

-2000

0

2000

4000

6000

8000

10000

12000

14000

16000

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

Cumulative bond flows into Indonesia

Cumulative equity flows into Indonesia

(USD mn)


This Is Not 1997 – External debt remains low

External debt Private external debt by economic sector

! External debt level has remained well under control after the large post-1997 improvements


Source: CEIC, Macquarie Research, September 2014 Source: CEIC, Macquarie Research, September 2014


31

18

8

10

27

1

19

8

1

3

0 10 20 30 40

Manufacturing

Financial, Leasing, Services

Trade, Hotel, Restaurant

Transportation, Communication

Mining and Drilling

Building

Electricity, Gas, Waterworks

Agriculture

Services

Others US$ bn

0%

10%

20%

30%

40%

50%

0

50

100

150

200

250

300

Mar

-07

Dec

-07

Sep-

08

Jun-

09

Mar

-10

Dec

-10

Sep-

11

Jun-

12

Mar

-13

Dec

-13

Long-TermShort-Termas % of GDP


FX Reserves adequate

!However, Indonesia stacks up well on the traditional metrics of FX reserve adequacy

FX reserve adequacy

Actual



Source: CEIC, IMF, Macquarie Research, September 2014

7.5

31

2.23

20

10

5

10

15

20

25

30

35

Import coverage (months)

M2 money supply coverage (%)

Short-term external debt coverage

(x)

Actual

Required


But is this 2013 all over again? Current account a big concern

Current account comparison Indonesia Current account breakdown

! Current account has marginally improved but the improvement is less significant when compared to the restof Asia

Latest Mar-13 Dec-09


Source: CEIC, Macquarie Source: Bloomberg, Macquarie


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Mar

14

Sep

13

Mar

13

Sep

12

Mar

12

Sep

11

Mar

11

Sep

10

Mar

10

Sep

09

Mar

09

Sep

08

Mar

08

Sep

07

Mar

07

Goods (CA) Services (CA) Income (CA)Transfers (CA) Basic Balance CA

Indonesia

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

CN KR SG TW ID MY TH PH IN

Latest Mar-13 Dec-09


Current account hampered by trade

Indonesia trade balance Commodity exports grew faster than manufacturing exports

!The falling trade balance is hurting Indonesia’s current account!Decline in commodity price weigh on Indonesia’s exports


Source: CEIC, Macquarie Research, September 2014 Source: CEIC, Macquarie Research, September 2014


-8%-6%-4%-2%0%2%4%6%8%

10%12%

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Trade balanceOil & Gas and Resource based trade balanceNon-natural Resource - Based manufacturing trade balance

3-month trailing, as % of GDP annualized

-40%

-20%

0%

20%

40%

60%

80%

Jan-

03

Apr-0

4

Jul-0

5

Oct

-06

Jan-

08

Apr-0

9

Jul-1

0

Oct

-11

Jan-

13

Apr-1

4

Oil & Gas and Resource based exports

Non-natural Resource - based manufacturing export

YoY%, 3MMACAGR (2003-11) = 18%YoY

CAGR (2003-11) = 10%YoY


High dependence on Commodities

Composition of exports Export basket dominated by 4 commodities

!Share of non-commodity based manufacturing exports remains too small


Source: CEIC, Macquarie Research, September 2014 (Data as of 2013) Source: CEIC, Macquarie Research, September 2014 (Data as of 2013)


Oil and Gas Export18%

Agriculture3%

Mining18%

Natural Resource

based manufacturing

export30%

Non-natural Resource -

Based manufacturing

export31%

19%

12%14% 14%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Coal, Coke, and Briquettes

Petroleum and Petroleum Products

Gas; Natural and

Manufactured

Animal Vegetable Oils/fats

Others

% share


Indonesia fiscal deficit has widened

Current account vs fiscal balance as % of GDP for EM Asia

Fiscal deficit remains wide

!Only Indonesia has twins deficit problem!Fiscal budget is getting closer to the 3% deficit ceiling


Source: Bloomberg, Macquarie Source: Reuters, Ministry of Finance - Indonesia, Macquarie


-1.86

-2.38 -2.4

-1.69

-2.32

-3.2

-3

-2.8

-2.6

-2.4

-2.2

-2

-1.8

-1.6

2012 2013 2014 2015

% fiscal budget of GDP (revised) % fiscal budget of GDP (approved)

IN

IDMY

SG

KR TW

TH

CN

HK

PHAU

NZ

VN

-7-6-5-4-3-2-101234

-5 0 5 10 15 20

% Current account of GDP

%fis

cal b

alan

ce o

f GD

P


Although Government debt to GDP ratio remains low

Government debt to GDP vs fiscal balance as % of GDP for EM Asia

Government debt to GDP

!Although admittedly public debt to GDP remains low


as % of GDP for EM Asia

Source: Bloomberg, Macquarie Source: Bloomberg, Macquarie For discussion purpose only

0

50

100

150

200

250

CN HK IN ID JP KR SG TH US MY

Dec 2013 Dec 2007

IN

ID MY

KR

TW

TH

CN

HK

PHAU

NZ

VN

-7-6-5-4-3-2-101234

15 25 35 45 55 65Government debt to GDP

%fis

cal b

alan

ce o

f GD

P


But work needs to be done: Fuel subsidy diverting funds away from development spending

Indonesia Central government spending profile

Subsidy bill has increased 2.5 times since GFC

!Fuel subsidies continue to rise as a proportion of total spending – this is not ideal


Source: Jakarta Post, Ministry of Finance - Indonesia, Macquarie Source: CEIC, BI, Macquarie Research, September 2014


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015

Fuel subsidyElectricity subsidyNon-energy subsidySpending for ministries, agencies, debt payments etc

0%

1%

2%

3%

4%

5%

6%

0

5

10

15

20

25

30

35

40

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

US$ bn as % of GDP


Infrastructure spending the biggest loser

Investments into infrastructure has not kept pace with overall trend

Lower subsidies can provide fiscal space for boosting infrastructure

!Investments into infrastructure has not kept pace with overall trend!This is where Jokowi offers hope, but can he deliver?


Source: World Bank, Macquarie Research, September 2014 Source: CEIC, BI, Macquarie Research, September 2014


0%

5%

10%

15%

20%

25%

30%

35%

40%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Subsidies Capital expenditure% share in total expenditure


Inflation and policy rate outlook

!Indonesia raised policy rate after the “taper tantrum”

Inflation for ASEAN Policy rates


Source: Bloomberg, Macquarie Source: Bloomberg, MacquarieFor discussion purpose only

4.53

3.3

4.9

1.82.16

4.94

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

ID MY PH SG TH VN

12m avg Latest(YoY%)

0

1

2

3

4

5

6

7

8

9

ID MY PH TH US

Q213 Current policy rate Q315 forecasts


What to do to set Indonesia on the right path

!Eliminate subsidies!Improve infrastructure!Revise the archaic Labour Laws !Eradicating corruption and cutting red tapes (bureaucracy) to ease doing business!Develop a manufacturing sector that could capitalise on Indonesia’s young workforce

and low cost base


and low cost base!Liberalise the economy to attract better FDI inflows into higher value added

processes than mining !The theoretical improvement in intensity of these traditional factors of production will

also raise total factor productivity, growth potential and income



Jokowi’s Reform Plan

Jokowi – Jusuf Kalla 9 Point Plan1 Increase the salary of Indonesian Military (TNI) officers, police officers and civil servants gradually over five years and improve their

professionalism.

2 Allocate an average of IDR1.4 billion in special aid funds to every village. Recruit village officials as civil servants.

3 Provide IDR 1million in monthly subsidy to poor families should the national economy grow by more than 7% annually.

4 Offer a land ownership program to 4.5 million families. Establish or revitalize irrigation on 3 million hectares (ha) of farmland. Establish 25 dams and 1 million ha of new agricultural land outside of Java. Establish a bank for farmers and small businesses. Empower the



25 dams and 1 million ha of new agricultural land outside of Java. Establish a bank for farmers and small businesses. Empower the State Logistics Agency.

5 Revitalize 5,000 traditional markets and establish fish auction, storage and processing facilities.

6 Provide 10 million new jobs within five years. Provide every cooperative with IDR 10million annual support fund. Empower and promote digital and creative industries.

7 Provide free inpatient and outpatient services with Healthy Indonesia Card (KIS). Provide 6,000 community health centres with inpatient facilities and clean water.

8 Improve the education quality of Islamic boarding schools and increase the welfare of their teachers.

9 Provide education for all citizens with Smart Indonesia Card (KIP). Provide quality education facilities and syllabus. Guarantee teachers’ welfare and increase teachers’ benefit. Continue the teacher certification program.

Source: Media Reports, Macquarie Research, September 2014


What are the businesses saying?

! What are the key problematic factors doing business in Indonesia?

The Most Problematic Factors for Doing Business in Indonesia

Inadequate supply of infrastructureInefficient government bureaucracy

Corruption


Source: World Economic Forum, Macquarie Research, September 2014

0 5 10 15 20 25

Foreign currency regulationsInsufficient capacity to innovate

Tax regulations Crime and theft

Poor public health Inadequately educated workforce

Government instability/coups Inflation

Tax rates Policy instability

Poor work ethic in national labor force Restrictive labor regulations

Access to financing Inadequate supply of infrastructure

% of responses


Reform: Capital expenditure and growth

!Liberalising FDI norms and improving infrastructure to ease supply bottlenecks can boost growth potential

Fixed Capex vs. Export Growth Cut subsidy to boost Capex



Source: CEIC, Macquarie Research, September 2014 Source: CEIC, BI, Macquarie Research, September 2014

-30%

-20%

-10%

0%

10%

20%

30%

0%

2%

4%

6%

8%

10%

12%

14%

Mar

-07

Dec

-07

Sep

-08

Jun-

09

Mar

-10

Dec

-10

Sep

-11

Jun-

12

Mar

-13

Dec

-13

Gross Fixed Capital FormationExport of Goods and Services

YoY% YoY%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Subsidies Capital expenditure% share in total expenditure


Reform: Severance Pay for Redundancy Dismissal

Severance Pay for Redundancy Dismissal in Asia

70

Average for workers with 1, 5 and 10 years of tenure, in salary weeks


Source: Doing Business (World Bank Group) 2014, Macquarie Research, September 2014

57.8

31.7

23.1 23.1 23.117.2

11.4

1.4 00

10

20

30

40

50

60

70

Indonesia Thailand Korea, Rep. Philippines China Malaysia India Hong Kong Singapore


Conclusion

!Indonesia remain well positioned on global investors’ radar screens given its longer term potential and the promise of reform from the recent election

!But exogenous risk factors could mean incoming President Jokowi would have to make the right moves to reassure investors that the reform plan remains intact

!Failing which, we anticipate short term pressure on Indonesian assets and the rupiah ahead, even as the Fed begins to normalise interest rates


!Twin deficits, foreign investors’ positioning and policy uncertainties will weigh on the market in the short term

!Longer term outlook is highly dependent on reform; eliminating subsidies, improving infrastructure, developing a bigger non-commodity manufacturing base, easing the norms for doing business in Indonesia and changing the labour law are key measures that would have lasting effect on long term potential growth

!We expect more short term pain, before long term gain. USDIDR could rise to 12,500 before a clearer path towards reform takes shape to attract inflows and support the currency back to 11,000



FX forecasts

Majors Spot 1m 3m 6m 1m 3m 6m 1m 3m 6m AUDUSD 0.90 0.89 0.86 0.88 -0.90 -4.24 -2.02 -0.78 -3.70 -0.79NZDUSD 0.81 0.80 0.78 0.79 -1.83 -4.28 -3.06 -1.54 -3.43 -1.32EURUSD 1.29 1.28 1.26 1.24 -0.91 -2.46 -4.01 -0.93 -2.55 -4.17USDJPY 109 110 112 114 1.08 2.92 4.76 1.12 3.01 4.98GBPUSD 1.64 1.65 1.66 1.68 0.47 1.08 2.30 0.49 1.10 2.44USDCAD 1.09 1.10 1.12 1.14 0.49 2.32 4.15 0.42 2.10 3.69USDCHF 0.93 0.94 0.96 0.98 0.59 2.73 4.87 0.64 2.89 5.15AUDNZD 1.10 1.13 1.13 1.13 2.08 2.22 2.37 1.90 1.90 1.83

FORECASTS % FROM SPOT % FROM FWD



Asian FX SPOT 1M 3M 6M 1M 3M 6M 1M 3M 6MUSDCNY 6.1414 6.15 6.17 6.12 0.14 0.47 -0.35 -0.12 -0.07 -1.20USDCNH 6.1473 6.15 6.17 6.12 0.04 0.37 -0.44 -0.26 -0.40 -1.78USDHKD 7.75 7.75 7.75 7.75 -0.02 -0.02 -0.02 -0.02 -0.02 -0.02USDIDR 11983 12250 12500 12000 2.23 4.31 0.14 1.54 2.51 -3.11USDINR 60.85 61.50 62.00 61.50 1.08 1.90 1.08 0.61 0.62 -1.99USDKRW 1043.4 1045 1050 1050 0.15 0.63 0.63 0.00 0.22 -0.11USDMYR 3.243 3.27 3.30 3.30 0.82 1.75 1.75 0.57 1.11 0.53USDPHP 44.42 45.00 45.50 45.00 1.30 2.42 1.30 0.96 1.90 0.56USDSGD 1.2677 1.275 1.280 1.270 0.58 0.97 0.18 0.57 0.96 0.18USDTHB 32.26 32.50 32.75 32.75 0.76 1.53 1.53 0.59 0.99 0.60USDTWD 30.246 30.30 30.50 30.50 0.18 0.84 0.84 0.13 0.93 1.19

FORECASTS % FROM SPOT % FROM FWD

AUDNZD 1.10 1.13 1.13 1.13 2.08 2.22 2.37 1.90 1.90 1.83EURCHF 1.21 1.20 1.21 1.22 -0.33 0.20 0.66 -0.29 0.27 0.76EURGBP 0.79 0.78 0.76 0.74 -1.37 -3.50 -6.16 -1.41 -3.61 -6.45


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MACQUARIE – INDONESIA Jakarta, 23-24 September 2014COMMODITIES CONFERENCE

THE OUTLOOK FOR INDONESIAN MINING THE OUTLOOK FOR INDONESIAN MINING POLICY & REGULATION AFTER 2014

WHAT CAN WE REALISTICALLY EXPECT?

Presented by:y

Bill SullivanCCHRISTIANHRISTIAN TTEOEO PURWONO & Partners

(in association with Stephenson Harwood LLP)Indonesia Stock Exchange Building

Tower II Floor 16 Suite 1604Tower II Floor 16 Suite 1604Sudirman Central Business District

Jl.Jend. Sudirman Kav.52-53, Jakarta 12190Tel : 62 21 515 0280 Fax : 62 21 515 0281

Email : [email protected]: 62 815 8506 0978

© CHRISTIAN TEO PURWONO & Partners 2014

OUTLINE OF SESSION

1. Introduction

2. 2012 to 2014 in review

3. Explaining what has happenedp g pp

4. Forthcoming change of Government

5. Implications for foreign investors

6. Implications for mining industryp g y

7. Summary and conclusions

1MACQUARIE – INDONESIA COMMODITIES CONFERENCE CHRISTIAN TEO PURWONO & Partners

INTRODUCTION

1. 2012 to 2014 has been a disastrous period formining companies in Indonesia

2. Declining commodity prices and increasingresource nationalism has created the “perfectstorm”storm

3. Many are hoping a new Government inOctober 2014 will bring better times forOctober 2014 will bring better times forIndonesia’s mining industry

4. Expectations of exponential improvementp p pafter October 2014 are probably unrealistic

5. Incremental improvement after October 2014h b bl

2

may, however, be possible

CHRISTIAN TEO PURWONO & PartnersMACQUARIE – INDONESIA COMMODITIES CONFERENCE

2012 TO 2014 IN REVIEW

1. Acceleration of divestiture requirement

2 Specification of “Investment Recovery only”2. Specification of Investment Recovery onlydivestiture price

3 I bilit t l IDX li ti3. Inability to rely on IDX listings

4. Apparent disregard of CoW/CCoW holder rights

5. Domestic processing and refining chaos

6 Ever greater restrictions on use of Forest Areas6. Ever greater restrictions on use of Forest Areas

7. New and increased taxes

3

8. Tighter restrictions on Mining Services providers


EXPLAINING WHAT HAS HAPPENED –MAJOR REASONSMAJOR REASONS

1. Government believes it did not “get its fairshare” during last commodities boomshare during last commodities boom

2. Perception that Indonesia has been tooaccomodating to foreign investorsaccomodating to foreign investors

3. Government believes foreign investors needIndonesia and will still be willing to investIndonesia and will still be willing to investdespite increased regulatory burdens

4. Disconnect between who bears thecosts/burdens of mining projects and who reapsthe benefits/rewards of mining projects

4

5. Growing influence of Provincial and RegionalGovernments


EXPLAINING WHAT HAS HAPPENED –MINOR REASONSMINOR REASONS

1. Growing emphasis on different values asIndonesia becomes more prosperous and selfIndonesia becomes more prosperous and self-confident

2. Deficiencies in the process of preparing and2. Deficiencies in the process of preparing andimplementing new mining laws, policies andregulations

3. Inadequate practical and technicalknowledge of mining at all levels ofGovernment

4. Opportunistic behavior on the part of certainlocal business groups and their political allies

5

5. Vote getting in advance of 2014 electionsCHRISTIAN TEO PURWONO & PartnersMACQUARIE – INDONESIA COMMODITIES CONFERENCE

ASSESSMENT OF MAJOR AND MINOR REASONSREASONS

1. 4 of the Major Reasons and 2 of the MinorReasons are expressions of resourcepnationalism in 1 form or another

2. 1 of the Major Reasons and 3 of the MinorReasons are simply statements of fact incontemporary Indonesia

3 O l 1 f h Mi R i di l li k d3. Only 1 of the Minor Reasons is directly linkedto the 2014 Elections and therefore likely tobe transitory in naturey

4. Overwhelmingly, the Major Reasons and theMinor Reasons are systemic and almost

bl h h h d

6 CHRISTIAN TEO PURWONO & PartnersMACQUARIE – INDONESIA COMMODITIES CONFERENCE

impossible to change in the short to mediumterm

FORTHCOMING CHANGE OF GOVERNMENT PART I– PART I

The optimistic view is:

(a) 2012 2014 developments have been primarily(a) 2012 – 2014 developments have been primarilydriven by vote getting initiatives in advance of2014 elections and exacerbated by weake isting Go e n entexisting Government

(b) new Government in 2014 will have a policyhorizon of at least 5 yearshorizon of at least 5 years

(c) the importance of foreign investment is wellunderstood and will not be overlooked by newyGovernment

(d) PDI–P and Jokowi will be more favorablydi d t th i i i d t d f i


disposed to the mining industry and foreigninvestors than are PD/Golkar/PKS and SBY

FORTHCOMING CHANGE OF GOVERNMENT PART II– PART II

The pessimistic view is:

( ) 2012 2014 d l b l(a) 2012 – 2014 developments are about a lot morethan vote getting and a weak existingGovernment

(b) PDI–P and Jokowi are the ultimate“populists” and not favorably disposed at all to

i i d f i i t tmining and foreign investment(c) Indonesia has come too far “down the path” of

resource nationalism to quickly change courseresource nationalism to quickly change courseafter October 2014

(d) Mining law reform is not likely to be high onh G ’ d

8

the new Government’s agenda


FORTHCOMING CHANGE OF GOVERNMENT PART III PDI P– PART III – PDI-P

PDI-P 2014 economic platform states:

“We are facing a situation in which our economic sovereigntyand policies are being dictated by foreign powers”

“Indonesia must limit foreign ownership in certain sectors”

“National interests are being harmed as the indirect result of theinflux of foreign capital with national interests taking a backinflux of foreign capital with national interests taking a backseat to foreign interests”


FORTHCOMING CHANGE OF GOVERNMENT PART IV JOKOWI– PART IV – JOKOWI

1. 2nd Presidential Debate

“A contract is a contract and therefore contracts whichhave already been signed need to be respected”

2. Post Presidential Election – 22 July

“First I want to sit down with stakeholders, investors,l d h h l k h bl dregulators and with the people to know the problem and

find a good solution for them. I want to know the details.”


FORTHCOMING CHANGE OF GOVERNMENT – PART V– PART V

The balanced view is:(a) Be very happy that PDI-P and Jokowi, rather than( ) y ppy J ,

Gerindra and Prabowo, will form the next GoI(b) Recognise that Megawati will still be the “dalang”

even though she is not the Presidenteven though she is not the President(c) Focus on Megawati’s past track record as President

from 2001 to 2004 rather than on PDI-P platform(d) Take comfort in the fact that Megawati has shown

herself to be:(i) an avowed secularist( )(ii) willing to appoint competent technocrats to

fill key Ministries(iii) t tl ti i i ti f i

11

(iii) not overtly anti-mining or anti-foreigninvestment


IMPLICATIONS FOR FOREIGN INVESTORS

A PDI-P/Jokowi led GoIwill:

(a) have the support and encouragement of foreigninvestors

(b) cause foreign investors to give Indonesia anotherchance to meet minimum expectations

( ) i i h I d i ill(c) generate optimism that Indonesia will now movetowards better governance and less corruption

(d) increase at least temporaril the al e of(d) increase, at least temporarily, the value ofIndonesian assets


IMPLICATIONS FOR MINING INDUSTRY

The mining industry should expect:

( ) h ffi i l G I li h i i(a) no change to official GoI policy re the miningindustry and foreign investment

(b) no change to the 2009 Mining Law

(c) a more competent and experienced MoEMR( ) p p

(d) better formulation and execution of miningpolicy

(e) some changes to the Implementing Regulations


CHANGING THE IMPLEMENTING REGULATIONS-2 CASE STUDIESREGULATIONS 2 CASE STUDIES

1. Domestic Processing & Refining(a) 2009 Mining Law requires “local value added(a) 2009 Mining Law requires local value added

activity within 5 years” but does not say what levelof processing and refining is required

(b) 2012 Implementing Regulation specifics 99%(b) 2012 Implementing Regulation specifics 99%purity for most metal minerals

2 Divestiture2. Divestiture(a) 2009 Mining Law requires “divestiture of

some shares within 5 years of commencingy gexploitation” but does not say how much orat what price

(b) 2012 Implementing Regulation says 51%

14

(b) 2012 Implementing Regulation says 51%divestiture and at replacement cost only


SUMMARY & CONCLUSIONS

1. New GoI will be better incrementally but notexponentially for foreign investors and themining industry

2. Resource nationalism will continue as officialGoI policy unless there is an economicGoI policy unless there is an economic“meltdown” in Indonesia

3 Changes to Implementing Regulations alone3. Changes to Implementing Regulations alonemay be sufficient to address some of the currentproblems

4. Indonesia can, once again, become an attractivedestination for mining investment so long as therelated risk is correctly assessed and priced


related risk is correctly assessed and priced

Thank YouThank You




In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.

Indonesia Commodities Conference Seaborne thermal coal market outlook

Stefan Ljubisavljevic +44 20 3037 4247

[email protected]

Macquarie Capital (Europe) Limited

Ropemaker Place 28 Ropemaker Street

London, UK EC2Y 9HD

September 2014

Thermal coal price history: spot prices are at a 5-year low

Source: globalCOAL, McCloskey, Macquarie Research, September 2014

Page 2

0

40

80

120

160

200

240

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

$/t 6,000 kcal spot price benchmarks

DES ARA Newcastle Richards Bay

65

70

75

80

85

90

95

100

Jan 13 Jul 13 Jan 14 Jul 14

$/tDES ARA Newcastle

Presentation outline ÎA recap of the global thermal coal market today ÎHow are prices determined in the seaborne market ÎWhat has gone wrong for the price YTD ÎA look ahead – is it all doom and gloom? ÎStructural changes in the Chinese coal industry and its seaborne market impact ÎPolicy implications

Page 3

Thermal coal is a 925mt seaborne market

Page 4

Russia

92mt

Australia

188mt

Japan, Korea, Taiwan

292mt (139 / 98 / 56mt)

China

224mt

EU-28

135mt

102mt

10mt

42mt

23mt

Indonesia

420mt

Colombia

74mt 133mt Japan – 82 Korea – 33 Taiwan – 18 42mt

112mt 14mt

18mt

40mt

4.5mt

USA

43mt

26mt

*Including lignite and Vietnamese anthracite. 2013 numbers. Source: Customs Data, Macquarie Research, September 2014

Major exporter

Major importer

USA 7mt

15mt

India

132mt

S Africa

73mt

Turkey, Israel 30mt

Other ASEAN 58mt

Chile 10mt

48mt

130mt

7mt

ÎThere is no natural surplus or deficit in a seaborne market. For every buyer (importer) you have a seller (exporter).

ÎThe Pacific market is key, because it represents 80% of global demand. More importantly, it contains the marginal producer of coal globally – China.

ÎA theoretical seaborne surplus clears through China, by displacing Chinese domestic production. We model the market with China as the price setter of Newcastle coal.

ÎIn other words, we model China imports as global supply minus ex-China demand. China’s overall coal consumption requirement minus this import level determines a domestic requirement, setting the price.

ÎRelative Atlantic/Pacific basin tightness will then dictate price spreads between the other key benchmarks, with caps/floors set by price arbitrages.

How are thermal coal prices determined?

Page 5

China as the price setter – surplus seaborne market tonnes clear by pricing in to China

Page 6 Source: SxCoal, McCloskey, Macquarie Research, September 2014

450

500

550

600

650

700

750

800

850

900

950

Jan 11 Jan 12 Jan 13 Jan 14

RMB/tChinese domestic thermal coal

prices

5800 NAR5500 NAR

65

75

85

95

105

115

125

135

145

155

Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14

$/t5500kcal coal delivered Guangzhou

Shanxi (QHD) 5500kc

Newc 5500kc (Cape f reight)

Andrew Chu Kar Chee

Andrew Chu Kar Chee

Why has thermal coal performed so badly this year?

Source: globalCOAL, McCloskey, Macquarie Research, September 2014

Page 7

ÎDemand globally has been weak

ÎSupply from key countries (Australia/Russia) has remained strong

ÎBoth the seaborne and China domestic cost curves have moved lower. At the best of times, the coal market is not very efficient

ÎCrossover tonnes have bled from the met coal market to the thermal market

Î The USD has performed strongly

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

27-D

ec

17-J

an

07-F

eb

28-F

eb

21-M

ar

11-A

pr

02-M

ay

23-M

ay

13-J

un

04-J

ul

25-J

ul

15-A

ug

05-S

ep

DES ARANewcastleRichards Bay

Demand from key regions has been weak YTD

Source: Customs Data, Macquarie Research, September 2014

Page 8

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Chi

na

Japa

n

Indi

a

EU

-28

Kor

ea

Taiw

an

Turk

ey

Mal

aysi

a

Thai

land

Phi

lippi

nes

HK

US

A

Vie

tnam

Oth

er

Atla

ntic

Oth

er

Pac

ific

Mt 7M14 YoY change seaborne thermal coal imports

Source: Customs Data, Macquarie Research, September 2014

Page 9

Supply from Australia and Russia continues to grow

-5

7 6

-3

1

-7

-1 0 0-1

-4

-8-10

-6

-2

2

6

10

Indo

nesi

a

Aus

tralia

Rus

sia

Col

ombi

a

SA

F

US

Chi

na

Can

ada

Vene

zuel

a

Pol

and

Vie

tnam

Sum

Mt 7M14 YoY change seaborne thermal coal exports

Source: Macquarie Research, September 2014 Page 10

Seaborne cost curve, delivered Asia basis. >40% may be theoretically cash negative, but there are a number of structural issues preventing cuts

0

10

20

30

40

50

60

70

80

90

100

110

120

0 50 100

150

200

250

300

350

400

450

500

550

600

650

700

750

800

850

900

Del

iver

ed A

sia

Cos

t ($/

t) -6

000N

AR

bas

is

Volume (mt)

6000kcal-adjusted export supply curve for Thermal Coal

USA Colombia Russia Indo BitIndo Sub-bit Indo lignite Australia South AfricaOther Spot Price

It has made economic sense for Australian producers to sell semi-soft coal as thermal YTD

Source: Company Data, Platts, globalCOAL, Macquarie Research, September 2014

Page 11

-15

-10

-5

0

5

10

15

20

25

30

35

40

Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14

$/to

nne

Semi-soft sales into thermal market

High ash LV PCI Semi Soft

Potential bleed to thermal-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Hunter Valley

Mount Thorley

Warkworth Total

YoYRio Tinto SSCC output change

The USD has performed strongly against most currencies, albeit not against the AUD

Source: globalCOAL, McCloskey, Bloomberg, Macquarie Research, September 2014

Page 12

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

27-D

ec

17-J

an

07-F

eb

28-F

eb

21-M

ar

11-A

pr

02-M

ay

23-M

ay

13-J

un

04-J

ul

25-J

ul

15-A

ug

05-S

ep

DES ARA in USD and EUR terms (indexed)

DES ARA (USD/t)

DES ARA (EUR/t)

76

78

80

82

84

86

88

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

US dollar index

Looking ahead ÎIndonesian supply – cuts materialising?

ÎAustralian export growth – when will it slow?

ÎWhat is going on with Russian supply?

ÎDemand positives: India, Korea

ÎThe big black box: China

ÎPolicy risks

ÎMacquarie S/D balance

Page 13

Indonesian supply has grown at 17% CAGR over the past decade

Page 14

0%

10%

20%

30%

40%

50%

60%

0

50

100

150

200

250

300

350

400

450

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Mt Indonesian coal exports

Lignite

Sub-bituminous

Bituminous

Sub-bit proportion

Source: Indonesian government statistics, Macquarie Research, September 2014

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

50

100

150

200

250

300

350

400

450

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

MtIndonesian thermal coal exportsIndonesia as % global

It has capitalised well on strong Indian demand growth

Page 15 Source: Port Data, Macquarie Research, September 2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Shares of Indian thermal coal imports

Indonesia

South Africa

Australia

However on a kcal adjusted basis, costs are relatively high and signs of supply cuts are emerging

Page 16 Source: Customs Data, Macquarie Research, September 2014

-20

-15

-10

-5

0

5

10

15

20

Indo Bit Indo Sub-Bit

Indo Lignite

Total Indo

exports

Indo Met

Total Indo

thermal

Mt 7M14 YoY change in officially reported Indonesian exports

-10

-8

-6

-4

-2

0

2

4

6

Mac

q In

dia

port

data

Chi

na s

team

Chi

na li

gnite

Chi

na s

team

+lig

nite

Japa

n st

eam

Kor

ea s

team

Taiw

an b

it

Thai

land

ste

am

HK

bit

Spa

in s

team

Italy

ste

am

Sam

ple

tota

l

MtImplied Indonesian exports (partner

country data)

Data from mining consultant Salva, shows a similar trend. Most pressure on new mines.

Page 17 Source: Salva, Macquarie Research, September 2014

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

TOTA

L

Eas

t K

alim

anta

n

Sou

th

Kal

iman

tan

Cen

tral

Kal

iman

tan

Sou

th

Sum

atra

Oth

er

YoY

Salva reported production by region Jan-Jul

-14%-12%-10%-8%-6%-4%-2%0%2%4%6%

TOTA

L

CC

OW

-1

CC

OW

-2

CC

OW

-3

IUP

Gov

ernm

ent

Com

pany

YoY

Salva reported production by concession type Jan-Jul

However that Indonesian production and exports are falling is far from a consensus view


ÎOutput from some key large producers is still rising (see chart) and others too (e.g. Kideco) are targeting increased volumes

ÎHave tighter regulations introduced this year increased or reduced the black market?

ÎImplied export data (from partner countries) should cover illegally exported material, but some importer data (e.g India) is laden with error too -40%

-30%

-20%

-10%

0%

10%

20%

Adaro Bumi Tbk

Harum ITMG PTBA PT Berau

1H14 YoY production change -selected producers

0

1

2

3

4

5

6

7

8

0

10

20

30

40

50

60

70

80

2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

2H14

e

1H15

e

2H15

e

MtAUD/t FOB

Whitehaven Coal cash cost trend

Avg. cash cost Total production

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

tonnesNew South Wales - saleable coal output per mineworker per year

Australia supply - Take or pays and cost controls/efficiency drives pushing volumes higher

Page 19 Source: Comapany Data, Coal Services, Macquarie Research, September 2014

-A$13/t

Australia supply – there is even more growth to come from new mines ramping up

Page 20 Source: Customs Data, Company Data, Macquarie Research, September 2014

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

160

180

200

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

MtAustralian thermal coal exportsAustralia as % global

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2015 2016 2017 2018

YoYPotential supply additions from 3

Australian producersGlencore Whitehaven Yancoal

Russian supply – no significant mine capacity additions. Weak domestic consumption frees up tonnes for export. Test: hedges will roll off year-end.

Page 21 Source: Metal Expert, Macquarie Research, September 2014

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Ther

mal

ou

tput

Dom

estic

pu

rcha

ses

Pur

chas

es

from

:

Pow

er

Com

pani

es

Oth

er

YoY

7M14 Russia thermal coal production and domestic demand

-1.08%

-4.45%

6.01%

2.06%2.87%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Total Thermal Nuclear Hydro Industrial

YoY8M14 Power Generation Growth

Demand – Indian growth a key positive

Page 22 Source: Port Data, Macquarie Research, September 2014

0

2

4

6

8

10

12

14

16

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MtIndian thermal coal imports

2011 2012 2013 2014 0

20

40

60

80

100

120

140

160

180

200

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

F20

15F

2016

F20

17F

2018

F20

19F

MtIndia thermal coal annual import

forecast

A key positive because: 1. Domestic supply growth is weak. Unlikely to change any time soon.

Page 23 Source: CIL, Indian Ministry of Coal, Macquarie Research, September 2014

0

100

200

300

400

500

600

FY03 FY05 FY07 FY09 FY11 FY13

Mt

India Coal Production -Fiscal Year (Apr-Mar)

Other (inc. Captive)SCCLCIL 6.5%

CAGR

2% CAGR

0

10

20

30

40

50

60

-10%

-5%

0%

5%

10%

15%

20%

Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

Stock (mt)YoY

Coal India (CIL) supply YOY

Production Dispatches Stock (rhs)

2. Coal reliance still rising, non-coal capacity development sluggish

Page 24 Source: Indian CEA, Macquarie Research, September 2014

0

20

40

60

80

100

120

140

160

FY06 FY08 FY10 FY12 FY14

GW Indian power capacity growth

Coal-f iredAll OtherHydro

0

5,000

10,000

15,000

20,000

25,000

FY13 FY14 FY15 FY16 FY17

MWIndia 12th Plan Coal Capacity

AdditionsBull Case Bear Case Actual

India thermal coal S/D balance

Page 25 Source: Macquarie Research, September 2014

Fiscal year (Apr-Mar) FY11 FY12 FY13 FY14 FY15 f FY16 f FY17 fCoal fired generation (GWh) 534,766 584,193 659,027 713,695 772,236 819,190 860,890

Coal fired capacity (MW) 88,272 106,431 123,865 139,475 149,558 157,049 162,546Plant load factor 73% 69% 65% 62% 61% 61% 62%

Power generation coal req. (mt) 385 421 474 514 556 590 620Other sector thermal coal req. (mt) 197 198 190 181 176 173 170

TOTAL 3500 kcal demand 618 665 695 732 763 790Domestic thermal supply (mt) 483 488 502 511 527 542 559

Implied import demand (3,500 kcal) 130 163 183 206 221 232Implied import demand (5,000 kcal) 69 91 114 128 144 155 162

YoY change 22 23 15 16 11 8

Demand – Korea is the other area of key growth. Significant capacity additions to alleviate power grid pressure


0

5

10

15

20

25

30

35

40

2003 2006 2009 2012 2015F

GWSouth Korea's coal capacity (year-

end)

Anthracite Bituminous Coal

40%

50%

60%

70%

80%

90%

100%

1992 1996 2000 2004 2008 2012

South Korea's coal capacity utilisation

Anthracite Bituminous Coal

Wave of new Korean power plants

Page 27 Source: KPX, Company data, KEPCO, Macquarie Research, September 2014

Power Company Subsidiary Unit Capacity (MW) Fuel Start-upKEPCO Kosep Yeongheung 5 870 Bit Coal 2014KEPCO Kosep Yeongheung 6 870 Bit Coal 2014KEPCO Kewespo Dangjin 9 1,000 Bit Coal 2015KEPCO Kospo Samcheok 1 1,000 Low grade 2015KEPCO Kewespo Dangjin 10 1,000 Bit Coal 2016KEPCO Kospo Samcheok 2 1,000 Low grade 2016KEPCO Komipo Sinboryeong 1 1,000 Bit Coal 2016KEPCO Kowepo Taean 9 1,000 Bit Coal 2016KEPCO Kowepo Taean 10 1,000 Bit Coal 2016

STX Electric Power - Bukpyung 1 595 Bit Coal 2016STX Electric Power - Bukpyung 2 595 Bit Coal 2016

Dongbu Energy - Dongbu 1 550 Bit Coal 2016Dongbu Energy - Dongbu 2 550 Bit Coal 2016

KEPCO Komipo Sinboryeong 2 1,000 Bit Coal 201712,030

Korea’s 6th plan sees even more (mainly non-KEPCO) capacity being added

Page 28 Source: KPX, Company data, KEPCO, Macquarie Research, September 2014

0

1

2

3

4

5

6

7

8

2014 2015 2016 2017 2018 2019 2020 2021

GW

Total scheduled coal capacity additions

6th plan

Korean import tax has not impacted demand, just supply sources

Page 29 Source: KPX, Macquarie Research, September 2014

0.00

0.05

0.10

0.15

0.20

0.25

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

USD/kWhKorean power generation costs

OilLNGCoal

Coal spec Tax Tax FOB price Tax. inc price(kcal) Source (KRW/kg) ($/t)* ($/t)** ($/t) Tax as %

3800 GAR Indonesia 17 16.2 51.9 68.9 24%4200 GAR Indonesia 17 16.2 55.8 72.8 22%4900 NAR Indonesia 17 16.2 64.3 81.3 20%5500 NAR Australia 19 18.2 60.7 79.7 23%6000 NAR Australia 19 18.2 66.1 85.1 21%6000 NAR Russia 19 18.2 68.6 87.6 21%* Based on current FX** 6,000kcal NAR adjusted

Korean coal import tax implemented 1 July:

China – the cost curve is key but it is ‘flexible’. We now think the top of the curve is no higher than 520 RMB/t, from our start-of-the year 600 RMB/t

Page 30 Source: Company Data, Macquarie Research, September 2014

0

100

200

300

400

500

600

700

Shenhua

China Coal

Yanzhou

Hebei small mines trucked

Other Shanxi SOE

Shanxi small mine rail

Inner Mongolia rail

Inner Mongolia trucked

Shanxi small mine trucked

VAT

Transportation cost

Tax, fees and others

Cash cost

RMB/t

mnt

Andrew Chu Kar Chee

This has put significant pressure on prices and has not been helped by weak consumption

Page 31 Source: Customs Data, NBS, Macquarie Research, September 2014

0

5

10

15

20

25

30

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Mt Chinese seaborne thermal coal imports

2014 20132012 2011

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan-11 Jan-12 Jan-13 Jan-14

YoYModelled Chinese consumption

growth

Weak consumption due to weak thermal power generation and improving plant efficiency

Page 32 Source: NBS, Macquarie Research, September 2014

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Thermal Hydro Nuclear Wind Total

YoYJan-Aug YoY power output growth

1.5

1.6

1.7

1.8

1.9

2.0

2010 2011 2012 2013

Bn t

Chinese coal consumption by power, cement and fertiliser sectors

Assuming f lat 34.5% ef f iciency

Assuming ef f iciency improvement of 2% pa

Medium-term, we see power capacity development remaining favourable for coal


55%

40%

18%

178%

297% 238%

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000 MW

2013 to 2020 China power capacity additions: Macquarie forecast

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

2010

2011

2012

2013

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Coal-fired share of total power capacity

The major concerns are: 1. A further move lower in the cost curve (by 30-50 RMB/t) following railway debottlenecking by 2016

Page 34 Source: Railway Ministry, CCTD, Macquarie Research, September 2014

The major concerns are: 2. Import restrictions.

Page 35 Source: Wood Mackenzie, Customs Data, Macquarie Research, September 2014

0

10

20

30

40

50

60

70

2007

2008

2009

2010

2011

2012

2013

2014

an

n.

MtChina to Australia thermal coal trade

China imports f rom Australia

Australia exports to China

81%

19%

Exportable Australian thermal coal -16% ash 1% sulphur cutoff

Meets threshold

Does not meet threshold

To conclude ÎMarket likely to remain under pressure over next 18-24 months

ÎChinese costs could fall further and policy risk remains

ÎThere is more supply from Australia to come

ÎA lack of large-scale supply cuts means that market rebalancing will take time

ÎHowever, longer-term import demand prospects from India and Korea look good

ÎAnd Chinese consumption prospects also look positive medium-term

ÎSlowing (maybe negative) export growth from Indonesia will help market rebalancing. 17% CAGR export growth rates are a thing of the past

Page 36

Macquarie S/D balance – assuming steady Indonesian supply growth. Chinese imports need to fall for stronger pricing to be realised.


Demand (mt) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019FEU-28 125 138 135 134 132 130 126 122 122Turkey 19 24 21 21 22 24 26 28 29Other Atlantic 41 40 34 40 40 40 42 44 47Korea 100 98 98 99 102 115 125 127 135Taiw an 55 54 56 55 55 56 58 60 62Japan 122 134 139 142 142 142 141 141 141India 85 107 132 140 152 161 168 175 180Other Pacif ic 78 81 90 90 93 98 105 114 119Total Ex-China 623 675 703 721 739 765 791 810 834(Required) Chinese imports 165 215 224 223 220 218 207 191 173

Supply (mt) 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019FAustralia 148 171 188 200 209 214 218 220 221Indonesia 349 380 420 430 435 440 445 445 445South Africa 69 75 73 75 77 80 82 83 84Colombia 76 80 74 75 82 92 97 99 101Russia 70 85 92 98 99 100 100 100 100USA 31 48 43 34 26 26 26 26 26Other 49 38 35 32 31 31 29 28 30Total 792 877 925 944 959 983 997 1,001 1,007Notional Balance 3 (14) (3) - - - - - -

Page 38

Important disclosures:

Recommendation definitions Macquarie - Australia/New Zealand

Outperform – return > 3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return > 3% below benchmark return

Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield.

Macquarie – Asia/Europe

Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected <-10%

Macquarie First South - South Africa


Macquarie - Canada


Macquarie - USA


Volatility index definition* This is calculated from the volatility of historic price movements.

Very high–highest risk – Stock should be expected to move up or down 60-100% in a year – investors should be aware this stock is highly speculative.

High – stock should be expected to move up or down at least 40-60% in a year – investors should be aware this stock could be speculative.

Medium – stock should be expected to move up or down at least 30-40% in a year.

Low–medium – stock should be expected to move up or down at least 25-30% in a year.

Low – stock should be expected to move up or down at least 15-25% in a year.

* Applicable to Australian/NZ stocks only

Recommendation – 12 months

Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit /efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 June 2014

AU/NZ Asia RSA USA CA EUR Outperform 51.67% 60.69% 34.67% 42.33% 55.41% 44.84% (for US coverage by MCUSA, 6.76% of stocks followed are investment banking clients) Neutral 33.00% 23.93% 38.67% 50.92% 38.51% 35.87% (for US coverage by MCUSA, 7.25% of stocks followed are investment banking clients) Underperform 15.33% 15.38% 26.67% 6.75% 6.08% 19.28% (for US coverage by MCUSA, 0.48% of stocks followed are investment banking clients)

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1

“New Paradigm for Coal Producers” PT Toba Bara Sejahtra Tbk (“Toba”)

Macquarie Conference Jakarta, 23rd September 2014

Presented by: Pandu P. Sjahrir

TOBABARA_ENG_Hi_117mb.mp4

2

Content

2

Snapshot of Global Coal Industry – Structural Problem

Cost Management Challenge for Domestic Coal Producers

3

1

Regulatory Framework towards Energy Security

4 Prospects of Domestic Power Demand Market

5 Business Model for Coal Producers

3

Snapshot of Global Coal Industry – Structural Problem 1

4

Weaker Chinese import demand due to domestic factors

(Economic, Environmental & Regulatory Pressures)

Significant amount of unaccounted coal volume

ending up in seaborne market

Structural Issues Causing Protracted Low and Volatile Coal Prices…

Newcastle coal price declined from ~US$ 93,0 in 1Q2013 to 73,1/ton 2Q2014 This condition leads to “survival of the fittest” where only those with lowest cash cost are able to survive

Costs of renewables & substitutes on decline

Excess supply

Global Seaborne Factors

Decrease in profitability and competitive advantage among seaborne coal producers

Domestic Factors

Rising global cash cost

Cost Management efforts not commensurate with weakening coal prices, resulting in margin squeeze and tougher competition among seaborne coal producers

Global Cost

Factor

…And closer to home (Indonesia)…

Potential increase in Royalty and Export Tax

5

Excess Supply in Global Coal Expected to Continue, and Indonesia is Major Supplier…

~40% of total seaborne coal supply is estimated to derive from Indonesian output

Source: McCloskey, Deutsche Bank Report (January 2014)

Global projection indicates supply is expected grow at higher volume than demand

Potential Illegal Mining Identified

75.2 mln tons

2012

BPS Export (a) 384.4 mln

Domestic Consumption (b)

67.5 mln

TOTAL 451.9 mln

Ministry of Energy & Public

Co.

395.6 mln

424.2 mln

72.0 mln

TOTAL 496.2 mln

CCOW and IUP

421.0 mln CCOW and IUP

2013

Potential Illegal Mining Identified

56.3 mln tons

Indonesian Coal Production from Unaccounted Coal Output Reached ~75 Million Tons in 2013, up by 34% from 2012

Sources: (a) BPS: Central Agency of Statistics, Export data YTD 2012 & 2013 (b) Kepmen 909.K/30/DJB/2012 d (c) Directorate General of Ministry of Energy, R.Sukhar, 3 January 2014, www.inilah.com

Export (a)

Domestic Consumption (c)

7

Cost Management Challenge for Domestic Coal Producers

2

Existing Cost Reduction Strategies Already at Optimum… (i)

� Most producers will have maximized lowering SR during 2014

Option Latest Development

Reduce SR 1

Source: Result of FGD Analyses

� Further push may compromise long term mine plan (hurting margins, cash flow, reserves)

Implication

Source: Deutsche Bank

Cost to Go Up as SR Downtrend Reverses

Source: Company Data, Morgan Stanley Research. E = Morgan Stanley Research estimates

Industry SR as largest production cost component bottoming out

8

Existing Cost Reduction Strategies Already at Optimum…(ii)

Option Latest Development

Reduce Fuel Cost

2 � Reliance on expensive

diesel fuel consumption remains high while oil price is on uptrend

Source: Result of FGD Analyses

� Decline in investment in greenfield exploration

� Lower long term growth of industry

Implication

9

Negotiate with Contractor

� Most producers have maximized renegotiation efforts for lower tariffs

Optimize Production

� Significant rise in production to reach economies of scale is no longer viable at current low prices

3

4

� Price war among contractors may affect productivity and quality

� For smaller producers with low CV coal and rising costs, continued weak coal price should also result in much lower production growth or mine closure

Capital Expenditure on Downtrend…

10

-

200

400

600

800

1,000

1,200

1,400

2009 2010 2011 2012 2013

Decline in CAPEX due to lower coal price, resulting in most coal producers cutting back on expansion and exploration

Historical Capex of 10 Indonesian Listed Coal Companies

Source: Bloomberg – Based on 10 Listed Companies’ Data

11

Regulatory Framework towards Energy Security 3

Government Policies (2009-2014) Emphasized on Securing Domestic Supply… (i)

12

2009 2011

NEW MINING LAW NO. 4 of 2009 Several provisions related to securing domestic supply: � Domestic Market Obligation (DMO):

Coal producers are required to supply coal to meet domestic needs;

� Obligation to process and refine/smelt mining products domestically;

� Renegotiation of CoW in favour of domestic interests.

OCTOBER 2011 President gave speech reiterating importance of implementing Energy Security Policy over next 3 years where mining industry should contribute more to country’s economic development.

Since enactment of New Mining Law of 2009, government has been in pursuit of : • Achieving national energy security and ensuring coal supply for domestic

consumption • Targeting higher tax and non-tax revenue from mining sector

Government Policies (2009-2014) Emphasized on Securing Domestic Supply…(ii)

13

2013 2014

APRIL 2013 Discussion on Export Tax for Coal Government contemplated imposing export tax on coal for first time. MID 2013 Discussion on Royalty Hike for Coal Government contemplated implementation of royalty hike on coal of IUP from existing 3%-7% to 10%-13%. DECEMBER 2013 Production Cut Government cut production for 2014 by +/-10% (40Mt and keeping YoY production flat). Rationale: 1) addressing oversupply issue; 2) preserving coal reserves. Most CCoW coal producers would be subject to this cut due to requirement of submitting annual production plans to government for approval.

JANUARY 2014 Export Ban for raw minerals. APRIL 2014 Mine Mouth Regulation issued by Minister of MEMR No. 10 of 2014 on Procedures of Supply and Coal Pricing for Mine-Mouth Power Plant. This regulation provides certainty for coal producers to enter into mine mouth power projects. JULY 2014 Ministry of Trade issued regulation requiring coal producers to be officially registered as exporters to conduct export activity. This is extra red tape for existing exporters to meet in order to export.

14

Prospects of Domestic Power Demand Market 4

15

Japan 127 millions / 287 GW

2.26 kW/pers

Source: Wikipedia, CIA, World Bank

France 66 millions/124 GW

1.90 kW/pers

Germany 82 millions /178 GW

2.18 kW/pers

USA 314 millions inhabitants

1,039 GW capacity installed 3.31 kW/pers

Indonesia 247 millions / 41 GW

0.17 kW/pers

Thailand 67 millions / 33 GW

0.50 kW/pers

X 3

Indonesia Power Sector is Underrated…

Malaysia 29.6 millions / 25.4 GW

0.86 kW/pers

Singapore 5.5 millions / 10.3 GW

1.87 kW/pers

China 1.35 billions / 1146 GW

0.85 kW/pers

Low Domestic Coal Consumption for Power Generation…

Source: (a) Wordbank.org, data indicator (2012), - China Electric Power Consumption: 3.298kWh/Capita and Population: ~1.4 bn - Indonesia Electric Power Consumption: 680kWh/Capita and and Population ~245 mn

Population

Electric Power Consumption (a)

1 : 5

Comparison Indonesia vs China

Increasing Electric Power Consumption

through empowerment

of coal fired power plants by doubling

domestic coal consumption

Current Domestic Coal

Consumption: ~1.8 bn Ton

Current Domestic Coal Consumption: ~70 Mn

ton

Easiest Solution

Increase electricity power consumption through coal fired power plant to increase domestic coal

consumption to >150 mn, an increase from current consumption at ~70 mn tons

Indonesia Scenario: To increase Electric

Power Consumption

against China’s ratio

Growing Indonesia Electricity Market…

Low electrification ratio demonstrates room for growth

Source: PLN , MEMR, World Bank

• With higher income levels, electricity demand is expected to continue to increase

• Ongoing transformation in cross-industry sectors

has also increased high electricity demand

• Indonesia’s per capita consumption of electricity, electrification levels and the installed capacity levels

are amongst the lowest in Asia

• Need for substantial increase in generating capacity is evident by increasing number of power outages in

recent years

With Government aiming to achieve > 90% electrification rate by 2019, PLN Programs such as Fast Track and IPP are enforced to attract Private Sector to enter into Electricity Sector

• Domestic energy demand growth of 9-11% in 2014-15, 8-10% until 2022, and expected to further surpass ~4-5% export growth due to continued progress of PLN’s Crash-Power program

• 1.8GW of coal fired power plants was completed in 2013

• PT PLN targets additional 3.3GW in 2014

• Existing installed capacity ~40-45 GW and projected to increase to 110GW in 2022

Coal as One of Indonesia’s Major Energy Sources…

Indonesia Target Energy Mix (2022)

Source: PLN’s RUPTL

Indonesia’s Primary Energy Supply (2013)

18

Source: Morgan Stanley Research

Indonesia Coal Demand

Coal 52%

Gas 24%

Geothermal 4%

Hydro 8% Diesel

12%

Others 0%

Coal 66%

Gas 16%

Geothermal 11%

Hydro 5%

Diesel 2%

Others 0%

213 TwH

440 TwH

• Coal remains to be cheapest energy source backed by more than sufficient reserves

• Growth in domestic coal demand will be driven by rise in usage by PLN utility, IPPs, and industries

• Indonesia’s total electricity consumption/capita remains low at ~0.7 MWh vs China’s 3 MWh, Japan’s 8 MWh, and Taiwan’s 10.7 MWh

What Opportunities Lie for Domestic Producers…

Source: MEMR Handbook of Energy & Economic Statistics 2012, Morgan Stanley Research

Source: Bloomberg, Morgan Stanley Research

19

Industrials Fuel Source Trend

Source: MEMR Handbook of Energy & Economic Statistics 2012, Morgan Stanley Research

Cost Comparison among Different Fuel Sources

PLN and IPP Power Generation Requirement

20

Business Model for Coal Producers 5

21

Create Downstream Synergy through Power Sector Backed by Continuous Reserve

Protect and maximize margin in prolonged weak & volatile coal price environment

Focus on continuous improvement in cost efficiency

Generate higher portion of durable cash-flow, improving margin over time Commercially-unproven

� Identify revolutionary technology to convert coal to new source of energy or raw material for industry

� Legal Jurisdiction and Govt. incentives needed

� Run executable mine plan focusing on profitable production growth

� Deploy financial hedging (coal & fuel price) � Source cheaper substitute energy to replace

diesel fuel

Commercially-viable � Build and operate coal-fired power plant and

optimizing supply for domestic consumption

Build sustainable cash-flow Increase margin

Short -Term

Short-Medium Term

Medium-Long Term

VERTICAL DIVERSIFICATION

Continuous increase in coal reserve via concession acquisition

22

Short-Term Solution – Sustainable & Profitable Production Growth

■ Create mine plan executable for the current low coal price environment

■ Operate mine plans that maximize coal extraction ■ Ensure contractors follow and execute mine plans effectively ■ To switch from diesel fuel to cheaper source of energy

Operation

� Control costs within production chain � Maintain stable healthy cash flow via optimal AP/AR management

and keep low leverage balance sheet � Deploy hedging program in both fuel and coal prices to

protect margin � Streamline each business unit to become financially independent

Finance

■ Build well-diversified customer base and export market coverage ■ Generate good quality sales backed by quality buyers and favorable

terms of payment ■ Maximize ASP via securing tighter discount at given Newcastle-

adjusted coal price

Marketing

Executed by

Competent Human

Resources

Urgently relevant in current coal environment

! !

!

!

Short-Medium Term – Move Downstream into Power Sector for Sustainable and Durable Cash flow

• Add further value within coal industry value chain through IPP (Independent Power Producer) or Mine-Mouth

• Lower government subsidies on diesel fuel as electricity source of energy where production cost of using coal fuel is cheaper

COAL PRODUCER

GOVERNMENT

OPPORTUNITY

• Facilitate coal producer with incentives (reasonable min IRR) and well-supported procedures in building power plant

• Encourage use of domestic coal for internal consumption as power plant fuel source

• Having both upstream capacity and financial resources, power business is natural extension of existing business

• Cash flow certainty in power makes it more attractive place to invest for commodities players

• Great challenge: government policies must promote existing domestic resources effectively and execute Land Acquisition Law

Synergy between Coal Producer and Government must be “Win-Win”

Typical PPA Structure

Coal- Fired Power Plant

PRO

S

CH

ALL

ENG

ES 1

PROS vs CHALLENGES ANALYSIS

Not susceptible to fluctuation in coal prices

2 Stable cash-flow

1 Political will

2 Support from ESDM & Local SOE

3 Support from Bank to provide funding

4 Selection Process Æ Credibility

5 Need Government Support in Land Acquisition

Power Purchase Agreement 25 years

Long-Term Off-taker

Power Supply

3 Energy independency

Medium-Long Term – Revolutionary Technology to Increase Value Add of Coal

CHALLENGES

OPPORTUNITY

� Much of technology remains commercially unproven � Pilot projects depend on initiative of coal producer and technology

owner to assess project’s economic viability � CAPEX needed to run feasibility studies/pilot projects Government Role: � Give Incentives: ie. tax holiday � Provide clear-cut legal jurisdiction and one gateway for license/permit

approval

In long run, properties of coal should be continually upgraded via usage of revolutionary technology and become: � New cleaner and/or cheaper form of energy � Raw material/feedstock for industrial process

Objective: To further enhance coal producer’s pricing power of coal in market place, hence maximizing margin

26

Thank You



Powering Indonesia’s long term energy needs

Achmad Sudarto, Finance Director of PT Bukit Asam

Presented at Macquarie Indonesia Commodities ConferenceJakarta, 23 September 2014

NATIONAL PRIMARY ENERGY MIX 2011 - 2030

In the future the role of oil and gas will decline. The decline of oil and gas share in the national supply will be substituted by coal and new renewable energy. Coal is expected to replace the dominance of oil in 2020 and the share of coal rises from 23% (in 2011) to 39% (in 2030).

Source: Indonesia Energy Outlook 2013, Agency For The Assesment and Application of Technology Page 1

Total Coal Resource: 161.34 billion tonsLignite (20%), Subbituminous (66%), bituminous (14%)

Total Coal Reserve: 31.3 billion tonsLignite (29%), Subbituminous (60%), bituminous (11%)

INDONESIAN COAL DISTRIBUTION

Source: Geological Agency, 2014 Page 2

Source: Indonesia Energy Outlook 2013, Agency For The Assesment and Application of Technology

COAL DEMAND 2011 - 2030

Page 3

Source: The Business Plan of Electricity Supply (RUPTL) PT PLN, 2013 - 2022

TARGET OF ENERGY MIX FOR POWER PLANT

• Electricity efficiency effort is conducted through diversification of primary energy in power generation (supply side) by optimising utilisation of gas, reducing oil consumption, increasing coal utilisation, and developing renewable energy power generation;

• Coal and Gas are priority to reduce dependance on oil in power generation;• Coal wil be mainstay as base load power plant and gas as load follower plant.

Page 4

31959 3398339885

45253 4786851214 53933

5991165310

75883

8515292310

97958104431

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Installed Capacity (MW)

134147

158174

188208

226246

266287

310334

359386

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Electricity Consumption (TWh)

• Total Installed Capacity (2013): 47,868MW (PLN 74%, IPP 22%, and PPU 4%)• Electricity Consumption (2013): 188 TWh (Household 41%, Industry 34%, Business 19%, Public 6%)• Demand Growth: 7.8% (2013), 10.1% p.a (projected up to 2031)• National Electrification Ratio (2013): 80.51%• Several area are facing limited electricity supply• Energy mix in power production (2013): Coal 51.6%, Gas 23.6%, Oil 12.5%, Hydro 7.9%, Geothermal 4.4%• Total investment in Power Sector (2012): ± USD 7.16 billion

Source: Projection and Planning based on RUPTL PLN 2013 - 2022

OVERVIEW OF INDONESIA ELECTRICITY CONDITION

Page 5

Source: PLN, 2014, Company Estimates

FUEL MIX FOR POWER PRODUCTION 2013 - 2022

Page 6

In terms of production costs, coal has thehighest efficiency when compared to otherfuels. The following is a comparison of coalrelative to others in generating electricity perKwh:Coal (Rp.500); Hydro (Rp.800); Gas (Rp.900);Diesel (Rp.1800)

ELECTRICITY DEMAND GROWTH 2013 - 2022

Source: PLN, 2014 Page 7

COAL DEMAND FOR POWER PLANTS 2014 - 2022

Source: PLN, 2014 Page 8

THE DEVELOPMENT OF TRANSMISSION LINE & POWER PLANTS SUMSEL 8, 9 & 10

Source: PLN, 2014

Awarded to PTBA

In bidding process

Page 9

Bogor

Inverter

Tanjung EnimBanko

PTBA mine operation location

Converter

Padang

Palembang

SamarindaPekan Baru

Lampung

Jakarta

Total Resources 7.29 billion tons

Total Mineable Reserves 1.99 billion tons

Ombilin

Teluk Bayur

Mining Business License (IUP)

Tanjung Enim Mine 66,414 Ha

Ombilin Mine 2,950 Ha

Peranap Mine 18,230 Ha

IPC Mine 3,238 Ha

Total 90,832 Ha

Peranap

PTBA core operations

TARAHAN PORTStockpile : 560,000 tonsThroughput : 13 M tpaVessel : 80,000 DWT

KERTAPATI PORTStockpile : 50.000 tonsThroughput : 2.5 M tpaBarging : 8,000 DWT

TELUK BAYUR PORTStockpile : 90,000 tonsThroughput : 2.5 M tpaVessel : 40,000 DWT IPC MINE

Resources : 0.045 billion tonsMineable : 0.01 billion tons

OMBILIN MINEResources : 0.10 billion tonsMineable : 0.02 billion tons

TANJUNG ENIM MINEResources : 6.36 billion tonsMineable : 1.59 billion tonsInstalled Cap. : 20 M tpa

PERANAP MINERecources : 0.79 billion tonsMineable : 0.37 billion tons

PTBA COAL RESOURCES, RESERVES AND INFRASTRUCTURES LOCATIONS

Source: PTBA, 2014 Page 10

PTBA has huge coal resources of 6.36 billion tons which is located in single area in Tanjung Enim, South Sumatera. It is quite potential to feed more mine mouth power plants during their life times which are being developed in this area.

Tanjung EnimTarahan

Kertapati

2x620MW Power Plant - Location : Central Banko- Coal Cons. : 5.4 M tpa- COD : 2017

3x10MW Power Plant - Usage : Internal Mine Sites- Coal Cons. : 0.15 M tpa- In Operation since Oct 2012

4x65MW Power Plant - Location : Tanjung Enim- Coal Cons. : 1.4 M tpa- In Operation since 1987

2x8MW Power Plant - Usage : Internal Port Sites- Coal Cons. : 0.10 M tpa- In Operation since Dec 2013

2x110MW Power Plant - Location : Banjarsari- Coal Cons. : 1.4 M tpa- COD : 2014

3x600MW Sumsel 9&10 PP- Location : Muara Enim- Coal Cons. : 8.4 M tpa- COD : 2018

800-1200MW Power Plant - Location : Peranap Riau- Coal Cons. : 8.4 M tpa- COD : 2018

PalembangTanjung Enim

Riau

Existing Projects

Tender / Cooperation Process

By 2020, PTBA is going to supply coal approximately 25 million tons to its mine mouth power plants with total capacity of 4,766MW

Lampung

PTBA MINE MOUTH POWER PLANT PROJECTS ACROSS SUMATERA


PTBA Projected Coal Sales Volume to 2017

12.4 12.9 13.415.3

17.8

25.0

31.034.0

44.0

2009(A) 2010(A) 2011(A) 2012 (A) 2013(A) 2014(F) 2015(F) 2016(F) 2017(F)

TE System ProductionTotal SalesRailways Transportation

In Million Ton

PTBA PROJECTED COAL OUTPUT VOLUME TO 2017 ONWARDS


CLOSING REMARKS:

1. Indonesia has a very large coal resources of about 161 billion tons, with reserves of 31 billion tons. Of which 53% of the reserves are located in South Sumatra. Going forward, with the large coal reserves, it should be prioritized to meet the needs of domestic coal supply which continues to increase, particularly for power generation.

2. The role of coal as fuel for power generation has increased from year to year. Of 51.6% (66 million tons) in 2013, then 73 million tons in 2014, up to 66% (151 million tons) in 2022, even after 2012, coal demand for power generation is above 150 million tons per year. Therefore, to fulfill the high electricity demand over the next 10 years, Coal Fired Power Plant is still dominant to be developed,including the development of Mine Mouth Power Plant across Indonesia archipelago.

3. PTBA, which is transforming as a leading energy company in the country, with large resources of coal (7.29 billion tons) and reserves of 1.99 billion tons, has the potential to become a reliable supplier to the national power generation in the long run. By the year 2020, PTBA has the capacity to supply coal approximatley 25 million tons per annum to meet the needs of its mine mouth power plants with a total capacity of about 4,766MW.

Page 13



BRITMINDO GROUP Professional Mining Services

A TIME TO INNOVATE AND INVEST

MACQUARIE INDONESIAN COMMODITIES

CONFERENCE 23rd September 2014

At the Crossroads – Challenges and Opportunities

• World coal prices have remained depressed for more than two years when compared with the highs of 2008 and 2011, however don’t forget similar low coal pricings were experienced in 2009.

• Indonesian Coal Production will still accrue to ±410 Mt in 2014 which will be in line with 2013 number of 420 Mt – thus demand remains strong despite the current long term low coal prices .

• Indonesia’s coal production based on heat value of Calorific Value (CV) going forward will see average reductions over the next 5 years of around 8%.

• Traditional markets like Japan will have to readjust it’s appetite for better quality Indonesian Coals – do something different or go elsewhere.

• The big seven in Indonesia are still providing nearly 65% of the total production of 260 Mt both domestically and overseas.

• The Indonesian Government is mooting “A Cap” on production quotas to conserve national resources and improve pricings.

At the Crossroads – Challenges and Opportunities

• Legislation is being mooted to charge a standard royalty tax rate (currently 13.5% at CCoW’s) across all coalmines - irrespective of coal quality type.

• Export Licence Requirements newly introduced for all mining companies wishing to sell coal outside of Indonesia (i.e. managing illegal export sales)

• Possible other tariffs on export tonnages. • China suggesting that caps will be applied on quotas of Indonesian imports

of certain low CV quality. • India is facing massive coal supply issues to both existing and proposed

power plants. • Significant reliance on Kalimantan river systems for much of the coal

production transportation from ports to customers. • In Sumatra other that PTBA (which uses rail) most of the coal

transportation relies heavily on public highways using small trucks. • Industry sources suggest that nearly 70 Mt per year is mined illegally

Estimated Production from Indonesia to 2035 Source IEA South East Asia Energy Outlook Sept 2013 Source IEA South East Asia Energy Outlook Sept 2013

Source IEA South East Energy Outlook Report Sept 2103

1990 2011 2020 2025 2030 2035 2011-2035

Indonesia 8 296 449 489 519 549 2.6% Vietnam 4 36 38 39 40 41 0.6% Rest of ASEAN 6 17 25 26 27 26 1.8% Total ASEAN 18 348 512 554 586 616 2.4% Share of World 0.6% 6.3% 8.5% 9.0% 9.4 9.7% n.a

Forecast Indonesian Production to 2020

Forecast Indonesian Coal Production by Quality

Year

-

100.0

200.0

300.0

400.0

500.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

High Rank Medium Rank Low Rank

Mill

ion

Tonn

es (M

t)

Coal Quality Average Projection to2020

2013 2014 2015 2016 2017 2018 2019 2020 Average Weighted CV (Kcal/Kg) 5,526 5,433 5,351 5,322 5,271 5,222 5,174 5,150

4,900

5,000

5,100

5,200

5,300

5,400

5,500

5,600 CV

(Kca

l/Kg

) Projected Quality Trends to 2020

The Influence of Transportation and Logistics

• Indonesia Mining Industry is becoming increasingly adversely affected by logistic issues and increasing transportation costs - even the CCoW’s are experiencing longer coal evacuation distances to navigable water.

• In Kalimantan the original mines in the early 1990’s (except Adaro) were generally well below 40 km haul to navigable water but now they are experiencing greater distances, land compensation issues, and operating costs .

• Many recent developing mines are mooting hauling over 100 km to get to a port which at today’s coal pricing structures makes them very marginal.

• The building of new haul roads is being severely curtailed by land acquisition and compensation issues.

• Proposals for the construction of railways and multi user ports have been around for sometime but high capital costs and uncertainty about markets and captive use continue to dog the project do-ability.

Infrastructure Requirements

• Government is still proposing “multi user ports” to handle coals from various locations within coal mining regions.

• For many years railway systems have been mooted in East Kalimantan to provide better and more efficient access to many of the inland coal fields which have previously been inaccessible due to logistical issues.

• PTBA and KAI are upgrading the railway link to Tarahan Port to boost coal tonnage throughput capacity to their port.

• In Sumatra only a number of purpose built non public haul roads have been constructed to accommodate coal traffic (such as the Servo Haul Road at Lahat)

• In Jambi, as previously in South Kalimantan, the use of public roads for coal hauling has in some cases been stopped due to local complaints.

• Similar issues have been noted in the Bengkulu Area with access to Pulau Bai only by continued use of public roads by small trucks.

So what does all of this tell us • The significant increases experienced by Indonesia in terms of coal

production over the last 20 years appears to be slowing down. • IEA forecasts suggest that Indonesian Coal Production will stabilise

somewhere around ±450 Mtpa up to year 2020. • Government and Industry pressure to cap levels of production will likely

underpin this view and will likely impact on any major new coal mining projects coming on line.

• The “sexy” image of coal in 2008 and again in 2011, when significant capital investments were noted, has been diminished by continued over supply issues and low pricing over the last 2.5 years.

• Over time lower CV coals will only be available, thus operating costs and transportation logistics will become more critical for most mine owners.

• Most adjustments in upward coal production will be met by the “major players “ who have large operating mines, with significant coal reserves and infrastructure in place (albeit that it may be creaking in many areas)

• Given the what has been stated before, most likely internal capital investment will only come to existing operations if there is a real case to “improve bottom line by doing something fundamentally different over a long term business case” or “radically improve costs” over short term.

• Without Central Government Intervention by way of an Energy Policy overarching a Coal Mining Policy, there will be little confidence by Mining Companies or Investors to make or financially support significant changes in current mining and transportation methods over the medium tolong term.

• With so much plant and equipment lying around very few mining contractors are investing in new equipment – most are trying to get more operating life hours out of current mining equipment.

• Many companies will try to add value by using coal products for different downstream value adding projects e.g. – local power plants, coal beneficiation, ethanol conversion, coal to gas projects and CBM projects .

So what does all of this tell us

Innovations in Mining Operations • Indonesia is without doubt a “shovel and truck” environment. • Only exception is PTBA where they are using Bucket Wheel Excavators. • Some deep mines have conducted Feasibility Studies into Inpit Crushing,

namely Wahana, Kideco, Arutmin and Adaro. • A number of dragline studies have been commissioned but unless the

mine is operating with flat seams and competent material to build stands for safe dragline operations the application is likely not to work.

• Dozer pushing has been tried and tested in some mines where the geometry permits but applications are again limited.

• Throw blasting has been tried but pit dimensions and the need to “sleep “ some major blasts (to be effective) has restricted the potential of this application.

• Auger Mining has been undertaken at some mines but is limited if it conflicts with the overall mine sequencing plan.

• Continuous Miner Underground Systems have been tried in a number of operating mine locations in Indonesia with mixed success outcomes.

• Conveyor systems for coal transportation are being developed in a number of long term mines but these specifically are long term and require small power plants to be constructed to support stable continuous electricity requirements.

• Slurry pipelines for transportation of coal over long distances are used in the USA but the commercial viability of such projects in Indonesia has yet to be established.

• Self propelled barges are becoming more prevalent as they demonstrate better cost effectiveness in moving coals.

Innovations in Mining Operations

Investment and Diversification - Adaro Energy • One Local Business Unit which has both invested and diversified over the last few

years is Adaro Energy which is targeting being a diversified energy supplier and provider with many divisions supporting the corporate objectives.

• Mine Acquisitions last two years IndoMet Coal Project 25% owned by Adaro Mustika Indah Permai 75% owned by Adaro Bukit Enam Energi 61% owned by Adaro Bhakti Energi Persada 10% owned by Adaro Balangan Coal 75% owned by Adaro • Power Plants Planned PT Bhimasena Power 2 x 1000 MW in Java PT Tanjung Power 2 x 100 MW in South Kalimantan PT Makmur Sejahtera 2 x 30 MW at Tanjung South Kalimantan • Mining Services Contractor PT SaptaIndra Sejati Provides international class mining services

Investment and Diversification - Adaro Energy

• Infrastructure Upgrades Current and Planned Adaro Overburden Crusher Adaro Mine 10Km Conveyor Facility Adaro Mine Kelanis Load out Upgrade Increase capacity from 55 to 80 Mtpa • Current Other Support Companies and Facilities PT Indonesia Bulk Terminal Ship Loading Company Sth Kalimantan PT Maritim Perkasa Coal Barging Company PT Sarana Dava Mandiri Barito Barging Channel Operator • Other Opportunities being Explored Coal to Gas conversion BEP Mine Coal Liquefaction BEP Mine

Other Diversifications into allied Industries • Bukit Assam has already constructed a 2 x 100 MW Banjarsari Coal Plant in

Lahat and has recently announced that it intends to allocate US$215M in Capital Expenditure for a power plant in Banko Tengah of 2 x 620 MW units capacity.

• Sekawan Intipratama intend to mine coal and use it in a $725 M ethanol plant adjacent to Indowana Coal Deposit in East Kalimantan.

• A number of American Companies are looking at converting coal to bio fuel, coal to gas and coal liquefaction plants and CBM units where some are in the process of constructing trial plants which they believe can be commercially viable.

• A number of coal miners who have large deposits of low CV coals are looking at constructing industrial estates which may use low value coal to create energy for Alumina Plants, Smelters or Significant Industrial Developments in East Kalimantan.

• Coal upgrading on a major commercial basis has yet to be proved but today’s low coal pricing reduces much of the margin in the project.

Likely Innovation and Investment in the future • Unless the New Administration radically introduces changes in policy on

Energy and Coal Mining to suit the needs of the people of Indonesia at large and the professional elements of the Coal Mining Fraternity in general – and introduces sensible legislation which addresses illegal mining, power generation, mine regulation, taxation, security of long term investment regulations and a number of other key issues.

……………..or Coal goes back up to US$120 per tonne FOB Newcastle • don’t expect any great changes globally from what’s happening currently. • Expect to see “pockets of excellence” from some Indonesian forward

thinking companies who will build their businesses by engaging in “value adding” projects provided that long term coal demand and pricing risks are positive.

• Coal demand from China may wane but India will need more imported coal to fuel it’s expanding coal fired power station demand. Don’t forget that Asia will get 45% of it’s power from coal over the next 20 years so demand is not the issue – its oversupply.

• The opportunity of adding value by creating other products derived from low energy coals are still being aggressively pursued by a number of companies.

• Look to see more investment in bio fuels, coal to synthetic natural gas and coal to ethanol plants and longer term CBM research given Indonesia’s significant coal resources of low grade coal.

• Should the key to upgrading and stabilising low CV coals to power station moisture specification (i.e 30-35% moisture) in large volumes on a commercial basis – then this breakthrough may well totally change the dynamics of the Indonesian Coal Landscape.

• Most established mining contractors will be mitigating investment in new plant and equipment as they amortise the existing fleets by extending machine life.

• Be optimistic, be positive but most of all - be realistic.

Likely Innovation and Investment in the future

BRITMINDO GROUP Professional Mining Services

www.britmindo.com

Graha Britmindo Jl. Taman Margasatwa Raya No. 14, Ragunan

Jakarta Selatan 12550, Indonesia Tel. +62 21 7884 9999 (hunting), Fax. +62 21 7884

9998 Email: [email protected]

THANK YOU

www.britmindo.com

Graha Britmindo Jl. Taman Margasatwa Raya No. 14, Ragunan

Jakarta Selatan 12550, Indonesia Tel. +62 21 7884 9999 (hunting), Fax. +62 21 7884 9998

Email: [email protected]



Documents

Day 1 Presentations MACQUARIE