Coal Mining Service Contractors in Indonesia 2010

INDONESIAN COMMERCIAL NEWSLETTER

October 2010

ROLE OF MINING SERVICE CONTRACTORS HIGHER IN DEMAND

The role of mining service contractors grows with the expansion of coal mining industry as most large coal mining companies use contractors to do the production work. Contractors account for around 70% of coal production in the country in 2009.

Coal producers choose to use mining service contractors to reach the highest efficiency. Coal mining will need heavy equipment such as excavators, dump trucks; bulldozers, loaders and graders, as well as skilled human resources all need large investment.

Some of the contractors are independent companies but some other are affiliated to the coal concession holders. Independent contractors generally belong to sales agent for heavy equipment such as Pama Persada (PAMA), which is owned by PT. United Tractors Tbk.

Growing demand for coal boosts mining contracting business

The country's coal production has increased sharply over the past several years. The production grew from 142.3 million tons in 2005 to 171.8 million tons in 2006, to 193.5 million tons in 2008 and to 227.2 million tons in 2009.

The leapfrogging increase in production has been boosted by growing demand in international markets for that commodity. Coal has been the most available and cheaper alternative to expensive oil.

The growing demand for coal has also boosted business in coal mining contracting service. Contractors have accounted for the largest part of coal production in the country.

Contractors account for around 10 million tons of coal production

Mining service contractors do most of the job of producing coal for major coal companies like Adaro, Kaltim Prima Coal (KPC), Kideco, Arutmin, Berau, Indominco, and Bukit Asam.

Adaro is the largest single producer of coal in the country with production reaching 40.6 million tons in 2009 or 17.8% of the country's total production. The second largest is Kaltim Prima Coal (KPC) with production of 38.1 million tons or 16.8% of he country's total production in he same year.

Following in the third is Kideco contributing 10.9% or 24.7 million tons to the country's total production. See the following table.

Coal mining contractors in Indonesia

Currently there are 116 companies operating as mining contractors offering contracting service for 60 coal producers in the country. Among the main contractors of coal mining are PT. Darma Henwa, Tbk, PT. Pama Persada Nusantara, PT. Thiess Contractors Indonesia, and PT. Bukit Makmur Utama Mandiri.

The largest among them is PT Pamapersada Nusantara; a subsidiary of heavy equipment company PT United Tractors Tbk. Pama Persada has a market share of 33%. The second largest is PT. Bukit Makmur Utama Mandiri with a market share of 19%, followed by Thiess with a market share of 12%.

Integrated players

Business in coal mining contract grew when coal mining industry began to grow significantly in the country. Holders of coal mining concession hired contractors to do the job of production. The contractors are used as they have experience and mining equipment. Most concession holders do not have sufficient mining equipment and experience in operating heavy equipment. Therefore, they need the service of contractors.

PT. Bukit Makmur Utama Mandiri (BUMA) began business by opening land for oil palm plantations. PT. Pama Persada Nusantara (PAMA) is subsidiary of PT United Tractors Tbk to handle the business diversification or expansion of the distributor of heavy equipment.

Many holders of coal mining concessions have established subsidiaries to operate as contractors of coal mining service as part of business diversification and expansion and to improve efficiency.

Adaro already has subsidiary operating as coal mining contractor, PT. Sapta Indah Sejati (SIS). Adaro also has units operating in barging (PT. Maritim Barito Perkasa), in dredging (PT. Sarana Daya Mandiri), in terminal (PT. Indonesian Bulk Terminal) and in coal trade (PT. Coaltrade Service international).

Meanwhile, some coal mining contractors have also created business integration with units in upstream sector among the concession holders. PAMA, for example, has established business integration with coal concession holder PT Prima Multi Mineral (PMM), a joint venture with PD Baramarta.

PT. Pama Persada Nusantara (PAMA)

Pama Persada (PAMA) is wholly owned by PT. United Tractors Tbk. PAMA itself has subsidiaries, PT Kalimantan Prima Persada (KPP) and PT Prima Multi Mineral (PMM).

KPP operates as coal mining contractor, and PMM, a joint venture with PD Baramarta, has coal mining concession under working contract (PKP2B) of the third generation. KPP also handles coal production for a number of companies owned by PAMA having coal concessions like PT. Nusantara Citra Jaya Abadi, PT. Kadya Caraka Mulia and PT. Eka Satya Yanatama.

Coal produced by PAMA has continued to increase over the past several years in 2008; it produced 59 million tons of coal and removed 442 bcm of overburden. In 009, the production rose to 68 million tons and overburden removed reached 597 million bcm.

Among the clients of PAMA are KPC, PTBA, Kideco Jaya, Adaro, and Indominco. Early 2009, PAMA signed coal mining cooperation agreement with Kideco Jaya. The 10-year agreement was an extension of a previous 5-year agreement. The new contract was valued at US$ 3 billion. The old contract was worth US$300 million.

PT. Bukit Makmur Utama Mandiri (BUMA)

BUMA was established in 1988 by the Johan Lensa family. Before staring business as a mining contractor, it operates as a contractor building oil palm plantations. It built oil palm plantations of the Astra and Salim groups. The company has a fleet of Hino trucks.

Currently Bukit Makmur is owned by PT Delta Dunia Makmur Tbk, which acquired 99.99% shares of BUMA from PT Bukitmakmur Widya and Johan Lensa on 6 November 2009.

In the first half of 2010, PT Delta Dunia Makmur Tbk injected a fresh capital of Rp 1.06 trillion into NUMA. This year BUMA plans capital spending between US$ 150 million - US$ 180 million on heavy equipment.

BUMA once planned rights issue to raise Rp 12 trillion to acquire coal miner Berau Coal, but the plan remained in the pipeline.

The company set higher target up 20% for coal production and overburden removal this year. In 2009, coal produced by the company totaled 32.8 million tons and removed 278 bcm of overburden. It's EBITDA in the first half of 2010 reached Rp 954 billion or 38.9%. BUMA's clients include PT. Berau Coal, Adaro, and Kideco Jaya.

PT Thiess Contractors Indonesia

Thiess started operation in 1972 as a local unit of Thiess Bros Pty Ltd. The business of this unit was acquired by other company and new unit was established again in 1988. The company secured its first mining contract in 1988 from BHP Billitons to do the coal mining job at Senakin, Kalimantan.

Thiess operates mainly in open pit mining using equipment including trucks, shovels, draglines, bulk dozing, and high wall mining.

Among projects being carried out by Thiess include mining projects of PT. Teguh Sinar Abadi (TSA) and Firman Ketaun Perkasa (PT Bayan Resources Group), coal mining projects in Sangatta of KPC, in Satui and Senakin in South Kalimantan owned by PT. Arutmin. Projects already completed included coal mining project in East Kalimantan of PT. Kideco Jaya.

PT. Dharma Henwa, Tbk

PT Darma Henwa Tbk was established in 1991 as a general mining service contractor with the status of domestic investment (PMDN) company. In 1996, its status changed into foreign investment (PMA) company with Henry Walker Group Ltd. (Australia) joining in as a new shareholder.

Dharma Henwa is now jointly controlled by Zurich Asset International Limited as a 25.64% shareholder and Goldwave Capital as a 24.75% owner with investing public holding 49.61% of the shares.

Darma Henwa has a set of equipment including excavators, dump trucks, bulldozers, loaders and graders of various brands including Hitachi, Komatsu, Caterpillar, Liebherr, and Terex.

In 2009, its production volume totaled 6 million tons of coal slightly declining from 6.1 million tons in 2008. Of the total production 4.8 million tons were from Bengalon area, down 21% from 6 million tons in 2008. Production from Asam-asam project totaled 1.2 million tons of coal in 2009 with 3.7 million bcm of overburden.

The company's net income was recorded at US$ 201 million in 2009, down from US$ 220 million in 2008 with equity declining 1.4% from US$ 278 million in 2008 to US$ 274 million in 2009.

Until 2009, PT Darma Henwa Tbk completed a number of mining projects including those of Petangis in South Kalimantan , Lerokis on the island of Wetar, gold mining project on the Wetar island, nickel mining in Maluku, Andau Wanagon and a tunnel in Papua, diversion of the Kelian river in East Kalimantan, copper mining project of Batu Hijau on the island of Sumbawa and coal mining in Busang and Pondok Labu in East Kalimantan

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