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Explaining BEP Transaction

31 May 2012

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Brief Introduction

PT Bhakti Energi Persada (“BEP”) is currently majority controlled by PT Persada Capital Investama

(“PCI”), PT Triputra Investindo Arya (“TIA”) and descendants of late Pak Winarto (together own

approximately 79.8% of BEP);

BEP has low grade (average 3,379 Kcal) JORC certified resources of coal in the Muara Wahau district

of approximately 9.04 billion tonnes;

The Muara Wahau coal is located in the East Kutai Regency, East Kalimantan;

The coal deposits are approximately 130 km away from the coast where deep water access relatively

close to the shore is available;

There are 7 concessions which are IUPs some of which have license to mine for 20 to 30 years with

potential ability to extend twice for 10 years each, others have exploration licenses which can be

converted into exploitation license;

The mines are largely undeveloped except for the exploration activities. A substantial part of land

acquisition for construction of hauling road has been completed;

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Why Acquire BEP?

BEP owns vast resources of low rank coal in East Kalimantan. Such vast resources are rare to find in

Indonesia or elsewhere;

BEP coal has low sulphur, low ash and has very thick seams of coal with extremely low strip ratio –

makes it possible to mine the coal with very low cost;

BEP IUPs are subject to low royalty (3%) and low income tax (25%);

BEP grade coal is already having wider acceptance in countries like India where locally sourced coal,

and coal exported from Indonesia is already at or below calorific value of coal that BEP has;

Vast resource base of BEP can be put to use to other possibilities like gasification, coal upgrading etc

which have not been considered in valuation or while making the acquisition decision;

IUPs owned by BEP provides an additional 20 to 30 years of exploitation to Adaro Energy, which is 10 to

20 years beyond the current term of Adaro Indonesia’s concession life (without considering the

extensions possible for these IUPs);

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BEP and the Group’s acquisitions

The Group has recently acquired interests in companies with significant reserve base with a view to

• Add to the reserve base of the Group in addition to the currently operating mine, PT Adaro

Indonesia;

• Diversify the geographical concentration in South Kalimantan (Tutupan/Wara mines)

• Diversify the products from sub-bituminous coal into a wide range of coking coal to low rank

coal reserves

• Diversify the license from one CCoW to a total of 8 CCoWs and 9 licenses

The acquisitions also increase the license period available to the Group to carry out mining activities

The Group has gone in for green-field acquisitions to leverage its expertise in developing mines and

thereby add greater value for its investors

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Adaro Indonesia

(Existing , S Kalimantan

Sub-bituminous coal)

Resources –

4.4 billion tonnes

Potentially up to 90% of

PT BEP

(NE Kalimantan

Low rank coal)

Resources –

9 billion tonnes

25% of JV with BHP

(Central Kalimantan

Coking coal)

Resources –

774 million tonnes

75% of MIP

(South Sumatra

Low rank coal)

Resources –

286 milion tonnes

With these acquisitions in 2010, 2011 2012; around 13 billion tonnes of coal resources are

potentially attributable to Adaro, ranging from low rank coal to coking coal across five different

locations and through 17 mining concessions 8 of which are CCoWs and remaining IUPs

The Group’s Operations & Acquisition Expanding Geographical & Product Base

61.04% of BEE

(South Sumatra)

Resources –

Under study

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Acquisition of BEP Structure

• Option (and not obligation) to provide

Convertible Loan of up to US$500 million

that can be converted into 51% equity over

3 years;

• The amount can be brought in as loan,

and refunded if Option 2 exercised;

• The amount will be used for development

of the mine, including infrastructure

development

Option 1 Option 2

• Option to acquire the existing Majority

shareholders (79.8%) of BEP by issuing

2,381.7 million shares in AE

• If Option 2 is exercised by AE; there is no

need for Option 1 to be exercised and the

amount lent by AE will be repaid

Both the options are given to AE for free and these are only Options available to AE and not its

Obligations.

A uniquely advantageous acquisition structure for AE where no upfront payment to the

Majority shareholders is made. AE commits funds as mine development progresses

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Acquisition Structure (cont’d)

Adaro does not pay anything upfront to controlling selling shareholders;

Adaro gets two Options for potential alternative acquisition structures;

Adaro does not pay any Option premium. The Options are granted free to Adaro and they

run for 3 years. Under both the Options, it is clearly stipulated as such and not as an

obligation;

It’s a unique structure beneficial to Adaro as an acquirer and minimizes its risks on

acquisition;

Adaro has control over management from the date Options are granted. Which means,

decisions on development of these mines, capital expenditures and overall management

of the process is controlled by Adaro from day one;

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Acquisition Structure Analysis of Option 1

Adaro can bring up to US$500 million over a period of 3 years in the form of loan and then

decide to convert it as up to 51% shares in BEP;

Adaro does not spend anything in acquiring shares from Majority right now;

Independent valuer has put BEP equity value at US$854.3 million;

Post investment of US$500 million, BEP values at US$1,354.3 million and 51% is US$690.7

million;

Normally, one would pay 51% of US$854.3 million upfront (ie US$435.7 million) and then

pay 51% of development cost of US$500m (ie US$255 million). The upfront payment would

be a sunk cost in case the mine is found unviable. In this case, by not paying anything

upfront, we minimize sunk cost (in worst case) to only the amount we bring in for

development;

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Acquisition Structure Analysis of Option 1 (cont’d)

Adaro can stop bringing any time the portion of US$500 million if it so deems fit;

Adaro’s only obligation then is to convert the amount it has brought in thus far into equity

using the formula of 51% equity for US$ 500 million (which effectively arises if Option 2 is

not exercised);

Adaro can take a decision to convert towards the end of 3 year period;

If Adaro decides to exercise Option 2 (discussed later), it does not have to exercise

Option 1 and can seek refund of the loan so provided.

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Acquisition Structure Analysis of Option 2

Adaro can acquire existing shares of Majority shareholders by offering 2,381.7 million

shares in AE;

79.8% shares in BEP at company valuation of US$854.3 million comes to US$681.7 million.

AE’s 2,381.7 million shares (assuming current level of IDR1,700 at exchange rate of

IDR9,200=1 US$) value US$440 million and thus, AE shareholders end up paying

significantly less than the inherent value of BEP shares;

Option 2 caps the upside potential for BEP shareholders in case BEP valuation to move

upwards and at the same time leaving the discretion to AE shareholders in case if the AE

share prices moved such that it becomes unattractive to exercise Option 2;

Option 2 runs for 3 years and will basically determine the whole transaction structure. If

Option 2 is exercised, basically Option 1 will not be exercised;

If Option 2 is exercised, it strengthens the capital structure of the Group as substantial

amount of equity is used to fund a large acquisition.

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0

500

1000

1500

2000

2500

May-12 May-15

Value of BEP

capped to AE

share value

AE Share Value

BEP Share Value

0

500

1000

1500

2000

2500

May-12 May-15

Value of BEP

Is far below AE’s -

Option 2 Won’t

Be exercised

Acquisition Structure Analysis of Option 2 (cont’d)

The Options are such structured that they are advantageous to AE. Option 2 will only be

exercised if on a relative basis, BEP valuation is attractive compared to AE shares being

offered when Option will be exercised. If AE’s shares for majority of BEP are much higher

valued on that date, it is logical that it would not be exercised;

Exercise of Option 2 or a decision not to do so will determine if the amount lent under

Option 1 will be converted into shares or loan will be refunded back to AE;

Both the options are given to AE for free and these are only Options available to AE and not its

Obligations.

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BEP Acquisition Related Parties

BEP is owned 30.787% each by PT Persada Capital Investama (a company

owned by Pak Benny Subianto & family) and PT Triputra Investindo Arya (a

company owned by Pak Teddy Rachmat & family);

There are three key shareholders of Adaro, Pak Edwin Soeryadjaja, Pak Garibaldi

Thohir and Pak Sandiaga Uno, who do not own any shares in BEP;

This nature of related party transaction (where only 2 of the 5 main shareholders

owned majority of BEP) ensured that evaluation of this transaction is scrutinized

fairly not just from the minority shareholder’s point of view, but also certain

substantial shareholders point of view, who form part of the controlling

Indonesian shareholders of the Group;

As the structure of the transaction explains, the transaction is uniquely

structured to favour the interests of AE.

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BEP Acquisition Evaluation by Professional Advisors

SRK consultants were advised by the Vendors in assessing the JORC resources of the

IUP holders owned by BEP;

AE retained services of Marston to verify certain technical assumptions including review

of drilling reports on the holes for ascertaining resource assumptions that SRK relied

upon;

Wood Mackenzie provided a report on low rank coal that helped us ascertain likely sale

price for coal of this nature;

We retained services of Rao, Yuhal and Partners, a Bapepam approved independent

valuer to carry out valuation and fairness report on the transaction.

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Coal Characteristics and Resources Marston Report

Concession Area Area (Ha) Total

PT Bumi Kaliman Sejahtera (BKS) 4,921 1,650

PT Birawa Pandu Selaras (BPS) 2,575 305

PT Bumi Murau Coal (BMC) 5,012 1,973

PT Khazana Bumi Kaliman (KBK) 5,066 950

PT Persada Multi Bara (PMB) 4,950 3,176

PT Telen Eco Coal (TEC) 6,844 987

Total 9,040

Parameter Value

Total Moisture (% gar) 46.9

Inherent Moisture (% adb) 14.5

Ash (% adb) 4.4

Volatile Matter (% adb) 42.0

Fixed Carbon (% adb) 39.1

Total Sulphur (% adb) 0.1

Calorific Value (kcal/kg gar) 3,379

Calorific Value (kcal/kg adb) 5,434

*) Note: Marston’s estimate insitu coal tonnages to a radii of 2,000 meters from accepted points of observation. Marston adjusted the coal density using

the Preston-Sanders method to account for moisture.

*)

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Key Assumptions of Our Valuation

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Production : 30 years production. 1 Mn tonnes in Year 1, increase to 8 Mn

tonnes in Year 3, then ramping up to 50 Mn tonnes by Year 12

onwards.

Stripping ratio : 2.0x for the first 3 years.; Average SR of 0.43x for 30 years

Assumed price (real terms) : $26/tonnes - $30/tonnes

Capex : $1.4 billion, of which up to $300 million to be spend during the

first 3 years

Our valuation model has adopted a conservative build up of production volume. We use only 1.2

billion tonnes of total production volume out of around 9 billion tonnes resources