RISK

1. Acquisition Risk
In the following year, ITM has planned to acquire two more sites after the newly
operated Kitadin Td. Mayang and Bharinto. These acquisitions represent ITM
intention to keep company growth. But as we know, Banpu as the majority
shareholder of ITM recently has acquired Centennial Coal Company in Australia.
Banpu also said that Centennial is their footage for further acquisition in
Australia. In the meantime, Banpu also sold 8.72% ITM share. This condition can
be considered as the risk that Banpu will move its operation to Australia and
won’t continue its operation in Indonesia.
2. Limited Reserve Risk
Based on our projection, ITM will begin experiencing run out of coal reserve at
Jorong site in 2014 and followed by others site. Their last site in Bharinto will be
run out in 2023. If ITM can’t periodically acquire more sites, this limited reserve
can be real problem.
3. Financial Risk
 Exchange Risk
As it deals in foreign currencies, the Company adopts hedging to reduce
exposure to shifts in currency valuations. Balance between foreign currency
earnings and costs can also be maintained.
 Coal and Fuel Price Risk
By using coal swaps and gas & oil swaps, the Company tries to mitigate risk
of price fluctuations. The completion of the captive coal fired power plant at
Bontang Coal Terminal (BoCT) will further reduce exposure to fluctuating
global energy prices.
4. Coal Business Risk
 Coal Market Volatility Risk
Significant changes to either coal prices or coal demand pose a threat to cash
flow. To minimize this, long-term sales contracts, signed more than a year
previous to delivery, stand at around half of coal sold in 2009, including both
market indexed and non-indexed pricing. A steady growth of customer base
has also succeeded in reducing risk of large coal demand fluctuations.
 Coal Quality and Delivery Risk
To guard against problems in coal quality and delivery, ISO standards have
been put in place. Coal quality assurance risk has decreased in the last two
years in part due to the new onsite Bontang Coal Laboratory, which has been
able to accurately and speedily test all coals prior to delivery. Current
expansion of the BoCT has increased delivery risk due to potential
construction related events. However, a variety of alternate shipping facilities
are available to ship coal in the event of a BoCT shutdown. These include
mechanisms for sea loading, and redirecting ships to ports in PT Jorong
Barutama Greston, Samarinda and others. The completion of TPM (Total
 Productive Maintenance) systems at PT Indominco Mandiri (including the
BoCT) has also reduced risk associated with equipment and/or equipment
systems failure, largely due to reduced equipment systems failure because of
TPM (the TPM Effect).
 Weather Risk
The island of Borneo is at times a very rainy place. The risks associated with
unusually heavy rains include work slowdown or stoppage, equipment failure,
and road wash-outs. To minimize these risks, production scheduling based on
weather prediction balances demand and inventorying costs to ensure targets
are met regardless of extraordinary rains. In addition, ITM has invested in
ditches, improved road construction and re-landscaping to prevent rains from
interfering too significantly in the production process.
Although ITM has made some effort to overcome the rain effect, the
production won’t be as efficient as in summer period. Australian Government
Bureau of Meteorology forecasting that the La Nina in the Pacific remains a
moderate to strong event. Long range models surveyed by the Bureau suggest
that La Nina will persist into at least early 2011. The forecast is based on
Southern Oscillation Index as show in the graph 1 and 2. So if the forecast is
happening, the ITM production will experienced slow growth until the first
quarter of next year.
5. Regulatory Risk
The Company at all times complies fully with all local, regional and national laws
and regulations. However, changes to regulation or disagreements over
interpretation may at times increase costs or necessitate changes in operating
procedures. Both the Company’s legal team and outside legal counsel are on hand
to evaluate all legalities and recommend appropriate action.
Minister of Energy and Mineral Resources 30 September 2009 issued new
regulation regarding mining service business. The biggest issue of the regulation
is that a mining company should use local or national contractors, except if there
are no capable local or national contractors, the use of foreign contractors are
allowed.
6. Contractor Management Risk
Roughly 83% of all ITM coal is mined by independent contractors. The recent
institution of the CMS has helped increase productivity and safety. Also, a
downsizing of the number of different contractors has allowed better oversight of
performance quality. These improvements have reduced this risk parameter
considerably over the last two years.
Expertise generated by some local contractors has ensured increased participation
for these local firms; however, the complexity of human, equipment,
environmental and systemic factors have shown that time is required to increase
local contractor capability in line with operational demands. ITM has within the
CMS an expertise enhancement program to fulfill its obligation to improve local
contractor participation.