2012 Results Announcement & Q1 2013 IMS - Part 1

2012 results announcement & q1 2013 IMS

Part 1 of 2

2012 Financial and operational highlights:

o Revenues of $1,531m up from $1,407m (ten months of trading) in 2011

o Underlying EBITDA of $365m (2011: $511m restated)

o Net debt (excluding restricted cash) of $514m (2011: $323m)

o Operational cash flow of $337m (2011: $460m restated)

o Non cash impairment of PT Berau ($815m) and write down of PT Bumi ($1.39bn)

o Production volumes up 8% to 21mt

o Production cost of sales of $37.8/tonne were 5% higher, due to an increase in hauling distances, fuel costs and stripping ratio

o Realised price (FOB) of $70.9/tonne, a decrease of 13% over 2011

Strong Q1 2013 performance:

o Significant increase in production: Q1 2013 coal production were 5.3mt; up 27% vs. Q1 2012

o Strong operating results showing:

§ Production costs declined by 7% to $36.6/t (Q1 2012: $39.2/t)

§ Stripping ratio reduced to 8.4bcm/t (Q1 2012: 10.6bcm/t)

§ Fuel costs fell to $8.4/t (Q1 2012: $10.6/t)

o Average selling price was $63.2, 19% below prior year (2012: $78.3/t)

Clear strategy to recover shareholder value:

·; Extensive review of the financial position of PT Berau completed:

o Expenditure of $152m in 2012 and $49m in 2011 identified with no clear business purpose

o Expenditures attributed to hauling roads, land compensation, consulting costs and goodwill

o Company to pursue all means available for the recovery of all expenditures

·; Further enhancement of controls across the Group:

o Improved controls and procedures being implemented at Berau

o New Berau CEO appointed and new management team installed

o Bumi plc CEO to join the board of Berau

·; Separation from PT Bumi and Bakrie Group:

o Escrow terms extended to 26 June 2013

o $50m of $278m in cash already in escrow

o The Company is preparing a circular to put the separation to a shareholder vote

·; The way forward:

o New independent chairman search well advanced - will oversee a smaller, revamped board

o Searches underway for CFO and Chief Mining Officer to be based in Jakarta

o First phase of independent benchmarking study completed to drive further operational efficiencies

o Capital structure review aims to reduce cost of debt

o Move to smaller London and Jakarta offices underway

Nick von Schirnding, Chief Executive Officer of Bumi plc said:

"The completion of the extensive review of the financial position of PT Berau marks the closing of an important chapter. We can now draw a line under the past and move on. We have taken decisive steps to change out key management and are implementing changes to further enhance our controls and governance framework. We are focusing on achieving separation from the Bakrie Group and PT Bumi and we have a clear priority to drive shareholder value. Following the separation from the Bakrie Group we will have the benefit of a strong balance sheet and be well placed to succeed as a leading coal producer focused on the growth markets of Asia.Production figures for the first quarter of 2013 are a reminder of the huge potential for profitable growth at Berau. We have completed the first phase of an independent benchmarking study which shows that there are significant opportunities to cut costs and drive efficiencies. I am encouraged by the first quarter results which showed a significant increase in production year on year and a reduction in costs."

Notes

1 Operating profit is after charging $116 m (2011: $88 m) in respect of the amortisation of fair value adjustments created as a result of the acquisition of PT Berau.

2 Underlying earnings and underlying EBITDA exclude separate items. Separate items are those items of financial performance that the Group believes should be separately disclosed. Separate items include when applicable, corporate transaction costs, impairment of goodwill and other assets, costs of acquiring and integrating acquisitions, fundamental restructuring of the business, profit or loss on disposal of a business or significant other asset, material claims and settlements and significant gains and losses on derivative instruments. From 2012, separate item includes the results of PT Bumi and expenditures in relation to other exceptional costs as they are not related to the on going business of the Group. Comparatives have been restated. The adjustments to net earnings to arrive at underlying earnings and underlying EBITDA are:

Movement on acquisition related financial instruments relates to changes in the PT Berau, PT Bumi and Vallar plc share prices and the Indonesian rupiah exchange rate between 1 January 2011 and completion of the acquisitions. 2011 comparatives have been restated to take account of exceptional costs and PT Bumi as PT Bumi is no longer considered part of the Group going forward.

3 After charging $107m (2011: $79m) in respect of the amortisation of fair value adjustments created as a result of the acquisition of PT Berau and $3m (2011: $24 m) as a result of the acquisition of PT Bumi.

4 After charging $60m (2011: $43m) in respect of the amortisation of fair value adjustments created as a result of the acquisition of PT Berau and $3m (2011: $24m) as a result of the acquisition of PT Bumi.

6 Basic earnings per share is calculated as loss for the financial period divided by the weighted average number of ordinary shares in issue for the period. The basic weighted average number of ordinary shares is 241m (2011: 192m).

7 Underlying earnings per share is calculated as underlying earnings divided by the weighted average number of ordinary shares in issue for the period.

The results presentation and Annual Report will be available on our website at 7am BST on 31st May 2013.

Financial and Operating results

The Group's operating loss for the year was $757m, with underlying loss of $52m and underlying EBITDA of $365m. Revenue for the Group was $1.5bn, with Free-On-Board (FOB) selling prices averaging $70.9/t during the year. The demand picture during the year was strong, with higher levels of Indian and Taiwanese sales. 

Cost increases were mainly due to higher fuel prices and a slight increase in the stripping ratio as well as greater haul distances from certain mines to coal processing plants. 

An extensive review of the financial position of PT Berau identified expenditure for which there is no clear business purpose. These totalled $152m in the year (2011: $49m) and have been classified as other exceptional costs. Comparatives have been reclassified where appropriate and restated for tax and other impacts.

Group cash at 31 December 2012 was $457m with restricted cash of $124m. $9 million of dividends were received from PT Bumi and $22m from PT Berau in respect of 2011.

Coal mined increased by 8% at PT Berau, to 21mt. Approximately 84% of Group coal sales went to exports, with around 16% to domestic Indonesian sales.

Impact of the review of the financial position of PT Berau

An extensive review of the financial position of PT Berau was undertaken, which identified expenditure that could not be substantiated as having a clear business purpose. In these circumstances the Board has disclosed all such expenditure separately as "other exceptional costs" in the income statement. A total of $152m was identified in 2012, of which previous management attributed $79m to hauling roads and construction in progress, $42m to land related payments and $5m in respect of goodwill. In addition, $24m of consulting costs has been reclassified to other exceptional costs. The impact in 2011 is a reclassification of $45m from cost of sales, a write off of $4m of assets under construction and additional income tax of $20m.

Where such expenditure affected opening balances at the time of acquisition of PT Berau, appropriate adjustments have been made to property, plant and equipment, deferred taxation and goodwill.

Vision and Strategy

Given the proposed disposal of PT Bumi, we have modified our vision reflecting the anticipated change in the Group's composition and the Company's future direction.

The Company's vision is to become a leading UK listed Asian resources company, with a focus on the growth markets of Asia. The immediate focus is on PT Berau. Key components of the Company's strategy are:

·; Optimisation. Driving operational efficiencies through the launch of a major independent benchmarking study

·; Organic Growth. Growing the business profitably with a major review of capital expenditure underway. The as yet largely unexploited Binungan mining area offers huge opportunity for cost effective production increases and will be underpinned by fully costed capital expenditure plans.

·; Capital structure. Ensuring an appropriate capital structure and reducing the cost of borrowing

Optimisation

The Group is undertaking a number of reviews that aim to change the short and long term cost structure of the business. During 2012, PT Berau reduced stripping ratios and hauling distances, leading to a significant reduction in operating cost by the fourth quarter. We have also focused on reducing mining costs and are negotiating more favourable mining contracts. This includes deferral of contracted price increases, and improved terms from contractors, while maintaining productions levels, quality and safety standards.

Further initiatives are underway that should impact positively on the cost structure of the business. In particular, a new asset optimisation and benchmarking review has been launched with the appointment of an independent consultancy. We will benchmark our mining operations at PT Berau against other comparable operations to identify opportunities for operational and capital expenditure efficiencies and drive the cost base of mining operations down.

Growth

PT Berau grew production by 8% in 2012 to 21.0mt from 19.4mt in 2011. This growth rate is expected to accelerate, with a target of 23mt of production in 2013, and a near term goal of 30mt. Incremental growth is forecast to come from increases in production at Lati and Binungan, two of our key operating mining areas, especially at the latter, where a major expansion is underway. Organic growth is the Company's immediate priority and while any attractive acquisition opportunity would naturally be assessed, the near term priority is delivering the significant organic growth options that are available. The proposed $290m overland conveyor and power plant project has been deferred and all significant items of capital expenditure are under review to ensure optimal returns for shareholders.

Capital Structure

At 31 December 2012, the Group had net debt of $514m, with gross debt levels of $971m. Our goal is to ensure an optimal capital structure and to bring down the Group's average borrowing cost.

Reclassification of PT Bumi

During the latter part of 2012 the Board determined that it was no longer able to exert any significant influence over PT Bumi. It therefore announced that it was necessary to reclassify PT Bumi from an associate to an investment. This reclassification was applied from 30 September 2012 following the resignation of the President Director of PT Bumi from the Bumi plc Board, and the Company is now pursuing an exit strategy from PT Bumi as part of the separation from the Bakrie Group. The income statement records a non cash charge of $1,394m, which reflects the investment being marked to market at that date to a value of $456m.

This lack of influence extended to the Company being unable to obtain access to the working papers of Tjiendradjaja & Handoko Tomo (Mazars Indonesia), the auditors of PT Bumi. PwC has therefore not been able to complete its audit procedures over Bumi plc's share of the loss of PT Bumi for the nine months ended 30 September 2012, and its qualified audit opinion reflects this limitation on the scope of their work.

Impairment of goodwill

With a weakened outlook for thermal coal prices, we have assessed the carrying value of PT Berau and determined that a non cash goodwill impairment of $815m is required. Further details are provided in the Annual Report.

Governance

Whilst the Board had designed an appropriate governance framework and worked to have this adopted and applied across the Group, it became evident that not all the Group's policies were being fully complied with and the extensive review undertaken by PT Berau's new management uncovered evidence of apparent financial irregularities and significant expenditure for which no clear business purpose could be established. Indonesian legal advisors have been instructed to advise on all options available to seek recourse and the Company will pursue all means available for the recovery of all relevant expenditure, including by way of engagement with relevant regulators.

Following the completion of this extensive review of PT Berau's financial position, its priority areas we are addressing to further enhance our controls are:

·; Further aligning the governance framework within PT Berau and its subsidiary companies with the framework approved by the Bumi plc Board and ensuring that policies and procedures that support this framework are fully implemented effectively. 

·; Increasing the more direct exercise of parent company control, while remaining compliant with local regulations, through Bumi plc's executive committee. This committee, which the Bumi plc CEO chairs and includes the President Director of PT Berau, will also receive regular reports on the effectiveness of internal control and risk management systems from Internal Audit.

·; Reviewing the organisational structure to ensure the appropriate resources and skills are more effectively deployed throughout the Group and in particular enhancing key controls over the financial reporting procedures in the Group.

·; In any case where the commercial terms of contracts are not in the best interests of the Group, they will be amended or cancelled. Taking the lessons learnt from the review, this exercise will be used to enhance the controls regarding related party transactions, to ensure that they are disclosed on a timely and comprehensive basis to the Conflicts Committee.

·; Enhancing the Group's investment appraisal procedures in relation to large capital projects and other significant expenditure programmes such as community development and access to land to support mine expansion.

Related party transactions

Whilst former Directors of PT Berau had agreed to work within the Group's approved governance framework, allowing for adaptation to local requirements, it became evident that not all of the Group's policies were being fully complied with despite assurances to the contrary. In particular there were concerns about non-compliance with delegated authorities, matters reserved for the Board and failure to fully disclose related party transactions. In response the Board, through the Audit Committee, undertook a review of contracts and payments to identify counterparties and the extent of any transactions with related parties. This work concluded that a number of related party transactions had not been disclosed by former PT Berau management and that a number of large payments could not be determined as having a clear business purpose. Despite a thorough review, it was not possible to conclude that all related party transactions entered into by former PT Berau management for the year ended 31 December 2012 had been identified and, as a result, PwC's audit opinion reflects this limitation in their scope. Further details are set out in the Bumi plc Annual Report.

Health, Safety, Environment and Communities

Bumi plc's business is run in a socially and environmentally responsible way. Employee safety, environmental protection and the wellbeing of local communities are essential to the Company's corporate identity and values. In terms of safety, there were no fatalities in 2012, a marked improvement over 2011 when PT Berau recorded four fatalities.

Outlook

The recovery in the global economy has been fragile, with Europe still impacted by little or no growth, and the US showing modest signs of growth in 2012. GDP growth for China and India slowed in 2012, but was still healthy at around 7% and 6% respectively.

In terms of thermal coal, the demand picture looks well supported for the Pacific region. Growing demand for lower calorific value coal is forecast for India and China, a clear benefit for PT Berau given its proximity to these markets. However, increases in supply caused the price of thermal coal to fall in 2012, and any recovery in prices is expected to be muted in 2013.

Proposed separation from the Bakrie Group and PT Bumi

On 11 October 2012 the Board announced that the Bakrie Group had proposed to enter into a transaction with the Company the effect of which would be to separate from the Bakrie Group and dispose of its shareholding in PT Bumi. The Board delegated to the Independent Non Executive Directors ("INEDs") the responsibility for reviewing this offer and appointed Rothschild Group to assist the INEDs and to evaluate this proposal together with the NR Investments Limited's alternative which was received on 5 November 2012. Following such evaluation it was decided to pursue a separation from the Bakrie Group as shareholders in the Company and the disposal of the Company's 29% interest in PT Bumi (the "Proposed Separation").

The Company is currently preparing a shareholder circular to convene a general meeting at which the transaction, in respect of which heads of terms were agreed and announced on 12 February 2013, will be put to a shareholder vote. The arrangements in respect of US$50m deposited in an escrow account by the Bakrie Group in relation to the Proposed Separation have been extended to 26 June 2013. The details of this propsed transaction are set out at the bottom of this page.1

PT Berau Operations

PT Berau mined 5.3mt of coal for the quarter, up 27% against Q1 2012. The average selling price per tonne in the first quarter was $63.2/t. Year to date stripping ratio was 8.4 bcm per tonne. PT Berau is forecast to mine 23mt for 2013. Production costs were down 7% at $36.6/t against Q1 2012, due primarily to reduced stripping ratios and reduced overburden haulage distances.

PT Berau is strongly managing its capex programme with a view to investing the minimum capital to achieve production targets. Currently, planned investments are smaller items of capex to meet its production target of 23mt this year. This includes road improvements, upgrades to coal receiving and stockyard facilities and additional fuel stations.

1 Bank cubic metres (bcm) of overburden removed per tonne of coal mined.

2 Restated for costs that were identified as having no clear business purpose.

The following information is provided on a 100% mine level basis, for the 12 months ended 31 December 2012, including pre-acquisition results.

PT Berau

PT Berau's assets are located in the north-eastern part of Kalimantan and consist of three operating mines, namely Lati (which is the largest mine, accounting for circa 51% of PT Berau's output), Binungan and Sambarata.

PT Berau recorded a strong operating performance for 2012. PT Berau mined 21.0mt of coal, an 8% increase over 2011, and recorded sales of 21.1mt of coal. The increase in coal mined was mainly due to increased production in recently opened pits (Lati East 2 and Sambarata B West) which offset decreased production in older pits (Lati Buma 1).

PT Berau's average selling price for the year was $70.9/tonne (2011: $81.4/tonne). Production cost of sales at PT Berau was $37.8/tonne (2011: $35.9/t). The increase was mainly due to a slight increase in stripping ratios and fuel prices and an increase in overburden hauling distances, leading to increased mining costs and fuel usage.

In terms of sales by destination, 81% were exports (mainland China: 34%, Taiwan: 18%, India: 14%, South Korea: 9%, rest of Asia: 6%), with the remaining 19% sold domestically into Indonesia (2011: 15%).

In terms of PT Berau's coal reserves, a new JORC report published in August 2012 showed total reserves increasing by 9% to 509mt at 31 December 2011, from 467mt at 31 December 2010.

1 Bank cubic metres (bcm) of overburden removed per tonne of coal mined.

2 Restated for the effect of other exceptional costs.

Summary of key financial data

1 This information is estimated due to limited access to information from PT Bumi.

2 2011 has been restated for other exceptional costs where appropriate

Interest cover is calculated by dividing the profit before finance items and tax by the finance costs.

1 Bank cubic metres (bcm) of overburden removed per tonne of coal mined.

2 Restated.

3 This information is estimated due to limited access to information from PT Bumi.

Bumi plc is a leading thermal coal company with significant assets in Indonesia, the world's biggest sea-borne thermal coal-exporting country. The group's key assets are PT Berau which is the country's fifth largest coal producer, and a 29% interest PT Bumi, which is the biggest thermal coal producer in Indonesia. Both PT Berau and PT Bumi have cost competitive positions in thermal coal, with all mining operations situated in the lower half of the cost curve. PT Bumi was reclassified as an investment, effective 30 September 2012.