2009 Mining Law: Indonesia to Stick with Mineral Ore Export Ban?
It remains unclear whether Indonesia will revise the export ban that is stipulated by the 2009 Mining Law (Law No. 4/2009 on Mineral and Coal Mining) and is supposed to come into effect on 12 January 2017. The 2009 Mining Law stipulates a ban on the export of unprocessed and semi-processed ores from Indonesia. The regulation aims to boost development of the nation's smelting capacity, hence becoming an exporter of materials that are positioned higher up in the value chain while curbing Indonesia's current dependence on exports of raw materials.
Although it makes sense to push for development of domestic processing facilities through the 2009 Mining Law, even though it meant breaching long-standing contracts of work with local miners - particularly foreign miners are affected negatively - and therefore a setback for legal certainty in Indonesia, the timing couldn't be worse. With commodity prices dropping sharply after 2011, miners have been reluctant to engage in costly investments in smelting facilities. Moreover, considering that Indonesia is known for its flip-flop policies, part of the mining community preferred to wait & see whether the Indonesian government would indeed push for this export ban.
Although a full ban on exports of unprocessed ores, which includes concentrates, was originally planned to come into effect in January 2014, a last minute intervention from former president Susilo Bambang Yudhoyono allowed for more time before the full ban would be imposed. The deadline was moved to January 2017 in order to give local miners more time to establish smelting facilities. However, in order to obtain temporary permits to resume unprocessed ore exports, miners needed to comply with several requirements through the signing of memorandum of understanding (MoU), including higher royalties and export tax, the payment of an assurance bond to the government to support smelter development, and providing evidence that the construction of smelting facilities is ongoing.
A sign that the Indonesian government is serious about upholding the 12 January 2017 deadline for the export ban is its recent decision to give a five-month permit to Freeport Indonesia to export 1.4 million metric tons of copper concentrate. This five-month period is less than the usual six-month permits that were granted by the Indonesian government and, unsurprisingly, the five-month permit will expire on 11 January 2017, one day before the full ban is scheduled to come into effect.
The Indonesian miner, unit of Freeport-McMoRan Inc, operates the Grasberg mine in Papua. After Escondida in Chile, this mine is the world’s largest copper mine and has the single largest gold reserves. According to the International Copper Study Group (or ICSG), Indonesia is the world's 13th-largest copper producer.
It also remains unclear at what price Freeport Indonesia will sell a 10.64 percent stake - the mandatory divestment for foreign miners that is stipulated by the 2009 New Mining Law - to an Indonesian company (or individual). Earlier this year we reported that there exists a huge gap between valuations made by the Indonesian government and Freeport Indonesia. Whereas Freeport Indonesia proposed a price of USD $1.7 billion, Indonesia's Ministry of Energy and Mineral Resources says the stake is only worth USD $630 million. The gap exists due to different methods of calculation. Freeport Indonesia uses a fair market value, while the government values the stake on replacement cost. It could require international arbitration to solve the matter.
Indonesian parliament is set to review the mineral ore export ban that is stipulated by the 2009 Mining Law later this year. There is a possibility that the full ban will simply be delayed by another three years. Scrapping the ban will surely cause outrage, particularly among those miners that have already reluctantly invested in costly smelting facilities.