Flip-Flopping the Mining Law: What are Indonesia's New Mining Rules?
The government of Indonesia revised rules regarding the ban on unprocessed ore exports. Originally, Southeast Asia's largest economy (a key exporter of natural resources) planned to ban exports of mineral ore per 12 January 2014 in a bid to encourage the development of domestic higher value smelting facilities (part of the New Mining Law that was unveiled in 2009). However, a three-year delay was announced (through a presidential regulation) on the evening before the ban would be imposed as local processing capacity was still insufficient. Now, three years later, there have been more revisions.
Over the past couple of months, as the three-year delay was approaching its deadline, there was a high degree of uncertainty about whether the Indonesian government would indeed ban all shipments of mineral ore per January 2017, or would, again, allow another delay. Most analysts expected to see another delay because smelting capacity in Indonesia remains inefficient today, implying that a full ban would damage Indonesia's mining industry (including the loss of many jobs) and it would undermine government revenue from this sector.
So what is the news? Indonesian Minister of Energy and Mineral Resources Ignasius Jonan said the government will not allow mining companies that are still active under the longstanding Contracts of Work (Kontrak Karya) to export unprocessed ore (starting from 12 January 2017). Only if they change the status of their contracts to the newer Special Mining Business Permit (Izin Usaha Pertambangan Khusus, or IUPK), then they will be allowed to resume exports of mineral ore. Changing the status of the contract will only require two weeks (provided the miner fulfills all requirements), Jonan said.
According to the minister, this decision is in line with Law No. 4/2009 on Mineral and Coal Mining (New Mining Law) because the Mining Law does not set a time limit to mineral ore exports for those miners that have the IUPK. However, it is not mandatory for a miner with a Contract of Work to change the status to IUPK. However, this means that he is only allowed to export processed material. In other words, these mining companies have two options: (1) export mineral ore under an IUPK, or (2) keep the Contract of Work status and develop a local smelter to export refined output.
However, Jonan added an important detail. The Energy Ministry of Indonesia needs to give a recommendation to a miner before the miner is allowed to export mineral ore (this recommendation, which is valid for one year, forms the basis for the Trade Ministry to issue an export permit). However, it will only grant a recommendation to miners with the IUPK status that show progress with the development of local processing facilities. Every six months the Energy Ministry will check whether there has indeed been progress with smelter construction. If there has not been sufficient progress, then it can revoke the export permit. Therefore, miners will still need to develop smelters in Indonesia.
Miners that are affected by these revisions include Freeport Indonesia and Amman Mineral Nusa Tenggara (formerly known as Newmont Nusa Tenggara). Both companies had already been pressured by authorities to renegotiate their Contracts of Work to make these more in line with the New Mining Law. This was part of the deal in order to be allowed to resume copper concentrate exports after January 2014. Both miners teamed up in 2014 to establish a new smelter in Gresik (East Java) because part of renegotiations was that they had to show proof of their commitment to develop a smelter (however there is still limited progress with this smelter).
Another regulation that has been revised concerns the timing of a request to extend a mining contract. Previously, a miner could only make a request to the government to extend its contract two years before the existing contract would expire. However, this was a major problem as miners need to have legal certainty before investing heavily in new mining facilities. A new regulation now allows miners to start negotiating contract extensions five years before the existing contract expires. As such, Freeport Indonesia can, per direct, sit together with the Indonesian government to talk about extending its Contract of Work that expires in 2021. However, it will have to change the status of the contract to an IUPK because the long-standing Contracts of Work will not be renewed.
All foreign miners in Indonesia (covering all mining activities and all contracts) will need to divest 51 percent of the shares in the company (to an Indonesian party) gradually. After five years the divestment has to begin and it has to be completed within a five-year period (in other words, within a ten-year period the foreign miner needs to have a minority stake). Whether an initial public offering (IPO) on the Indonesia Stock Exchange will also be allowed (instead of divestment) still needs to be studied by authorities.
On Friday (13/01) it was reported in Indonesian media that Chinese nickel smelter operator Virtue Dragon Nickel Industry as well as other miners consider to sue the Indonesian government over these latest mining rules. Meanwhile, a civil society said it plans to challenge the new rules at Indonesia's Supreme Court because they are considered breaching the 2009 Mining Law.