New Mining Decree Makes Indonesia 'Less Attractive' to Investors

Kamis, 08 Maret 2012 | 09:50

Keen to strengthen the country’s control over its own natural resources, the government has come out with a new regulation that would force foreign companies holding mining permits to start divesting their stakes to local entities in the sixth year after production.President Susilo Bambang Yudhoyono signed the new regulation into law on Feb. 21, but it was only made available to the public on Wednesday.

The regulation says foreign investors holding mining business permits (IUP) and special mining business permits (IUPK) must divest a minimum of 51 percent of their stake in the mining operation to Indonesian entities within a five-year period.

“In a bid to give a greater opportunity for Indonesian entities to participate in the mineral and coal-mining business, it needs to be regulated that foreign investors must divest parts of the stake to Indonesian entities,” the regulation states.

The divestment must begin during the sixth year of mining production. Under the existing regulations, by the sixth year, Indonesian investors must own at least a 20 percent stake in mining ventures.

It has to be gradually increased to 30 percent in the seventh year, 37 percent in the eight year, 44 percent in the ninth year and 51 percent in the ninth year.

The new regulation applies to firms mining for coal, minerals and metals.

The divested shares can be acquired by the central, provincial or district governments, state-owned enterprises, local government-owned companies or even local private firms.

Since Indonesia introduced the new mining law in 2009, the old licensing scheme called contracts of work has been replaced with two types of licenses, the IUP and IUPK, with the latter typically awarded to larger-scale mining operations with a longer concession period.

However, Supriatna Suhala, the executive director of the Indonesian Coal Mining Association (APBI), said the new regulation would not affect existing contracts of work.

That means that giant miners still operating under that scheme, including Freeport Indonesia, the local unit of US gold and copper miner Freeport-McMoRan Copper & Gold, and Newmont Nusa Tenggara, the local division of US gold miner Newmont Mining Corp., will not experience any impact to their operations.

“This will instead affect future investment in the mining sector,” Supriatna said, citing as an example upcoming investments such as one involving French miner Eramet.

Eramet chairman and chief executive Patrick Buffet said last September that the company planned to spend $450 million in the first phase of a $6 billion investment to develop a nickel and cobalt mine as well as a processing plant on North Maluku’s Halmahera Island.

“If they [the government] want to put a brake on this sector, that’s fine, but the fact is they want more investment in the mining sector,” Buffet said. “This regulation will make Indonesia less attractive to new investors.

“Five years is too short for investors to enjoy a profit in the mining sector.”

Supriatna said that with bank-loan maturity in the mining sector being at between 10 and 13 years, divesting after five years would lose whatever potential gains already existed.

By Muhamad Al Azhari