Mining Industry Challenges in Indonesia

Processing
 
Implementation
 
Indonesia finally implemented the Law No. 4 of 2009 on Mineral and Coal Mining (“Mining Law”)’s raw mineral export restriction in early 2014 through Government Regulation No. 1 of 2014 (“GR 1/2014”) and Minister of Energy and Mineral Resources Regulation No. 1 of 2014 (“ESDM 1/2014”).  However, the restriction is not in full effect as ESDM exempts five minerals from a higher standard of refinement for a period of three years, on the condition that the exporter owns sufficient reserves for eventual smelting and has a credible plan to construct a smelter or jointly process the ores.
 
The original mandate under the Mining Law is for all miners to domestically process raw ores so as to add value to them and meet domestic demand.  Notwithstanding this mandate, the brunt of these two regulations focuses on banning raw mineral export – it does not penalise a miners’ failure to process domestically insofar as no export takes place.  Indeed, mining license holders may sell unrefined ores domestically.  Such domestic sales are completely exempt from the obligation to refine.
 
Practically, all of the raw mineral ores fall under the export restriction.  The regulation specifies the processing/purification standards for 11 metals, 8 non-metal minerals and 19 stones.  As a caveat, Article 10 of ESDM 1/2014 places a blanket export restriction on all minerals, listed or not.  All those minerals that are currently not listed may not be exported until such time as ESDM has issued a purification standard and the mineral has been purified to that standard.  The regulation also requires refinement of purification and processing by-products, including muds, cathodes and anodes.
 
The six metals that must be purified (mostly up to 99%) to the standards set out in the appendix are nickel, bauxite, tin, gold, silver and chromium.
 
The five metals that only need processing (to a concentrate form generally of 15% to 49% purity) during the 3-year grace period (until 11 January 2017) are copper, manganese, lead zinc and iron.  However, export of these minerals in their processed but not purified forms are conditional upon obtaining recommendation from the ESDM.
 
Export of metal concentrates is however conditional.  Article 12(8) in conjunction with Article 12(6) of ESDM 1/2014 permits the export of the concentrates of the five ores listed above on the ground the exporter is recommended by the Director General of Coal and Minerals (DGCM).  To obtain this recommendation, an exporter must have sufficient reserves for refining and demonstrate a credible commitment to building a smelter.
 
Export Tax
 
The Minister of Finance has issued Regulation No. 6/PMK.011/2014, which imposes tax on the export of five mineral concentrates: copper, zinc, manganese, iron and lead, initially set at 20-25% and incrementally increasing to 60%, before being completely banned.
 
A miner may not sell any minerals abroad unless the Ministry of Trade (MoT) clears them for export.  In turn, the MoT will only issue the export clearance if the miner obtains recommendation to export from the ESDM (ESDM Export Recommendation), pays all applicable government levies, e.g. the export duties on these minerals.
 
The government’s approach is based on compromise.  The mining law mandates all minerals to be refined, without stipulating further standards or conditions.  The Government is using this technical loophole to differentiate the purification standards, taking into account the low domestic refining capability as well as value add-ons resulting from refining the minerals.
 
The Ministry of Trade (MoT), after coordinating with the ESDM team, decides the base price, and periodically (typically monthly) issues a list known as the Export Base Price for Minerals (Harga Patokan Ekspor for Mining Products (“HPE”)).  The HPE applies as the base price upon which the payable duties are calculated.
 
The MoT has wide discretion in deciding the HPE.  It will use as guidance four price indices, which are the highest average price at/in: (i) international bourses; (ii) FOB; (iii) domestic price (iv); importing country.  In addition, the MoT will also factor in domestic needs, environmental sustainability, domestic price stability and competitiveness level of the exported ore. 
 
Divestment
 
Minister of Energy and Natural Resources Regulation No. 27 of 2013 on Procedures for Divestment and Share Pricing and Changes to Investment in Mineral and Coal Mining Businesses (“Regulation”) has been issued on 13 September 2013.  The Regulation implements the divestment obligations for foreign owned companies holding post-2009 (IUP/IUPK) mining licenses, specifying the operation of the previously legislated requirement to divest 20% after six years and 51% after 10 years of production. 
 
The significant aspects of the Regulation are as follows:
 
 - The divesting party, or its affiliates, are prohibited from providing a loan for the acquisition of the divested shares to the Indonesian party (Art.2(6)).
 
 - If the mining company is 51% Indonesian owned five years after production the divestment requirement does not apply (Art.2(7)).
 
 - There is an anti-dilution clause that requires post-divestment Indonesian ownership to be maintained (Art.2(8)).
 
 - Shares that are burdened with a security interest cannot be used for divestment (Art.3)
 
 - Shares sold through the capital market do not count towards the divestment obligation (Art.4)
 
Article 13 states that the basis for pricing the divested shares is replacement cost (calculated by independent assessors), defined as investment cost less depreciation/amortization and financial obligations.  This replacement cost is the highest price that can be offered to Government and the base price when offered for bidding to State and private companies.  The use of investment cost less depreciation appears inconsistent with Indonesia’s numerous bilateral investment treaty obligations regarding expropriation, which, in addition to “public purpose,” require compensation at “market value,” which necessarily includes not only the investment cost but also the businesses’ value as a going concern (including the value of the yet to be extracted natural resources).
 
Acquisition of shares in domestic-owned mining companies by foreign shareholders is limited to:

 - Maximum 75% foreign during exploration (Art.18(2))
 - Maximum 49% foreign during production (Art.19(3))
 - Requiring approval by the Minister on the basis of the recommendation of the Governor/Regent(Bupati)/Mayor.
 
Transfer of shares in partially foreign-owned mining companies is only possible if the resulting foreign ownership is:

 - Maximum 75% foreign during exploration (Art.27(2)
 - Maximum 49% foreign during production (Art.27(3))
 
These effectively serve as accelerated limits on foreign shareholding for mining companies following any change in shareholding structure, prevent outright acquisitions by foreign parties, and limit foreign investment into concessions with production licences (which in practice are often far from being at the production stage) to a minority stake, therefore requiring Indonesian partners who are able to provide the necessary capital contributions to fund the mine development.
 
The following issues remain to be clarified:
 
The Article 4 exclusion of capital market sales from the divestment obligation appears to be designed to prevent fulfillment of the divestment obligation through an IPO, however, it is not immediately clear how this article will operate in conjunction with already listed companies.  Specifically, in the following two scenarios: (i) public float of 51+%, if not counted towards the divestment obligation, would make the full required divestment unworkable even if the entirety of the shares that are not publicly traded are owned by a domestic Indonesian entity, and (ii) listed companies whose subsidiaries hold mining licenses and whether such subsidiaries will now have to become 51% domestic owned.
 
Mohamed Idwan (‘Kiki’) Ganie is the Managing Partner of Lubis Ganie Surowidjojo (LGS).  He graduated from the Faculty of Law of the University of Indonesia and holds a PhD in Law from the University of Hamburg, Germany.  Dr. Ganie has more than 30 years of legal experience, and specialises in commercial transactions and commercial litigation, including alternative dispute resolution and has acted as an expert in a number court and arbitration proceedings.  His expertise covers general corporate/company law, banking law, finance, bankruptcy and restructuring, mining, investment, acquisitions, infrastructure projects/project finance, antitrust, and shipping/aviation, with a particular focus on corporate governance and compliance.
 
Dr. Mohamed Idwan (‘Kiki’) Ganie
Managing Partner
Lubis Ganie Surowidjojo
 
Address:
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Email: ganie@lgslaw.co.id
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