Indonesia says foreign miners must grant 51% ownership to domestic companies

Published by MAC on 2012-03-14
Source: Reuters

Indonesia rattles foreign miners with '51% after 10 years' ownership change

By Reza Thaher and Neil Chatterjee

Reuters

7 March 2012

JAKARTA - Indonesia will take more of the profits from its vast mineral resources by limiting foreign ownership of mines in a move likely to scare off new investment in the world's top exporter of thermal coal and tin.

Under new rules announced on the mining ministry's website, Southeast Asia's largest economy will require foreign companies to sell down stakes in mines and increase domestic ownership to at least 51 percent by the 10th year of production.

The move is part of a global trend of increased resource nationalization that is pushing up the costs of mining for international companies and giving governments in emerging market countries more cash and clout.

Indonesia may have a fresh stamp of approval from ratings agencies as an investment grade nation, but the unexpected regulation underlines continuing policy uncertainties that have long been a major risk for investors hoping to tap some of the world's richest deposits of coal, gold and copper.

The regulation, signed by President Susilo Bambang Yudhoyono on Feb. 21, comes as the government is renegotiating existing royalty contracts with major foreign investors such as Freeport McMoRan Copper & Gold Inc and Newmont Mining Corp.

It was not clear how soon the regulation will apply to existing investors.

"The aim is the state has to get more. For new investment it will be simple, but for existing investment there must be re-negotiation," Mining Minister Jero Wacik told Reuters.

Freeport said it was confident the Indonesian government will honor all existing contracts and that it has voluntarily agreed to divest some of its stake.

In a statement to Reuters in Jakarta, the company stressed there was a "mutual commitment as part of Freeport Indonesia efforts for future investment."

Spokesman Eric Kinneberg separately told Reuters in New York that Freeport's contract does not require the company to divest any portion of its ownership in its local units, PT Freeport Indonesia or PT Indocopper Investama.

Freeport owns 90.64 percent of the vast Grasberg copper and gold mine and the Jakarta government owns the other 9.36 percent. Kinneberg said the company had earlier agreed to voluntarily divest at fair market value a 9.36 percent part of its interest.

"Discussions with potential acquirers, including the Province of Papua, regarding a potential transaction are ongoing, he said."

Freeport also said it will resume operations at Grasberg on March 12 following a temporary suspension due to work disruptions.

A spokesman for Denver-based Newmont said the company, the world's second-largest gold producer, believed the proposals would have no impact since it already divested and now owns a minority stake in the Indonesian unit that operates its Batu Hijau mine. A nearby development project, Elang, is covered by the same contract.

"The divestiture requirements outlined in the new law appear to be very similar to the terms of our existing contract of work," Omar Jabara said in an e-mail to Reuters in New York.

He said 44 percent of the shares in PT Newmont Nusa Tenggara are already owned by Indonesian entities and the remaining 7 percent was already offered for sale and is awaiting final purchase from the Indonesian government.

Freeport stock dropped 1.1 percent to close at $38.99. on the New York Stock Exchange. Newmont fell 50 cents to close at $56.68.

After steep rises in commodity prices over the last decade, Indonesian politicians have become increasingly vocal in demanding better deals with mining companies, many of which were struck in the era of former autocratic leader Suharto.

The fast-growing mining sector accounts for over a tenth of GDP in the G20 economy.

The key mine at stake is Freeport's Grasberg, the world's largest gold mine and second-largest copper mine. Freeport currently owns about 90 percent and has a long-standing contract, as do other major miners such as coal company Bumi Plc.

"I'm sure foreign investors will not invest in the mining sector anymore in Indonesia. This policy will threaten Indonesia's mining investment climate," said Syahrir Abubakar, executive director of the Indonesian Mining Association.

Shares in Indian coal miner Adani Enterprises, which owns coal mines in Indonesia, dropped 9 percent after the news, while shares in Indonesia's top coal miner Bumi Resources fell 1 percent.

The regulation supports a 2009 mining law, and strengthens an earlier 2010 regulation that called for foreign investors to sell a 20 percent stake to locals after five years.

"Holders of mining business permits and special mining business permits, in terms of foreign investment, are required to divest the shares gradually five years after production, so in the 10th year the shares are at least 51 percent owned by Indonesian entities," the new regulation stated.

Tougher Deals

While Freeport's mine alone accounts for 1.6 percent of Indonesia's GDP, the government's revenues from it were hurt by an unprecedented three-month strike at Grasberg last year when workers pushed for more pay.

In its latest earnings report, Freeport said its Indonesia revenues last year were $2.3 billion.

Some analysts argue Indonesia needs to strike a tougher bargain with foreign resource companies to make up for low overall tax revenues and to gain extra funds to overhaul the country's notoriously weak infrastructure.

"It's clear that the government was extremely unimpressed by events at Grasberg and I wouldn't be surprised to find they are taking a much tougher line with the international mining companies as a result," said Nic Brown, head of commodities research at Natixis.

"I wouldn't be surprised to find the government is pushing this 51 percent local ownership as part of these negotiations," he said. "It's part of a major long-term trend which will increase the costs of mining all the base metals across the world."

Broker Liberum Capital said miners such as Bumi and Freeport, who operate under the country's previous "contracts of work" licensing system will be required to shift to new "mining business licenses" when their contracts expire.

Only last month, Freeport said it wanted to extend its contract with the government to enable it to run Grasberg beyond 2021, adding it wanted to work in Indonesia for "many more decades."

The 2009 mining law was aimed at boosting investment in mining and metals processing, but its supporting regulations have not gone down well with the industry and new investors still face risks such as policy reversals, local community demands, a tortuous permit process and poor infrastructure.

"The government regulation ... is impossible for foreign mining investors. It's impossible if in only 10 years after production they have to divest 51 percent of their stake in the mines," said the mining association's Abubakar.

Major foreign miners in Indonesia include Newmont and International Nickel Indonesia (INCO), part of Brazil's Vale Inco. BHP Billiton has a 75 percent stake in a $1.3 billion Kalimantan coal project, and France's Eramet has a nickel project with Japan's Mitsubishi Corp.

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Indonesia mine rule applies to all, not just aimed at Freeport - minister

By Reza Thaher and Matthew Bigg

Reuters

8 March 2012

JAKARTA - A new Indonesian regulation that changes the rules on foreign ownership of mines applies to all foreign companies and is not aimed specifically at the largest of those, Freeport McMoRan Copper & Gold Inc , the deputy energy and mining minister said on Thursday.

Indonesia has substantial mineral wealth and is the world's top exporter of thermal coal and tin, but attention has focused on Freeport since news on Wednesday of the regulation which could deter fresh investment in the sector.

Freeport is negotiating to renew its royalty contract to run the Grasberg mining complex, which has the world's largest gold reserves and is the second-largest copper mine.

The regulation could be an attempt by the government to increase pressure on Freeport, said some analysts and people with knowledge of Indonesian mining.

Under the rules signed by President Susilo Bambang Yudhoyono on Feb. 21, Southeast Asia's largest economy will require foreign companies to sell down stakes in mines and increase domestic ownership to at least 51 percent by the 10th year of production.

"The regulation will be imposed on every mining company operating in Indonesia, in general. That includes Freeport and Newmont," said Deputy Minister Widjajono Partowidagdo, adding it was wrong to assume the law was aimed specifically at Freeport.

Newmont Mining Corp is also engaged in a renegotiation with the government.

"This regulation is not only for Freeport. It is for all foreign mining companies in Indonesia, to guarantee greater benefit to the country from the mining sector," the minister told Reuters in a telephone interview.

Thamrin Sihite, director general of coal and mining in the ministry of energy and minerals, said the new regulation was already part of the talks with Freeport.

"Negative Consequences"

Indonesia won investment grade status recently due to its relatively stable fiscal environment, low level of debt, annual growth running at more than 6 percent and a big domestic market in the fourth-largest country in the world.

The new status could boost calls already growing in the country for a more assertive attitude towards partnership with foreign companies, particularly in the resources sector where last year there were several cases of violent clashes over land rights.

Freeport alone contributes 1.6 percent of Indonesia's gross domestic product and, according to the country's statistics bureau, the mining sector as a whole made up 11.9 percent of the economy in 2011.

"Many in Indonesian politics and the public see that Freeport is not fair to Indonesia and some other cases. The principle is that we need to implement that law - but how much and how fast - that is still under the ministry of mining and energy," Deputy Trade Minister Bayu Krisnamurthi said.

"We still believe, even with only 49 percent, it (the mining sector) is still very alluring, still very lucrative for everybody. In some countries, this industry is prohibited from international investors," Krisnamurthi said in an interview.

Some analysts and mining industry sources said inconsistent policy-making could threaten growth in the sector, which was shaken by a rule last month that companies must stop exporting unprocessed raw metals in 2014. Coal was exempted.

"Fitch believes Indonesia will take a pragmatic approach to industry regulations as failing to do so can have negative consequences for the sector in the long-run," the ratings agency said in a special report on Thursday.

"Indonesia's coal mining sector should continue to see strong growth prospects but can benefit from clearer and more predictable regulations," it said.

Unrest

The Grasberg mine has become a high-profile example of growing labor unrest in Indonesia as workers push for more of the spoils in a booming economy. Freeport partially met in December worker demands for a pay rise after a 3-month strike.

Since then, upheaval at the mine in Papua has continued and Freeport Indonesia said late on Wednesday it would resume operations there on Monday after a suspension caused by work disruptions.

On Thursday, the union disputed that, saying it, rather than management, had decided to resume work and Freeport was refusing to pay workers who were slow to return after the strike.

"We want to give the management a month starting Monday to sort the wage problem with the workers. We will see on April 12 if this problem can be sorted out," union spokesman Virgo Solossa told Reuters by telephone.

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Australian miners play down impact of Indonesia's new ownership law

By Sonali Paul

Reuters

9 March 2012

MELBOURNE - Australian miners are playing down the impact of a new law in Indonesia limiting foreign ownership in mines to no more than 49 percent, even after a senior Indonesian official said the law would apply to all foreign miners.

The government has said it wants Indonesians to have greater ownership of resources in the country, which is the world's top exporter of thermal coal and tin and has abundant reserves of copper and gold.

Those holding what are called 'contracts of work' or 'coal contracts of work', such as Newcrest Mining, believe those agreements will remain intact until expiry, and reckon so-called IUP mining concessions are the target of the new law.

Newcrest, the world's third-largest gold miner, said on Friday its 82.5 percent stake in the Gosowong mine in Indonesia would not be affected by the rule, at least until its existing contract runs out.

"We understand the changes do not apply to the existing contract of work for the Gosowong mine which expires in 2029," said Kerrina Watson, a spokeswoman for Newcrest, which already has an Indonesian partner in Gosowong, PT Aneka Tambang , with a 17.5 percent stake.

A lawyer in Jakarta said that based on comments this week by the director general of minerals and coal, the divestment rule should only apply to new contracts, and may be part of ongoing talks on aligning existing contracts with the new mining law.

"I would expect some short-term cooling in some immediate investments because it will cause people to reflect upon the economics of their particular transactions," said David Holme, a partner at law firm Allens Arthur Robinson in Jakarta, which has advised BHP Billiton, Rio Tinto and Newcrest.

He declined to comment on any company's specific situation.

Under Review

Top global miner BHP Billiton owns a 75 percent stake in coal contracts of work in Kalimantan, where it has undeveloped coking coal assets. The company has said it is reviewing the Indonesian president's statement on the new rule.

Other companies already subject to the divestment rule said they have so far not been forced to sell down their stakes.

Straits, which owns the Mt Muro Gold mine in central Kalimantan through PT Indo Muro Kencana, a 100 percent subsidiary of Straits Metals Ltd, has a contract that requires it to offer 51 percent of the holding company for purchase at fair market value by the Indonesian government.

"Straits complies with this requirement each year, but has not received any proposal to date," the company said on its web site.

Kingsrose Mining under its existing contract of work was supposed to start selling down its 85 percent stake in PT Natarang Mining (PTNM) to 49 percent from 2012, but that has twice been deferred.

"PTNM has been advised that it has strong grounds to succeed in deferring the commencement of the divestment obligation to March 2016," Kingsrose Finance Director Timothy Spencer said in a statement to the Australian stock exchange.

One company that has said it may be affected is Intrepid Mines, which has an IUP mining concession for its Tujuh Bukit mine. Intrepid said the effect and timeframe for the regulations were subject to interpretation by the government.

"The company is currently studying these regulations and is considering its best course of action in light of a number of related issues that have yet to be addressed and ongoing discussion with the Ministry of Energy and Mineral Resources," it said in a statement on Friday.

Shares in Intrepid shares fell 6 percent on Friday, while Kingsrose rebounded 4.5 percent following a drop on Thursday. The major miners' shares were all higher.

Rio Mum

Rio Tinto has declined to comment so far on whether its rights to 40 percent of production from Freeport McMoRan's giant Grasberg copper and gold mine from 2021 will be affected by the new rule.

Freeport McMoRan is seen as the main target of the new law, although the government has said the change will apply to all foreign companies.

An Australia-based lawyer said the change in the mining law could have unintended consequences as it could make miners re-think mine development plans in order to mine the best grades early before having to divest their stakes.

"It doesn't necessarily lead to the best of mining practices," said Michael Blakiston, a partner at law firm Gilbert & Tobin in Perth, who advises on mining deals.

He added that for capital intensive mine developments, there could be concerns about how new local equity partners would be able to foot the bill for major projects.