Q+A-Indonesia coal: Will global majors get in on rising output?

NUSA DUA, Indonesia, June 3 (Reuters) - Indonesia, already the world's largest exporter of thermal coal, is seeing rising production and drawing increasing interest from utilities and private investors looking to fuel Asia's demand for power.

But none of the world's global mining majors produce coal in Indonesia now, and only BHP Billiton (BLT.L)(BHP.AX) has plans to do so after getting the go-ahead last month to develop a joint venture project with local firm Adaro Energy (ADRO.JK).

As Indonesia's resort island of Bali hosts industry officials this week at Coaltrans Asia, the region's largest coal conference, here are some questions and answers about the lack of major miners and the country's investment outlook.

WHY ARE THERE NO MAJORS IN INDONESIA?

Global miners used to own coal mines in Indonesia under deals signed during the rule of former President Suharto, but were required to sell stakes to locals after a certain period of production and the majors faced rising pressure from resource nationalists to give up their assets.

These contracts meant BHP Billiton, Rio Tinto (RIO.L) and BP (BP.L) ended up selling their stakes in prize assets Arutmin and Kaltim Prima Coal to Bumi Resources (BUMI.JK), controlled by local tycoon and politician Aburizal Bakrie.

"It was not because Indonesia is not attractive. It is very attractive but the government prevented them from owning these mines," said Kalai Pillay, senior director of corporate ratings for Asia Pacific at Fitch Ratings.

BHP, the world's top mining group, is the only major left in coal and has decided to push on with its Maruwai coal project, but only as a joint venture, after saying last year it would not proceed as the project did not fit its long-term strategy.

It won government approval in May to sell a 25 percent stake in Maruwai to Indonesia's second-largest coal miner, Adaro, for $335 million. With coal reserves estimated at 774 million tonnes, Maruwai is slated to start commercial output in 2014.

WILL THIS CHANGE?

Maybe not.

Indonesia brought out a long-awaited new mining law last year and two further regulations this year to allow firms to start obtaining mining permits and speed up issuance for existing investors. For details of the draft law, click [ID:nJAK367075] and for regulations, click [ID:nJAK279731] and [ID:nJAK463935].

The government hopes this will spur investment in the sector.

"The new mining law provides a level playing field," said Bob Kamandanu, chairman of the country's Coal Mining Association. "Big foreign mining names have started to look for mining acquisitions."

But the new rules are not seen as a cause for celebration by majors, since they limit contract work that can be outsourced, lifting costs and favouring locals. The government can also change tax rates and terminate mining licenses.

Miners can only export if they meet local demand for a certain time, favouring domestic needs over foreign firms who would rather export to exploit higher world prices or supply their home markets.

Finally, foreign investors who wholly own Indonesian mining operations must sell a stake of 20 percent gradually to Indonesian investors, making joint ventures the only way ahead.

Despite increasing political stability in Indonesia and booming stock and bond markets in the past year, legal uncertainty, red tape, corruption and inadequate infrastructure remain obstacles for investors in fixed assets.

"Big players like Xstrata (XTA.L), they want to make a profit, and legal certainty is the main thing," said an equity analyst based in Indonesia, who declined to be identified.

Fitch's Pillay said the expected lack of major miners was not a problem in developing the sector as local players have plenty of capital and could easily tap world bond markets.

WHO IS CONSIDERING COAL INVESTMENTS?

The biggest Indonesian miners, flush with cash from higher coal prices, aim to expand at home. Adaro told Reuters this week it wants to buy a world class coal deposit to double existing assets [ID:nJAK274667].

Bumi plans to increase its output about 15 percent this year and expects profits to climb more than 10 percent [ID:nJAK226072].

Private equity investors are also circling over resource assets in Indonesia for exposure to commodity prices.

Indonesian investment firm Recapital Advisors paid $1.5 billion last year for a controlling stake in the country's fifth-biggest miner, Berau Coal, which plans to raise $1 billion this year through share and debt sales to fund expansion.

Regional utilities such as Indian power generators are said to be desperate to secure supplies of Indonesian thermal coal. Tata Power Co (TTPW.BO), India's largest private sector utility, told Coaltrans it was looking for coal suppliers in Indonesia, while Chinese buyers inked a flurry of deals this week [ID:nSGE6510EW]. (Additional reporting by Fayen Wong and Janeman Latul; Writing by Neil Chatterjee; Editing by Clarence Fernandez)