Indonesia rule change rattles foreign mine owners

JAKARTA Wed Mar 7, 2012 10:37am EST

1 of 5. A worker uses the tapping process to separate nickel ore from other elements at the nickel processing plant owned by PT Vale Indonesia,Tbk in Sorowako of Indonesia's South Sulawesi Province March 1, 2012. Indonesia's new mining law is aimed at generating more funds for government from the mining sector, the energy and minerals minister said on March 7, 2012. The law announced on the energy ministry website will require foreign firms to sell down stakes in mines by the 10th year of production and also require companies to increase domestic ownership to at least 51 percent.

Credit: Reuters/Yusuf Ahmad

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JAKARTA (Reuters) - 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 firms 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 firms 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 February 21, comes as the government is renegotiating existing royalty contracts with major foreign investors such as Freeport McMoRan Copper & Gold Inc (FCX.N) and Newmont Mining Corp (NEM.N).

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.

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.

There was no immediate comment from Freeport.

Newmont stock fell 1.4 percent to $56.36 in morning trading on the New York Stock Exchange and Freeport was down 2 percent at $38.65.

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GRAPHIC on top coal miners link.reuters.com/hym74s

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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 firm Bumi Plc BUMIP.L.

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

Freeport declined to provide immediate comment.

Shares in Indian coal miner Adani Enterprises (ADEL.NS), which owns coal mines in Indonesia, dropped 9 percent after the news, while shares in Indonesia's top coal miner Bumi Resources (BUMI.JK) 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 5 years.

"Holders of mining business permits and special mining business permits, in terms of foreign investment, are required to divest the shares gradually 5 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 3-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 firms 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) (INCO.JK), part of Brazil's Vale Inco (VALE5.SA). BHP Billiton (BLT.L) (BHP.AX) has a 75 percent stake in a $1.3 billion Kalimantan coal project, and France's Eramet (ERMT.PA) has a nickel project with Japan's Mitsubishi Corp (8058.T).

FIGHT FOR CONTROL

Newmont and partner Sumitomo Corp (8053.T), which run the country's second-biggest copper mine, have already been required to sell 51 percent in the mine to local state and private investors.

The sale of the final 7 percent to the central government last year drew attacks from opposition lawmakers from the Golkar Party, who said it should go to local government. The family of Golkar Chairman Aburizal Bakrie already indirectly owns 24 percent of the mine through a consortium with local governments.

The new regulation calls for foreign firms to first offer stake sales to central government, followed by local government and state-owned enterprises, with private domestic firms able to win any leftovers via auction.

"As the divestment process with Newmont showed, (it) is far too easy to be hijacked by powerful business interests who may not have the best interests of the mine at heart," said risk analyst Keith Loveard of Jakarta-based Concord Consulting.

A recent spat between Nat Rothschild, scion of the European banking dynasty, with his Indonesia partners the Bakrie Group, over boardroom control of Bumi Plc also shows an increasing tussle for control for some of the world's richest mines.

Analysts have said another previous regulation aimed at banning exports of some unprocessed metals from 2014 could also be an attempt to spur some miners to sell assets, since many were unlikely to comply by building costly local smelters. That regulation was introduced despite industry pleas to delay it.

"This is another step towards Indonesia becoming a political oligarchy of resource interests," said Kevin O'Rourke, an independent Jakarta-based political analyst.

(Additional reporting by Rieka Rahadiana, Aditya Suharmoko and Yayat Supriatna in JAKARTA,; Clara Ferreira Marques and Harpreet Bhal in LONDON, Steve James in NEW YORK; Writing by Neil Chatterjee; Editing by Matthew Bigg, Ian Geoghegan, Dave Zimmerman)

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Comments (2)
WJL wrote:
Suharto, the petty dictator propped up by America. The award of these mining leases were probably not open and corrupt.

Mar 07, 2012 4:55am EST  --  Report as abuse
capinfergie wrote:
Re:WJL
You are exactly right. Google Escalante, Clinton and the Riady family. Most under reported scandal of the last two decades. Made the Indonesian clean coal mines the most profitable in the world and sold out our children’s future to China. Shameful.

Mar 07, 2012 6:44am EST  --  Report as abuse
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