* Jakarta changing rules on foreign mine ownership
* Indonesia aims to take more profit from resources
* Stocks in U.S. cos, Newmont, Freeport-McMoRan drop
By Reza Thaher and Neil Chatterjee
JAKARTA, March 7 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
"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
"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
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
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.
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
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
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