Indonesia’s draft regulations on Mineral and Coal Mining activities

Although Indonesia’s new Minerals and Coal Mining Law (New Mining Law), came into effect on 12 January 2009, much of the regulatory detail is determined by implementing regulations produced by the Ministry of Energy and Minerals Resources (MoEMR) and submitted for approval to the House of Representatives within 12 months of the passing of the law. In November, the Ministry circulated for consideration and discussion by interested parties, the fourth draft of the Implementing Regulation for Mineral and Coal Mining Enterprise Activities (MCME). It provides the best available indication of what the Indonesian Government’s current thinking is on a number of important issues left unresolved by the New Mining Law itself.

The following Executive Summary* has been provided by Bill Sullivan, Licensed Foreign Advocate with Christian Teo & Associates, a leader in Indonesian mining law and practice (Email:; Office: +62 21 5150280; Cell: +62 815 85060978):

THE FOURTH DRAFT Implementing Regulation for Mineral and Coal Mining Enterprise Activities has clarified a number of important issues regarding Indonesia’s New Mining Law. The administrative, technical and financial requirements for participants in tenders for Exploration IUPs (Ijin Usaha Pertambangan - Mining Business Licenses) and IUPKs (Izin Usaha Pertambangan Khusus – Special Mining Business Licenses) have now been made clearer.

Multiple Permits

A business entity, cooperative or individual, having the intention to carry out metal or coal mining, may only hold one WIUP (Wilayah Ijin Usaha Pertambangan Khusus - Mining Business License Areas) while a publicly listed company may hold more than one WIUP for one commodity. A business entity may only hold one WIUPK. The holder of an Exploration IUP/IUPK is guaranteed the right to obtain a Production Operation IUP/IUPK without going through a tender process.

An Exploration IUP/IUPK holder also has a first priority right to exploit minerals other than the type specified in its IUP/IUPK and may submit a new application to the relevant government authority for a separate Exploration IUP in respect of the same.

Benchmark Pricing

For the purpose of meeting domestic needs for minerals and coal only, the Indonesian Government has the right to determine the domestic selling price of the minerals and coal as well as control other aspects of the production, supply and sale of minerals and coal.

It has become somewhat clearer what will be sufficient to satisfy the local “processing and refining” requirement in certain instances. In the case of coal only, crushing, washing and blending (among other things) will constitute “processing and refining”. Any sales of minerals and coal production by a IUP/IUPK holder to its affiliates must obtain prior approval from MoEMR.

MoEMR will set a benchmark price for minerals and coal having regard to international market conditions. The benchmark price for coal only will be set on the basis of FOB delivery. IUP/IUPK holders will be prohibited from selling minerals and coal at a price below the specified benchmark price. If the actual selling price of minerals and coal is less than the specified benchmark price (i) the selling price will be subject to adjustment in order to bring the same into line with the benchmark price, (ii) the shortfall in selling price must be paid to the Government and (iii) the seller will be liable to a fine.

Not later than 90 days after the fifth anniversary of production, a 100% foreign owned IUP/IUPK holder must divest shares (“Divestiture Shares”) to local parties such that local parties hold a minimum of 20% of the issued capital of the IUP/IUPK holder. The Divestiture Shares must be offered to the Government (BUMN – national state-owned enterprise or BUMD regional state-owned enterprise). The Government must accept the offer within 60 days or, otherwise, the Divestiture Shares are then to be offered to national private business entities which must accept the offer within 30 days. The purchase price for the Divestiture Shares will be determined based on the amount of investment that has been made/spent by the Production Operation IUP/IUPK holder from the exploration stage until the fifth year of production operation less depreciation in accordance with the prevailing laws and regulations.

The local Indonesian party, who wishes to acquire the Divestiture Shares, must pay the purchase price for the Divestiture Shares not later than 90 days after the local Indonesian party expresses its intention to acquire the Divestiture Shares. The local Indonesian party, who acquires the Divestiture Shares, is to be protected against subsequent dilution.

Conversions and Tenders

If, at the expiry of a Production Operation IUP/IUPK, the subject WIUP/WIUPK still contains material recoverable reserves, the WIUP/WIUPK will be re-tendered, with the previous IUP/IUPK holder having the right to “match” the highest tender price and thereby, once again, secure control of the WIUP/WIUPK.

Existing KPs (Kuasa Pertambangan – Mining Permit) are to be converted into IUPs not later than the first anniversary of the Implementing Regulations. Existing Contracts of Work and PKP2Bs (Perjanjian Karya Pengusahaan Pertambangan Batubara – Coal Mining Work Agreements), that are in the production operation stage, are to be extendable twice, each for up to a further 10 years, by conversion to a Production Operation IUP, without going through tender process.

The holders of IUPs, IUPKs, IPRs, (Izin Pertambangan Rakyat – Small Scale Mining Permit), Contracts of Works and PKP2Bs, in the production operation stage and having processing facilities are allowed to accept mining materials from other IUP, IUPK, IPR, Contract of Works and PKP2B holders, for processing, up to the level of installed production capacity, pursuant to a Memorandum of Understanding.

A party that already has more than one KP and/or in respect of more than one commodity is allowed to keep the multiple KPs until the expiry of the KPs provided that: (a) once the KPs have been expired, the same must be converted into IUPs; and (b) if the areas covered by the KPs are situated within the same Regency/City, those KPs may be combined to become one IUP regardless to the size of the area.

The Fourth Draft Implementing Regulation for MCME Activities says nothing new about, to what extent, the Indonesian Government will push for the financial and other terms of Contracts of Work and PKP2Bs to be brought into line with the New Mining Law. Notwithstanding this, readers should be aware that, at a meeting with MoEMR officials on 15 June 2009, the holders of all Contracts of Work and PKP2Bs were presented with a list of proposed amendments to Contracts of Work and PKP2Bs which MoEMR wants holders to accept.

Further clarification required

Notwithstanding the above, there remain many areas of uncertainty in the New Mining Law which have not been fully resolved by the Fourth Draft Implementing Regulation for MCME Activities. Also, the Fourth Draft Implementing Regulation for MCME Activities gives rise to its own uncertainties. Accordingly, further clarification is still required in respect of a number of issues which are likely to be very important to foreign investors and their professional advisers. These outstanding and unresolved issues include the following:

(a) Local Processing & Refining: In the case of metal minerals that are capable of being processed and refined into successive and more highly value added products, what is the level of processing and refining which the IUP/IUPK holder must carry out in Indonesia? The reference in Article 54(2) of the Fourth Draft Implementing Regulation for MCME Activities to “processing” and “refining” leaves this entirely unclear.

(b) Divestiture: What about IUP/IUPK holders that are more than 80% but less than 100% foreign owned? Will the divestiture requirement apply to these IUP/IUPK holders on a proportionate basis?

(c) Must a local Indonesian party, who acquires the Divestiture Shares, be able to pay, in full, the purchase price for the Divestiture Shares within the determined period (ie, 90 days) or are the parties free to negotiate the terms of payment?

(d) How will the anti-dilution protection work?

(e) Benchmark Prices: Do the MoEMR determined Benchmark Prices for minerals and coal only apply to export sales or do they also apply to domestic sales?

(f) What happens to existing long term or fixed period supply arrangements which do not comply with the Benchmark Price requirements?

(g) Conversion of KPs: How will the conversion of KPs to IUPs be carried out? The mechanics of the conversion process remain unspecified.

It is hoped and expected that the remaining areas of uncertainty concerning the New Mining Law and the Fourth Draft Implementing Regulation for MCME Activities (some only of which are highlighted above) will be resolved in the final version of the Implementing Regulation for MCME Activities.

*Contact the author for earlier summary and analysis of the New Mining Law itself; the final form of the Implementing Regulation in respect of Mining Services; and the second draft of three additional Implementing Regulations in respect of Mining Area Determination, Direction and Supervision of Mining Business and Reclamation & Post Mining Activities.