17 December 2008

Indonesia Passes Comprehensive New Mining Law

By Reuben Carder and Deden Sudrajat, Dow Jones Newswires, 12-16-08 6:49 AM EST

JAKARTA -(Dow Jones)- Indonesia's parliament Tuesday passed a new mining law, significantly replacing the existing contract system with a licensing system wherein mining companies will need to get a permit from local or regional governments for each stage of development of a mine rather than sign a long- term, umbrella contract with the central government, and requiring mining companies to pay 10% of their profits to the local authorities.

The law contains, among other clauses, requirements mining companies develop smelting capacity locally, and indicates state mining firms could be prioritized for permission to develop mineral deposits considered state property.

Analysts and industry executives expressed caution over the comprehensive new law, many aspects of which have been public for some time, saying it could reduce investor confidence in Indonesia and turn away investment.

"The bill has been passed into law, despite (lawmakers from) three parties refusing to approve it," Muhaimin Iskandar, who chaired the plenary session in which parliament passed the bill, told reporters.

Iskandar didn't give further details on the nature of the law.

Separately Tuesday, the Minister for Energy and Mineral Resources told reporters the government intends to honor existing Contracts of Work that mining companies hold, despite passing a new mining law that scraps the contract system.

Yusgiantoro Purnomo said Contracts of Work "already in existence will be honored until their expiration," at which point mining companies keen to continue to invest will have to renegotiate for mining licenses under the new system.

A draft of the law, viewed by Dow Jones Newswires, said existing Contracts of Work and Coal Contracts of Work that mining companies have signed with Jakarta " are to be adjusted (to fit) the new law within one year of the law's passage," indicating holders of such contracts may have to renegotiate them as Mining Licences with regional authorities, and to apply for permits to proceed with the various stages of mine development such as exploration and production.

Some mining industry participants had feared existing Contracts of Work would have to be renegotiated and existing projects would have to continue under Mining Licences.

Though Purnomo has clarified on the issue, the license system could still deter new investors from entering Indonesia, as it diminishes investment security, compared with the guarantee a contract with the central government offers.

Under the new law, exploration permits for metal mining will be effective for a maximum of eight years, and coal mining exploration periods effective for up to seven years.

Mining Companies Must Give Part Of Profits

The draft of the law also shows mining companies will be required to pay 10% of their profits to the government alongside normal royalty payments - 4% to the central government and 6% to various levels of regional authority, another clause that is likely to be unpopular.

The draft didn't specify what the 10% was for, only saying holders of an Operating and Production license will be required to pay.

The new law has been in development for three years and various aspects of it have been publicly discussed, many of them raising concerns within the mining industry itself.

The local mining industry has strongly opposed several aspects of the new law, most notably the shift away from contracts to licenses, which it says doesn't provide the security needed for a large investment to develop a significant mine, and will thus discourage investment in the sector.

Priyo Pribadi Soemarno, executive director of the Indonesian Mining Association, said Monday the 10% additional tax on net profit wouldn't be imposed on companies in any other industry besides mining and constitutes a " burden."

Ari Pitoyo, a mining analyst at Mandiri Sekuritas, said the government's intention to take a tenth of net profit and reclassify mining companies under the general taxation scheme will "create jitters."

The law also contains a requirement companies must develop smelting capacity locally to smelt ore, within five years of the law's passage.

Such a regulation was announced as being under consideration two years ago, and led to concerns input costs will become prohibitive as mining companies will have to build their own smelting capacity rather than contracting it out to others, should it be included in the law.

Another clause states state-owned companies may be prioritized for permission to develop mineral reserves categorized as belonging to the state, indicating such large players as state nickel miner Aneka Tambang (ANTM.JK) and coal producer Pertambangan Batubara Bukit Asam (PTBA.JK) could reap some benefits under the new law.

Many major international mining companies such as Freeport-McMoran Copper & Gold Inc. (FCX) and Newmont Mining Corp. (NEM) have mining concessions in Indonesia.

Rio Tinto PLC (RTP) maintains a presence via its 13% production-sharing venture at Freeport's Grasberg site, the largest gold and third-largest copper mine in the world.

Indonesia holds some of the world's largest deposits of tin, copper, nickel and coal. Despite this, no company has reached a deal to invest in a major project here since the turn of the millennium, which analysts and industry observers attribute to decentralization which has placed more authority over contracts in the hands of the regional governments, which are seen as unreliable.

Budi Irianto, a spokesman at Rio Tinto Indonesia, said: "We are still committed to investing in Sulawesi, but we will first study the new mining law."

Rio Tinto's proposed $2 billion La Sampala nickel development in Sulawesi province is estimated to contain laterite equivalent to about 100,000 metric tons of nickel.

Copyright (c) 2008 Dow Jones & Company, Inc.

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