28 January 2014
Indonesian Mining Law – What's Going On?
Practice Group(s):
By Chris Scott, Perth and Lian Yok Tan, Singapore
Energy, Infrastructure
and Resources
Resources nationalism is not confined to Africa. In 2009, the Indonesian Parliament
passed a new Mining Law (Law No. 4 of 2009 on Mineral and Coal Mining). In addition to
replacing the established "Contract of Work" system1 with a permitting (IUP2) system,
the Mining Law has two aspects which have caused a dampening effect on foreign
investment in the resources sector. These are:
 export of unprocessed minerals after 12 January 2014 is prohibited, requiring mining
companies to process and refine their product in Indonesia
 accelerated divestment requirement, under which foreign shareholders in companies
holding a mining production permit are required to divest shares to achieve majority
Indonesian ownership within 10 years from the commencement of commercial
production.
The Mining Law deliberately left some important aspects to be dealt with by way of
Ministerial Regulations and included a number of internal inconsistencies or apparent
contradictions, which have required elucidation by Ministerial Regulations. In each case,
the two principles referred to above have recently been the subject of clarifying
Ministerial or Presidential regulations, which are discussed below.
Value Adding Requirement
The Mining Law requires all mineral ores to be processed in Indonesia before being
exported. Under the law, raw ores and semi-processed minerals with purity levels below
the Government's threshold can no longer be exported after 12 January 2014.
However, it became apparent in late 2013 that, despite five years lead time, very few if
any Indonesian miners had arranged compliance with the obligation to set up processing
plants to process their ore to the required standard set by the Government. Given the
importance of mining to the economy, both in terms of exports and employment, the
Government sought the consent of Parliament to amend the Mining Law to extend the
time for compliance with this processing requirement but the Parliament did not agree.
Faced with a prospect of the country's commodity export trade grinding to a halt,
unemployment in the sector (during an election year) and a black hole in the State
budget, the Government has implemented a two tier solution. This is outlined below.
Tier One Solution
Under Government Regulation No. 1 of 2014 re Increase of Mineral Value Added
Through Domestic Processing & Refining (GR 1/2014), the purity threshold for many
minerals (excluding nickel, bauxite, chromium, gold, silver and tin for which smelting
capacity exists) has been significantly reduced, on a temporary basis for a period of three
years, to permit those minerals to continue to be exported in semi-processed form by
1
Until the 2009 Mining Law, the only means for a foreign-owned company to mine in Indonesia was to sign a contract
with the Government of Indonesia, under which it mined on behalf of the Government. Such contracts are legally
binding on both parties. This practice has been discontinued, but existing Contracts of Work remain on foot, although
they are supposed to be "adjusted" to comply with the 2009 Mining Law (it is uncertain what this means in practice).
2
Izin Usaha Pertambangan (Permit to carry on mining business) – issued in two stages: Exploration IUP and
Exploitation (production) IUP.
Indonesian Mining Law – What's Going On?
companies which have evidenced an intention to set up their own processing facilities.
For example, GR 1/2014 specifies the following (probably temporarily) reduced minimum
required levels of purity:
Mineral
Previous purity
requirement
GR 1/2014
requirement
Copper
99%
15%
Iron Ore
80 – 88%
62%
Lead
99.85%
57%
Zinc
90%
52%
Various
49%
Titanium
94%
56 – 58%
Ilmenite
98%
56%
Manganese
Tier Two Solution
Under Ministry of Finance Regulation No.6 of 2014 re Determination of Export Goods
that are subject to Export Duty and the Export Duty Tariff (MoFR 6/2014), to encourage
companies to progress their plans for processing plants, semi-processed minerals will be
subject to an export duty during the period of the reduced thresholds, at a progressive
rate commencing at 25% (for copper concentrates) and 20% for other specified
concentrates and increasing to 60% after three years. In order to discourage massive
exports of raw minerals before the export ban came into force, Indonesia has charged an
export duty of 20% on ore exports since 2012. 3
Discussion
The effect of these reductions is, in many instances, to permit existing miners to continue
exporting semi-processed minerals at their current level of purity for the time being. The
reduction is effected by Government Regulation and so could be amended at any time by
another Government Regulation issued by the President. The Government's intention is
to give mining companies more time to build and commission processing plants.
Whether this intention will be realised remains to be seen.
GR1/2014 and MoFR 6/2014 apply to all mining companies, whether the mining
company holds an IUP or a Contract of Work. It remains to be seen what will be the
outcome where the terms of a Contract of Work (which remains valid and binding but are
required to be adjusted to comply with the 2009 Mining Law) are inconsistent with the
new Regulations. There are a number of inconsistencies and uncertainties to be worked
through, reflecting the last minute compromise nature of the new regulations.
Additionally, the Trade Ministry and the Energy and Mineral Resources Ministry have
announced a new export regime, requiring from 3 February 2014 for all mineral exporters
to:
 be registered at the Trade Ministry
3
In 2012, an export tax of 20% was imposed on ore exports. No export tax was imposed on concentrates. However,
this year, MoFR 6/2014 imposes a progressive export tax on concentrates
.4 "Penanaman Modal Asing" or foreign investment company.
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Indonesian Mining Law – What's Going On?
 undergo pre-shipment verification that the exporter has met the processing level set
by the Energy and Mineral Resources Ministry for exporters of processed minerals
(copper, iron and manganese concentrates, but not refined products, such as nickel
matte and ferro nickel) to obtain export permits from the Trade Ministry to ship their
products overseas.
Limits on Foreign Ownership
The Mining Law provided that mining for minerals and coal in Indonesia was a permitted
area of foreign investment, subject to an obligation on the foreign shareholder to
progressively divest its shareholding to a minority stake over time. This obligation was
elucidated in two Ministerial Regulations, most recently in September 2013, under
Regulation 27 of 2013. Previously, Regulation 23 of 2010 had provided that initially a
company holding a production IUP could be 100% foreign-owned, but that foreign
shareholder had to progressively divest shares, from the date of commencement of
production, to procure a minimum:
 20% local ownership by year six
 30% local ownership by year seven
 37% local ownership by year eight
 44% local ownership by year nine
 51% local ownership by year 10.
These limits still apply, unless by the end of year five, the minimum local ownership
threshold has already been achieved (permitting a private sale).
However, Regulation 27 of 2013 went further. In the context that most IUPs historically
had been held by 100% domestically-owned Indonesian companies, the Regulation
provided that, where such a company changes its status to permit foreign shareholdings
(ie to become a "PMA"4 company) or ownership of foreign shares in a PMA company
changes hands, the maximum permitted foreign shareholding in the PMA company is to
be only:
 75% (subject to divestment, as above) for a company holding an exploration IUP
 49% for a company holding a production IUP.
This has the effect of accelerating the local ownership requirement if a foreign owner
seeks to sell its interest before the sixth year of production and inhibiting sales by foreign
investors of interests in operating mines (although a change of ownership of an offshore
holding company will not trigger the provision).
For example, if a foreign company holding an exploration IUP has 80% ownership, and
wishes to sell its shares to another foreign company, the maximum foreign ownership
would be restricted to 75% – the extra 5% would need to be sold to qualifying
Indonesians. If the IUP were a production IUP, the maximum foreign ownership that an
incoming foreign investor could acquire in the company holding the IUP would be only
49%.
Floating the company on the Indonesian Stock Exchange does not satisfy the divestment
requirement to sell to local participants.
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"Penanaman Modal Asing" or foreign investment company.
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Indonesian Mining Law – What's Going On?
There are number of practical issues associated with the divestment/local ownership
requirement.
 The shares must be offered in a mandated order of priority:
o first to central, provincial and regional governments, each of which require the
approval of their respective legislative bodies to approve the acquisition
o if they do not take up the offer, to state-owned or regional-owned enterprises, by
tender
o if they do not take up the offer, to private Indonesian parties, by tender.
This process is likely to cause delay and add cost and will not necessarily give the
foreign investor the best economic outcome.
 The transfer price is a mandated "appraisal price", based on historic net cost rather
than discounted future value or market value. This price acts as a "cap" on the price a
Government body must pay and as a "floor" price for other approved buyers. The
foreign shareholder is therefore unlikely to achieve substantial return on its investment
other than cost-recovery (less depreciation and amortisation).
 Consent is required from BKPM (Investment Coordinating Board) and the Minister of
Energy and Mineral Resources for a transfer of shares in a foreign investment mining
company.
It remains unclear the extent to which these Regulations apply to the quite different
divestment requirements under ongoing Contracts of Work. Even though the Mining Law
provides that these ongoing contracts are to be aligned with the new law, Contract of
Work holders are likely to take the position that the existing provisions are contractually
agreed and binding on the Government.
Authors:
Chris Scott
chris.scott@klgates.com
+61.8.9216.0933
Lian Yok Tan
lian.tan@klgates.com
+65.6507.8105
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Indonesian Mining Law – What's Going On?
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