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18 January, 2017
On 11 January 2017, the Indonesian Government issued Government Regulation No.1 of 2017 (“GR 1/2017”) together with two implementing regulations, Ministry of Energy and Mineral Resources Regulations No. 5 and No. 6 of 2017. These new regulations extend the existing ore export ban exemptions (with new conditions), revise the local divestment requirements for mining companies and extend the period to renew mining licenses.
Extension of ore export ban exemptions
GR 1/2017 and its implementing regulations partially extend the existing exemptions to the ore export ban for certain minerals, which was originally scheduled to expire on 11 January 2017. Under the implementing regulations, certain mining companies can, for the next five years, continue to apply for export recommendations for the export of certain processed (but not yet refined) mineral concentrates which have been processed in accordance with the prescribed minimum mineral content. This exemption (consistent with the existing regulations) does not allow for the export of unrefined tin, gold, silver or chromium. Helpfully, the export recommendations will now have a validity period of 12 months (increased from the current term of 6 months).
However, in order to apply for the required recommendation for the export of concentrates, mining companies must now (in addition to the previous requirements):
- provide an “integrity pact” (in the prescribed form) committing to build a refining facility;
- for those mining companies which have already commenced or completed the construction of a refining facility, provide a verification report of such physical development from an independent verifier; and
- provide a report on the latest estimated reserves of the mining company.
The Director General of Minerals and Coal will also evaluate the progress for the construction of the refining facility at least every six months and, if the holder of the ore export recommendation has not achieved 90% of its planned progress, then the ore export recommendation may be revoked.
Further, the ability to apply for an ore export recommendation is limited to mining companies which hold a mining business license (“IUP”) or a special mining business license (“IUPK”) (for production and operation or processing and refining). Importantly, the holders of a contract of work (“COW”) no longer have a regulatory basis to apply for such a recommendation. As a result it appears that any holder of a COW who wishes to apply for an export recommendation for the export of mineral ore must first apply for an IUPK over their mining area, thus further pressuring COW companies to agree with the Government’s request to convert their COWs into a licensing regime.
GR 1/2017 and its implementing regulations also now allow for the export of low-grade nickel (less than 1.7% Cu) and washed bauxite (more than 42% Al2O3) (which were previously not permitted to be exported, except as refined minerals). In order to export such low-grade nickel or washed bauxite, mining companies must also obtain an export recommendation (every 12 months for up to 5 years) and comply with the additional requirements set out above. Further, any export of low-grade nickel can only occur after at least 30% of the total nickel smelting capacity has been utilized for that low-grade nickel.
Updated divestment requirements
In a retrograde step, GR 1/2017 also again amends the local divestment requirements applicable to mining companies. Under regulatory changes in 2014, the maximum foreign ownership of mining companies had been increased to 60% or 70% (with divestment up to the 15th year of production), depending on whether the mining company had its own processing and/or refining facilities or carried out underground mining.
However, the latest position set out in GR 1/2017 is that all mining companies must comply with a maximum foreign ownership of 49% (by the 10th year of production or, for the holders of COWs which have operated for more than 5 years, within 5 further years), irrespective of whether they have their own processing and/or refining facilities or carry out underground mining. This latest unfortunate policy position returns the local divestment requirements to those prescribed by the Indonesian Government prior to 2014.
Extension period to renew IUP/IUPKs
The Indonesian Government has also now issued the long-awaited amendment allowing mining companies to apply for an extension of their IUP/IUPK up to 5 years prior to its expiry. This change will be well received by the mining industry as it should allow greater certainty, planning and investment by mining companies in the years leading up to the expiry of a mining license.
Further commentary
The fledgling processing and refining industry in Indonesia has been very critical of the decision by the Indonesian Government to continue to allow the limited export of mineral concentrates, including the new regime allowing the export of low-grade nickel and washed bauxite. While the processing and refining industry has obtained licenses for at least 32 new smelters within the past four years, reportedly only two of these new smelter projects have actually commenced operations. As a result, while GR 1/2017 and its implementing regulations will be seen as a hit to the local processing and refining industry, the Indonesian Government has effectively been forced into this position through its own policies which have not allowed for the efficient construction of sufficient refining capacity in the country.
GR 1/2017 also represents a significant landmark in the stalemate between mining companies and the Indonesian Government for the long-running re-negotiation of the terms of COWs and the conversion of all COWs into IUP/IUPKs. While the 2009 Mining Law required all COWs to be adjusted in accordance with the provisions of the Mining Law by 2010, to date, only a relatively small number of COWs have been adjusted. By using the licensing process for the export of ore concentrates as leverage, the Indonesian Government is playing a strong hand in trying to force major mining companies (most notably Freeport and Medco, as the owners of the large Grasberg and Batu Hijau mines) into agreeing to convert their COWs into IUPKs. GR 1/2017 and the latest implementing regulations purport to state that if the Indonesian Government accepts an application from the holder of a COW for an IUPK and issues an IUPK then the COW will be terminated. However, we expect that the holders of COWs will seek to strongly defend the preferential treatment under their existing COWs (as previously granted by the Government), including the lower income tax rates and different local divestment requirements enjoyed under those agreements. While preliminary reports suggests that both Freeport and Medco are reporting considering converting their COWs into IUP/IUPKs in exchange for export permits, the risk of dispute with the Indonesian Government in relation to a number of key rights of mining companies under their COWs remains high.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
david.dawborn@hbtlaw.com
