11 April, 2016
In brief
In January 2009, the Indonesian Government issued a new Mining Law which, as well as introducing an entirely new mining licensing regime, imposed an obligation on mining license holders to process and refine/smelt their mining products domestically.
Summary
The Mining Law states that holders of existing contracts of work were required to comply with this local processing obligation within 5 years (i.e. by January 2014). To help enforce this local processing obligation, the Indonesian Government first imposed a blanket ban on the export of raw ore after January 2014. However, this was later extended and watered-down for certain commodities (including copper, iron and zinc) to an obligation to obtain an ore export permit (attracting higher export tariffs, up to 60% in 2016 depending on the company's progress in relation to its smelter construction) if the relevant mining company could demonstrate its seriousness in the process of building a smelter or downstream processing facility.
However, with the downturn of the global commodities market and the looming re-imposition of the blanket ore export ban (due to become effective on 10 January 2017), the Indonesian Government is again showing signs that it is considering extending the timeframe for the implementation of the local processing obligation. One of the key reasons for this proposed extension is the acknowledgement by the Indonesian Government that most of these smelter projects are currently economically unviable and, in many cases, limited by serious public infrastructure issues. To date, only a handful of new small-scale smelters have been built and there is still no timeline for a copper smelter, which is generally seen by the Indonesian Government as the most important in terms of size and value.
Another rumoured amendment to the Mining Law is the ability for the holders of contracts of work to make early applications for the extension of their contracts. Currently, the holders of contracts of work can only apply for an extension to their contract two years prior to their expiry. This is proving particularly difficult for Freeport (the owner of Indonesia’s largest copper and gold mine) whose contract of work expires in 2021 but requires certainty of business continuation beyond 2021 before embarking on its next capital-intensive long-term expansion program.
The proposed amendments to the Mining Law are expected to be debated and passed later in the year.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
david.dawborn@hbtlaw.com
