The Government of the Republic of Indonesia on 11 January 2017 issued new mining regulations regulating (i) ‘new’ share divestment requirements for foreign investment companies holding an IUP or IUPK; and (ii) new export requirements for contract of works (CoW) holders who will likely be required to convert their CoW into an IUPK in order to continue exporting mineral concentrates.
‘New’ unified share divestment requirements
Government Regulation No 1 of 2017 (GR 1/2017) has re-introduced unified share divestment rules applicable for all foreign-owned mining companies holding mining licences, regardless of: the mining method used by the mining companies (open pit or underground) or whether the mining companies undertake their own processing/purification activities in Indonesia. This change brings us back to the previous position under GR 24/2012.
Pursuant to GR 1/2017, after the fifth year of production, a foreign investment holder of a mining licence (izin usaha pertambangan, IUP) or a special mining licence (izin usaha pertambangan khusus, IUPK) must gradually divest its shares so that by the tenth year of production, 51% of shares in the company are owned by Indonesian parties. The minimum Indonesian share ownership for each year, after the fifth year of production, is as follows:
The unification of the divestment rules would certainly affect IUP holders who expect to get the benefit from the indulgence to have extra share ownership under the GR 77/2014 qualifiers (additional 21% in 10th year for those undertaking underground mining activities and/or open pit mining activities, or a total 70% foreign ownership; and additional 11% in 10th year for those having an integrated processing or refining facility, or a total 60% foreign ownership).
As part of the implementation of GR 1/2017, the Minister of Energy and Mineral Resources (MEMR) on 20 January 2017 issued MEMR Regulation No. 9 of 2017 on the Divestment Procedures and Pricing Mechanism (MEMR Reg 9/2017). Under MEMR Reg 9/2017, the divested shares must be offered to Indonesian parties and the central government must be prioritised. If the government declines to take the divested shares, then the shares shall be offered to (in order of priority): the provincial government (at the provincial or the regional/municipal level); state owned entities or region owned entities; and, lastly, national private entities. The offer to the state owned entities or region owned entities and Indonesian national private entities will be conducted by way of tender. In the event where the divestment fails to be conducted through the stages offer, MEMR Reg 9/2017 allows share divestment to be conducted through public offering or IPO. Unlike the previous regulations, MEMR Reg 9/2017 introduces new provisions on divestment such as an offering period of 12 months and pricing which shall be based on fair market price.
In respect of CoW holders, MEMR Reg 9/2017 stipulates that the divestment provisions shall also apply to CoW holders. This is rather surprising because GR 1/2017 is silent on the divestment position for CoW holders, which would presumably be interpreted as following the terms of the CoW. In our view, as long as the divestment provisions in the CoW have not been amended, where there is a conflict between the divestment provisions in the CoW and those set out in MEMR 9/2017, the provisions in the CoW should prevail. The provisions in MEMR 9/2017 may still apply to CoW holders where those provisions have not been regulated in the CoW. For example, where a CoW does not contain a mechanism to determine the price per share for shares to be divested.
New export requirements
The ban on the export of mineral concentrates which was due to take effect in mid-January 2017 has been lifted. Export of certain mineral concentrates will now be permitted for the next five years (until 11 January 2022) as long as: (i) in respect of CoW holder, the CoW is converted into IUPK; (ii) those minerals have been processed until they reach the processing threshold set out in the regulation; and (iii) the relevant exporter obtains export approval from the Minister of Trade and an export recommendation from MEMR (which is still required every year). In order to obtain the export approval and recommendation, the exporter must show progress in the construction of its smelter. MEMR will periodically monitor progress of the smelter construction. Any delay in the smelter construction may lead to the revocation of the export recommendation.
Conversion of CoW into an IUPK
Accordingly, a CoW holder who wishes to continue to export mineral concentrates and enjoy the five year relaxation will have no option but to convert the CoW into an IUPK. There is no need to convert the CoW into IUPK if it has refined its minerals domestically according to the refining threshold set by the regulation.
The new regulations arguably adversely affect IUP holders who have started underground mining with the expectation to be able to hold more than 49% by foreigners. It will also affect refinery or smelting companies that expect to be able to process and refine minerals from others by 2017 as now there will be another five years grace period for the minerals to be exported in the form of concentrate.
Clearly the introduction of the new mining regulations is a sign from the government that it continues to push CoW holders to convert into IUPK although it still leaves some leeway for CoW holders to stay as they are and use smelters or refineries of other companies.