Bauxite Mining and Alumina Refinery Investment Environment in Indonesia June 2017 175

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Bauxite Mining and Alumina Refinery

Investment Environment in Indonesia

Michael Scott Carl

michaelcarl@ssek.com

June 14-15, 2017

3rd_{Global Bauxite Conference 2017}

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SSEK INDONESIAN LEGAL CONSULTANTS

Draft of New Mining Law

A. Progress

- Part of the National Legislation Program 2015 – 2019, on the

initiative of the Indonesian Parliament (DPR)

-

Government is still preparing the draft of new mining law

-

Focus group discussions with mining associations and experts of

Commission VII of DPR, meetings with local governments, and

public consultations (Balikpapan, Medan, Surabaya, and Makassar)

have taken place*

* Source: Directorate General of Mineral and Coal, “Strategic Issues and Subsector Regulations of Mineral and Coal”, February 2, 2017,

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Draft New Mining Law

B. Expected Changes

-

Authorities: to be consistent with the Regional Governments Law

-

Adjustment with Constitutional Court decision: stipulation of

mining area, deletion of minimum area of exploration mining

business license, community involvement in the stipulation of

mining area

-

Simplification of licensing

-

Increase of added value of mineral

-

Adjustment of COW and Coal Contract of Work

-

Share Divestment

-

Supervision*

* Source: Directorate General of Mineral and Coal, “Strategic Issues and Subsector Regulations of Mineral and Coal”, February 2, 2017,

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Bauxite Mining in Indonesia

By 2016, the known total resources of bauxite ore in Indonesia was 3.787 million tonnes and the total reserves was 1.282 million tonnes.*

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Bauxite Mining in Indonesia

There is only one alumina processing facility in operation in Indonesia (PT Well Harvest Winning Alumina Refinery in Ketapang, West Kalimantan)*

* Source: Directorate General of Mineral and Coal, Performance Report - 2016

Existing Bauxite Mines:

Riau Islands, West Kalimantan

Existing Bauxite

Smelter/Alumina Processing

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New Regulations

Mineral Processing & Refining, Exports, and Benchmark Price

• Minister of Energy and Mineral Resources (MEMR) Regulation No. 5 of

2017 regarding Increase of Mineral Added Value through Domestic Mineral Processing and Refinery Activities (January 11, 2017), as

amended by MEMR Regulation No. 28 of 2017 (March 31, 2017) (MEMR

Reg 5, as amended)

• MEMR Regulation No. 6 of 2017 regarding Procedures and Requirements

to Grant Export Recommendation for Processed and Refined Minerals (January 11, 2017), as amended by MEMR Regulation No. 35 of 2017

(May 15, 2017) (MEMR Reg 6, as amended)

• MEMR Regulation No. 7 of 2017 regarding Procedures for the Stipulation

of the Benchmark Price for the Sale of Metal Minerals and Coal (January

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New Regulations

Mining Investment and Licensing

• MEMR Regulation No. 13 of 2017 regarding the Amendment of MEMR

Regulation No. 15 of 2016 regarding 3-Hour Licensing for Infrastructure in the Energy and Mineral Resources Sector (February 7, 2017) (MEMR Reg 13)

• MEMR Regulation No. 34 of 2017 regarding Licensing in Mineral and Coal

Mining (May 9, 2017) (MEMR Reg 34)

• Government Regulation No. 1 of 2017 regarding the Fourth Amendment to

Government Regulation No. 23 of 2010 regarding Mineral and Coal Mining Business Activities (January 11, 2017) (GR 1 of 2017)

• MEMR Regulation No. 9 of 2017 regarding Shares Divestment Procedures and

the Mechanism for the Stipulation of the Price of Divested Shares in Mineral and Coal Mining Business Activities (January 20, 2017) (MEMR Reg 9)

• MEMR Regulation No. 15 of 2017 regarding Procedures for the Granting of

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Current Policy on

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Export Ban

• MEMR Reg 5, as amended: Mining companies must perform domestic

processing and refining of mining commodities in accordance with minimum thresholds:

– Processing: the product has unchanged physical and chemical characteristics

as the original mineral

– Refining: extraction and refining to produce products that have different

physical and chemical characteristics from the original mineral

– Exception: mining companies that sell their mining commodities to be

directly used for domestic interest

• Domestic processing and refinery activities may be done by:

– Constructing and owning a smelter; or

– Entering into a cooperation with other mining/smelter companies, in the

form of:

• Sale and purchase of ore/raw material or concentrate; or

• Joint construction of smelter facility

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Minimum Refining/Processing Threshold for Bauxite

Commodity

Minimum Threshold

Ore Mineral

Processing Refinery

Product Quality Product Quality

Bauxite a. Gibbsite b. Diaspore c. Boehmite

- - Oxide Metal/

Hydroxide and Metal

a. Smelter grade alumina ≥ 98%

Al₂O_3;

pressure, fraction size: -20+40 mesh ≤ 5.2% -30+50 mesh ≤ 2.5%; or -40+70 mesh ≤ 2.0% 3) Apparent Specific Gravity

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Relaxation of Export Ban

• MEMR Reg 5, as amended: Export of washed bauxite (Al

2

O

3

≥

42%) in certain amount is

allowed until January 11, 2022

• Mining or smelter company is allowed to conduct such

exports on the following conditions:

– It has constructed or is constructing a refinery facility, whether on its

own or in cooperation with another party;

– It pays export duties as per the applicable regulation; and

– It obtains recommendation for export from the MEMR (c.q.

Directorate General of Mineral and Coal) and approval of export from the Ministry of Trade.

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Reasons for Relaxation of Export Ban

• Companies are facing difficulty constructing smelter facilities:

high cost and high risk

• Decline in global mining commodity prices

• Export of raw materials can be used to help fund the

construction of smelters

• Export relaxation is expected to increase the value of

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Procedure for Export of Washed Bauxite

• MEMR 6/2017:

• MEMR Recommendation period: 1 year and renewable

MEMR

Recommendation

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Procedure to Obtain MEMR Recommendation

for Export of Washed Bauxite

• The requirements to obtain MEMR recommendation to export washed

bauxite emphasize the commitment to construct a smelter. Requirements include:

– Pact of integrity to construct a domestic smelter facility;

– Construction plan for refinery facility, verified by an Independent

Verifier, or if the smelter construction is through a cooperation, a copy of the cooperation agreement;

– Report on the physical progress of the construction, verified by an

Independent Verifier, for the mining/smelter company that has constructed or is constructing the refinery facility;

– Recent Report of Analysis and Certificate of Analysis from an

independent surveyor appointed by MEMR proving that the product has met minimum processing threshold;

– Evidence of payment of royalty (PNBP) for the past one year; and

– Export plan, including the type and amount of metal mineral, loading

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Security Deposit for Export

• Previously, a security deposit was required for an MEMR

Recommendation for Export (Article 15 of MEMR Regulation No. 5

of 2016):

– 5% of the total new investment or 5% of the remaining investment for

construction of refinery facility

– Security deposit may only be disbursed if construction of the refinery facility

reaches 35% of planned construction by no later than January 12, 2022

– If the targeted construction period is not achieved, the security deposit is

forfeited to the state treasury through a perception bank by no later than 3 months from the above date

• The security deposit no longer applies by virtue of MEMR

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Benchmark Pricing

• MEMR Reg 7: Any sale of bauxite or alumina shall refer to the

benchmark price of the metal mineral set by the Directorate

General of Mineral and Coal (DGMC)

• The benchmark price is used as the floor price in the calculation of

royalty payment by mining companies

• The benchmark price formula will be stipulated by the DGMC (and

will be evaluated semi-annually)

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Foreign Shareholding Limitation and

Divestment Requirement

Smelter Companies

• 100% open for foreign ownership

• No share divestment requirement

Mining Companies (IUP and IUPK holders)

• 100% open for foreign ownership if establishing a new company to bid for a

mining license

• Divestment requirement after 5 years of commercial production

• Divestment requirement is gradual from 6th through 10th year after commercial

production

• Divestment procedures and the stipulation of the price of divested shares are set

out under MEMR Reg 9

Acquiring Existing Mining Company

• 75%  maximum foreign ownership if acquiring an existing mining company in

the exploration stage

• 49%  maximum foreign ownership if acquiring an existing mining company in

the operation production stage

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Foreign Shareholding Limitation and

Divestment Requirement

• Divestment  Requirement to sell shares to Indonesian parties, which

include:

– Central Government

– Regional Governments

– State-Owned Enterprises

– Regional-Owned Enterprises

– Indonesian private business entities (in the form of limited liability

company)

• Divesting party cannot provide loan to the Indonesian parties to purchase

the divested shares

• Prohibition on pledging shares that must be divested

• Stipulation of the price of divested shares: fair market value and without

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Foreign Shareholding Limitation and

Divestment Requirement

Year after commercial

production

Mining Companies (IUP or IUPK holders)

6th 20%

7th 30%

8th 37%

9th 44%

10th 51%

Gradual divestment from the 6th_{through 10}th_{year after commercial production}

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Issuance of Mining Licenses by BKPM

• MEMR Regulation No. 25 of 2015 regarding Delegation of

Authority for Granting Mineral and Coal Business Licenses in

the Framework of Integrated Licensing System at the BKPM

• MEMR has delegated the issuance of the following mining

licenses to BKPM:

– Exploration License

– Operation Production License and its extensions

– Trading License and its extensions

– Smelter License and its extensions

– Principal License for Smelter

– Temporary License for transportation and sale

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3-Hour Licensing Process by BKPM

Head of BKPM Regulation No. 8 of 2016 stipulates a three-hour investment

licensing process whereby applicants will be able to obtain 8 products in at least three hours, namely:

– Investment License

– Company Deeds and MOLHR Legalization

– Taxpayer Registration Number (NPWP)

– Company Registration Certificate (TDP)

– Use of Foreign Workers Plan (RPTKA)

– License to Hire Foreign Workers (IMTA)

– Production Import Identification Number (API-P)

– Customs Number (NIK)

– Statement Letter on Map Information of Land Availability (if

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3-Hour Licensing Process by BKPM

To be eligible for 3-hour BKPM licensing, an investor must meet

these requirements:

–

Minimum investment amount of IDR 100 billion and/or

requires a minimum of 1,000 workers

–

Investor appears at BKPM in person or is represented by

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Smelter Licenses (MOI vs. MEMR)

Difference

Smelter licensed by MOI Smelter licensed by MEMR

Location Must be located in an industrial estate or an area zoned for industrial activities, unless due to its raw materials and/or production process, a special location is required (i.e., if the smelter is to be located near the mining area)

Must be located in an area zoned for mining activities

Minimum amount of investment

Minimum investment (equity and loan):

• IDR 10 billion and up

Minimum equity:

Minimum investment (equity and loan):

Minimum equity:

Reporting obligation

Only periodic reports (LKPM) to BKPM

Besides LKPM, there are additional reporting obligations to MEMR:

• Annual Work Plan and Budget

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• A smelter may be licensed by the Minister of Industry (MOI) or the Minister of

Energy and Mineral Resources (MEMR)

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Smelter Licenses (MOI v MEMR)

Difference

Smelter licensed by MOI Smelter licensed by MEMR

_• Monthly, Quarterly and Annual reports

• Term sheet/MOU for any mineral sale

agreement

Term

As long as the smelter company continues in business

30 years and can be extended, each for a maximum 20 years

Transfer of shares Does not require recommendation from MOI

Requires recommendation from MEMR

Application procedures Additional requirements:

• MOU or cooperation agreement with

ore supplier

• Experts in mining or metallurgy having

at least 3 years experience

• MOU with the refined products

purchaser

• Feasibility study approved by MEMR or

Governor

• Corporate documents and mining

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