Sector outlook, Mining, Resource Nationalism, CLSA

Indonesia has released a Presidential Instruction restricting foreign ownership of mining concessions after 10 years of production to 49%. The rule only affects new generation mining concessions (IUPs) which are governed by the 2009 mining law. It does not affect holders of Contracts of Work which were issued up until 2000 and is not retroactive. We see limited potential impact on existing miners under our coverage including ITMG which is 65% owned by Banpu.


The rule only affects new/renewed concessions
 The Presidential Regulation clearly stipulates that the rule only applies to IUPs and IUPKs which are governed by the 2009 mining law.
 Existing Contracts of Work are not affected as they have terms which rank above the prevailing regulations.
 The government has also clarified that existing IUPs and IUPKs issued before the instruction (Feb 21st 2012) are unaffected.

Not new: the rule has been flagged as part of a 2009 mining law
 Whilst hitting the headlines again after a Presidential Instruction was released, the requirement has been around since the 2009 mining law was published.
 The Presidential Instruction sets forth the expected timeline for divestment and the order by which a stake in the mining projects must be offered to local interests.
Preference to the state, then private interests
 A clear hierarchy of divestment options is presented in the law.
 The Central Government is given first right of refusal, followed by regional governments then SOEs.
 If no government bodies are interested, private Indonesian companies may participate in a tender to purchase a stake.

Limited impact on the incumbents
 All of the coal companies under our coverage, except ITMG, are majority owned by Indonesian interests (private individuals or the government in the case of PTBA).
 For ITMG, all existing production is unaffected. The rule does potentially preclude the company for bidding for any new concessions issued after Feb 21st this year.
 Vale Indonesia operates under a mineral Contract of Work which is unaffected.
 Rules such as this will deter further foreign direct investment in new mining projects in our view.

Download file : Indonesia Mining Sector 080312