Adaro's coal mine sees ownership dispute

The ownership of Indonesia's largest coal mine is in dispute, in a battle that pits a local tycoon against one of the country's best-known business families and could affect plans to bring in big new foreign capital to raise the mine's production by 40%, the Dow Jones Newswires reported on Friday.

Indonesian businessman Sukanto Tanoto is trying to regain control of the PT Adaro Indonesia coal mine, in which he used to hold a 40% stake. Deutsche Bank AG (DB) foreclosed on that stake and sold it, in 2002, to a company controlled by Edwin Soeryadjaya, younger son of the founder of one of Indonesia's biggest companies, auto maker PT Astra International (ASII.JK).

On Feb. 25, a Jakarta High Court ruled the foreclosure and sale invalid. Deutsche Bank has appealed the ruling to Indonesia's Supreme Court, and a decision is pending.

At stake is Soeryadjaya's plan to expand the mine, which would boost Indonesia's export revenue at a time when income from oil exports is dwindling. The case is one of several disputes being closely watched by investors, as President Susilo Bambang Yudhoyono attempts to lure back foreign investment, which dropped 26% last year.

Tanoto, who in the 1990s became a major player in Indonesia's pulp and paper industry, declined to publicly comment on the coal case, beyond recent full-page advertisements in Jakarta newspapers outlining his legal claim to control of Adaro.

His lawyer, Lucas, charges that Deutsche Bank sold the stake to Soeryadjaya for well below market price, and that the private nature of the foreclosure and sale also violated Indonesian law. The law "requires a public auction to get the highest and fairest price," said Lucas, who like many Indonesians uses only one name.

Deutsche Bank foreclosed after a company controlled by Tanoto defaulted on repayment of bridge financing for the original purchase of the stake in the mine. Deutsche Bank's lawyer, Amir Syamsuddin, disputed Tanoto's claims and said the company he controls authorized the bank to sell the collateral either through auction or privately.

The Feb. 25 verdict against the foreclosure and sale casts doubt on a recent transaction by Soeryadjaya to buy an additional 41% stake in Adaro from New Hope Corp. (NHC.AU), an Australian coal mining, handling and trading concern. This deal would bring Soeryadjaya's total stake in Adaro to 92%, and could catapult the Soeryadjaya clan back among the ranks of Indonesia's richest families. The Soeryadjaya family lost its majority ownership in Astra when the company's founder sold shares in the early 1990s to deal with financial problems at a family-controlled bank.

Lawyers for Tanoto contend that New Hope can't sell its Adaro stake to a third party without his consent, and that Tanoto has a pre-emptive right to buy it.

Soeryadjaya, who remains Adaro's president pending the Supreme Court ruling, expressed optimism that the judiciary will uphold his purchase of Tanoto's share in Adaro and said that the coal company's expansion plans are intact.

The New Hope deal is scheduled to close in the fourth week of April, pending the Australian company's annual shareholders' meeting. New Hope didn't return calls seeking comment.

The dispute also has cast a shadow over a $950 million financing deal between Soeryadjaya and a consortium -- led by Singapore's state investment company Temasek Holdings Pte. Ltd. and U.S.-based equity financier Farallon Capital Management -- to fund the buyout and provide capital investment to boost Adaro's coal output to 35 million metric tons by 2008 from 25 million tons in 2004. "The recent legal maneuvers...have raised the perceived risk, thus causing us as financiers and banks to raise the risk premium," said one of the financiers involved in the Temasek-Farallon consortium. Temasek declined to comment.

A majority purchase of the mine would be a good move by Soeryadjaya, said Wilson Nababan, president director of PT CISI Raya Utama, a private Jakarta credit-information and corporate-research company. "The coal industry has a bright future, with coal prices rising to $55-$60 per ton currently from $22-$23 three years ago," he said.

The mine, in South Kalimantan province, is considered a prize because its low-ash, low-sulfur coal is more environmentally friendly than most other coals. It has reserves of two billion tons and exports coal to Taiwan and South Korea, as well as Europe and the Americas. The planned expansion is designed to power a significant boost in shipments of coal to China, whose massive industrial engine is becoming increasingly environmentally conscious. (*)