Interview: MEMI investing the future in coal and new gold business opportunity

By Thomas Sembiring

PT Medco Energi Mining Internasional (MEMI) started its coal mining business in Nunukan, North Kalimantan Province, in 2005.  The company has endured the ups and downs of the coal industry, which has seen some mines in the region closed down over the years due to global coal price volatility and unfavorable government policy.

MEMI has not only survived the global coal market downturn in recent years, but is now set to expand its coal mining operations and is looking to diversify into gold.

Since early this year, the company has been spun-off from IDX-listed PT Medco Energi Internasional Tbk, the flagship company of Medco Group, providing it with the freedom to make business maneuver without fear of influencing the stock price of Medco Energi Internasional.  

Petromindo.com/Coal Asia’s reporter Thomas Sembiring and photographer Mudasir recently interviewed MEMI Chief Operating Officer F. Hary Kristiono regarding the company’s operating performance, industry development, and expansion plans.  Following are the excerpts of the interview.

What is the latest development of MEMI following recent acquisition of a new coal asset?

We initially have two (coal mine) assets.  The first is Duta Tambang Rekayasa with (annual) production capacity of 600,000 tons.  Another is Duta Tambang Sumber Alam with (annual) capacity of 300,000 tons.  The two, located in Nunukan, North Kalimantan, specialize in high calorific value and high sulphur coal for cement and smelting plant in India, Thailand, Vietnam, Cambodia, & Philippine..

We have been asked by the owner (of MEMI, the Arifin Panigoro Family, founding owner of Medco Group) to grow so that within the next two years sales capacity can reach three vessels.  By relying only on the Nunukan mines, it (sales) can only reach two vessels.

That’s why this year we’re opening (new mine) in Samarinda (East Kalimantan) with production capacity of 300,000 tons.  Going forward production capacity from this Mahakam Cluster in East Kalimantan will increase to 1 million tons per year because there are five prospecs or five IUP (mining business license) mines with which we can form cooperation.  We have just secured one called Borneo Mas Hitam.  Hopefully, the other four will follow suit, so that the total capacity will reach 1 million tons.

The calorific value (CV) of coal (in the Mahakam Cluster) varies as compared to coal in Nunukan where the coal has sulphur content of 3.5 percent and CV of 6,500 GAR/Gross As Received (kcal/kg), which are mostly dedicated for cement makers.  The sulphur content (of our current asset in Mahakam Cluster) is 2 percent with CV of 6,500 GAR/Gross As Received.  One potential asset has CV of 6,000 GAR/Gross As Received and total sulphur of 1 percent.

Maiden shipment of our new asset (in the Mahakam Cluster) is expected to be made in September this year starting with one vessel of 25,000 tons. 

How was the operating performance in the first quarter of this year?

Our coal production (in the first quarter) only came from Duta Tambang Rekayasa, at a rate of 50,000 tons (per month), or around 150,000 tons (in the first quarter).

The other mine (Duta Tambang Sumber Alam and Nunukan Bara Sentosa, in Nunukan) will start production next year at around 900,000 tons. Together with the (production) from in the Mahakam Cluster, total (annual) production (of MEMI) will be around 2 million tons within the next two years (2021).  This is in line with the aspiration of our owner for sales to reach around three vessels per month.

What is your estimate for second quarter performance?

The coal market during the second quarter was in quite difficult condition.  This was compounded with government policies introduced last year such DMO (domestic market obligation), and the requirement to use the services of domestic insurance firms and national ships in carrying out export.  Previously, we’re not responsible for the insuranc cost (in export transaction), but now we have to buy the insurance policy, which increases cost.

Our coal production (in second quarter) is estimated to remain stable at around 150,000 tons.  The price is estimated to be lower, which will translate into lower revenue.  How much lower? It will depend on the our niche market of cement industry, which we believe the demand still exist.

What about sales picture in the first and second quarter.  Will there be changes?

Not really.  We have gradually shifted (our export market).  The India market is quite price sensitive.  When the price index is down, they (Indian buyers) purchase plenty of coal.  If the price index is up, they suspend (purchase).  Our initial production went to India.  But gradually since last year, we have shifted to Southeast Asia markets such as Vietnam, the Philippines, Thailand, Cambodia, and Myanmar.  So in the last year only 20% export was made to India.

With the upcoming maiden shipment from the Mahakam Cluster, do you allocate special capital expenditure (capex)?

It must be informed that we have not been using (third party) mining contractors.  We have been developing the mine by our own.  The capex for this year, with additional output expected from Mahakam Cluster, is around US$24 million, while opex (operating expenditure) is around $41 million.  Most were allocated for heavy equipment, excluding for acquisition plan.

Our acquisition model is through cooperation.  Of course, we have acquisition budget but the size is small.  We’ll later take over the mines.  But not full takeover because it will be quite heavy on the capex.  We want majority (ownership).  So the target is to acquire between 70 percent-90 percent ownership.

What about plans for next year?

For this year, output from Nunukan Cluster is expected to remain at around 600,000 tons.   Mahakam is expected 300,000 tons. 

Next year, output from the Nunukan Cluster is projected to reach around 1.2 million tons with additional output from Duta Tambang Sumber Alam and Nunukan Bara Sentosa.  Meanwhile, output from Mahakam Cluster will remain at 300,000 tons.

Within the next two years, in 2021, Nunukan Cluster (production) will be stable at 1.2 million tons, and (production) at Mahakam Cluster is expected to increase to 1 million tons.  I can’t disclose the prospect yet because we have yet to hold (the other potential assets in Mahakam Cluster).

MEMI has previously said it was looking to diversify into gold.  What is the progress?

We have been spun-off from PT Medco Energi Internasional Tbk since February this year.  So MEMI is now 100 percent owned by Pak (honorific) Arifin Panigoro Family.  We’re now independent (of Medco Energi Internasional), and is now a fully privately-owned company, with a focus on mining.   

With this new entity concept, we’re trying to diversify into gold (mining).  It will not be in the scale (equipped) with smelter (operation), but it will be using the heap leach technology.   We’re moving toward this direction. 

We’re also looking at another (gold mining) opportunity not in Indonesia, but in Suriname.  We have been invited by the (Suriname) Prime Minister to team up with that country’s state-owned mining firm.  This year, we’re studying (the gold potential) in Suriname, in the hope that we’ll be focusing on gold (mining) without smelter (operation).  It will not be like the scale of operations of PT Freeport Indonesia (in Papua Province) or PT Amman Mineral Nusa Tenggara (in West Nusa Tenggara).  The model will be more like the operation of the Martabe gold mine (in North Sumatra).  

Have you set up a joint venture for the Suriname project?

Not yet.  It’s still at the (stage of) MEMI and Government of Suriname.  The Suriname government-owned company had signed a MOU with MEMI.   We have visited the country.  We’re currently at the phase of conducting feasibility, or desk study.  We’re studying their data, and then we’ll make decision. 

What is the reason to go to Suriname?  How large is the gold mining potential in that country?

The mining potential picture of the country is that about 80 percent is still in the form of forest area.  Only around 20 percent have been opened up, near the Atlantic Ocean.  So there’s much of untapped potential.  It’s like Indonesia (mining sector) in the 1970s.  All are handled by the government. 

The duration period of the country’s leadership is also similar to Indonesia, allowing room for two-term of leadership.  This will allow for a sustainable policy.  So what we see is that the opportunity there is still green.

How serious are you to invest in Suriname?  What are the preparations?

I don’t know yet.  Hopefully, the desk study can be completed by year-end so that we can know how much investment is required.  We could decide this year whether we’ll invest there or not.  Because they also need electricity and other things, etc.

How does MEMI respond to government policy of requiring the use of national vessels in the export of coal?  This policy has been considered of creating heavy burden for the coal industry?  

Yes of course.   The cost (of export) will increase.  Our response is the same as APBI’s (the Indonesia Coal Mining Association).  We have expressed our response during the focused group of discussion and to the government working committee.  We condier this (policy) as quite disturbing to our (coal) production, which of course at the end will also affect royalty (payment to the government) and state revenue.  Using national vessels (for export) is not competitive yet.       

What is the progress of the underground coal gasification (UCG) project?

Six years ago, we initiated what we called energy security project, and found quite large of gas potential from coal (in South Sumatra). 

But it’s still in the form of resources, which must be converted into reserves.  To realize this, we must have IUP (mining business license) for exploration.  But the government for the past six years have suspended the issuance of (new) IUP license for exploration.

We have asked for the government to give us the license.  But the government said it can’t.  It must be offered via auction. 

We’ve met with the minister (of energy and mineral resources).  But the reply was quite simple.  Our existing law does not allow for the government to assign a new coal IUP to a particular company without tender process, although we have fulfilled the requirements for such assignment such as teaming up with a government agency, in this case with Tekmira (the ministry’s Center for Research and Development of Coal and Mineral Technology).   

We’re told to carry out drilling and site characterization.  And then if we find potential, we must carry out flare stage, and then stop. And then tender process will proceed, where Medco will have the right to match.

Just imagine, once we succeed, we’re told to stop.  We may not necessarily be able proceed with the project, although we have made investment in it.  So we asked for the tender to be held now (before making investment), and we’re going to participate.  But then they (the ministry) was also confused because there’s no (initial) data (for holding the tender). 

That’s the condition.  The regulation is not quite right.  

Is there sill opportunity to resume the UCG project?

I think that whether it will be run by Medco or not, this (UCG project) must proceed.  That’s why through Tekmira, DEN, University, & APBI we have been campaigning to push this (UCG development) because it’s related to (the country’s) energy security.  This is actually our common homework.  There has to be a change in the law.  

If you follow the Medco Mining fan page, I talk about 2022 when (Indonesia) will have to start making gas import, which will affect the state’s balance of payment.   

I’ve also told APBI for Medco to offer its assistance in the development of UCG.  Last week, I was informed that coal firm Indominco is teaming up with Tekmira to develop UCG project.  And then it will be followed by Indika (coal firm).   It’s okay, this means that the country’s gas reserves can increase if these (projects) succeed.         

What is your suggestion to the government?

First, change the law to allow for exploration.  So that those which have started, pioneering the (UCG) project, hold the right to be able continue with the development.

As a businessman, for me the most important thing is the regulation.  At the Rimau (UCG) project in Palembang (South Sumatra), we planned to use the gas for our own.  

In relation to UCG project, and energy security, give people the opportunity to carry out exploration.  The moratorium (of new coal exploration permit) is not right.

Furthermore, when we talk about KDI (compensation for information and data paid by miners to participate in auction of mining concession held by government) it’s quite expensive.  In the coal sector, the tender started only last year for a concession in Muara Bungo, Jambi, which ended up at PTUN (state administrative court).  I think this (the KDI fee) is quite costly, causing investors to be less interested (in participating in the tender).  

What is the picture of MEMI in the next five years?

We have been directed by Pak Tony (president director of MEMI) and son of Pak Arifin – Raimi Panigoro/chief of finance of MEMI (owner).  Coal is like oil and gas which will not last for ever.  But for us, coal is still the cheapest form of energy in the emerging economies.   We (the country) could not afford to buy (rely) on energy from solar cells, wind, and others, which are expensive.

So it’s unfair if Europe and other developed nations had been allowed to pass through this phase (getting cheap energy from coal to fuel their economic development), while we (developing nations) can’t. 

We must pass through this phase so that our GDP can increase and industries developed, so that it will eventually be affordable for us to purchase clean energy.  So coal will remain the vital source of energy for emerging countries in Asia.  So we’ll be there (in the coal sector), it’s our fundmentals.

We’ll also move toward gold mining with the heap leach technology.  Not at the scale with smelter operation like Amman Mineral Nusa Tenggara.  It will be smaller operations as the large ones have been taken by other groups.  We’re also looking to expand to Suriname.  We’ll continue to optimize this with the end objective of entering the future energy sector. 

Editing by Reiner Simanjuntak