Special Issue: Game-changing amendments to mining regulations issued!

Foreign-invested mining concession (IUP) companies must ensure that Indonesian participants own at least 20% of the shares in the IUP company by the fifth anniversary of production start, and thereafter the foreign shareholders must continue to divest until the Indonesian participants own at least 51% by the 10^th anniversary of production start in the following stages:

− 20% by the 6th year;

− 30% by 7th year;

− 37% by 8th year;

− 44% by 9th year;

− 51% by 10th year.

The regulation is clearly expressed to only apply to IUP holders, not Coal Contract of Work (CCoW)/mineral Contract of Work (CoW) holders. However the 2009 Mining Law does contain a provision which requires all existing CCoWs/CoWs to be amended to bring them into line with the principles of the 2009 Mining Law. It is therefore not entirely clear whether CCoW/CoW companies whose contracts have a lower Indonesian participation requirement than prescribed by the amended regulation will need to follow the new divestment shareholding percentage (either by virtue of the ongoing discussion of CCoW/CoW amendments or otherwise).

Authority to issue concessions: For IUPs, the issuing authority is the Regent or Mayor (Regional Government) if the concession area, port and processing facilities are all in one Regency; Governor of the Province if there is an overlap between Regencies; or the Minister if there is an overlap between Provinces.

IUPs for companies with foreign ownership will be issued by the Minister.

This change re-centralises control over IUPs issued to foreign investment companies. Whilst the tender for the award of the actual mining business area (WIUP) remains with the Regional Government, where a foreign investment company wins thattender, the Regional Government relinquishes control and it is the Central Government that issues (and administers) the IUP. For this reason alone, it may turn out to be unlikely that foreign investment companies will find themselves as the selected winning bidder for new WIUP areas. Further concerns are how the decision over the issuing authority would be dealt with in a situation where an existing Indonesian-owned IUP company (which therefore has most likely had its IUP issued by Regional Government) is acquired by a foreign investor ? is there a need for the IUP to be re-issued by the Minister? Or is it only intended that this requirement apply to new tenders carried out in the future? There are likely many permutations and combinations which will make it very difficult to apply this principle in practice.

Transfer of IUP: Not expressly permitted (although some ambiguity in the wording does suggest that transfers to third parties may be permitted once a project has completed its feasibility stage).

A transfer of IUPs to a subsidiary is permitted, provided that 51% or more of the shares in the subsidiary are owned by the IUP transferor.

This may assist in fixing problems where multiple IUPs are held by one company (making it difficult for interested investors to invest in a particular IUP without investing in the group of IUPs). However, it is not clear what happens if it is proposed to transfer shares in the subsidiary so that the original ownership falls below 51% (there are consequences for farm-ins and joint ventures).

Transfer of part of IUP area by State-Owned Company: Not regulated.

A part of the IUP area (in production operation stage) owned by a State-Owned Company can, with the approval of the Minister, be transferred to a subsidiary owned by that State-Owned Company to the extent of at least 51%.

As a number of the State-owned mining companies are sitting on very large concession areas under a single IUP, it appears that this provision is aimed at allowing those companies to divide their single large concession into smaller stand-alone blocks, to facilitate the development and financing of the a series of stand-alone projects (e.g. it allows a mining resource for a mine mouth power project to be ring-fenced from the larger mining area, hence facilitating project financing).

Extension of COW/CCOW: Upon a CCoW/CoW reaching the end of its 30 year production period, those contracts may be extended in the form of an IUP.

Provides more details around the processing of CCoW/CoW extension requests, including a set of administrative, technical, environmental and financial requirements that must be fulfilled before the CCoW/CoW holder becomes entitled to the extension (in the form of an IUP). Even after fulfilling the requirements, the Minister may refuse the application for extension if the mining company has demonstrated "poor performance".

Under the 2010 regulation, extensions of mining rights under CCoW/CoW were effectively at the discretion of the Minister. The new provisions give some concrete criteria that must be fulfilled, and if they are fulfilled, the CCoW/CoW holder will be granted an extension (albeit in the form of an IUP, not as an extension to the CCoW/CoW). That said, there is still quite a broad discretion for the Minister to reject an extension for "poor performance".