Indonesia Mining Report Q4 2009

A major blow was dealt to foreign investment in the country by the decision by Australian mining giant BHP Billiton to divest all of its assets in the country in July 2009. Though the company did not cite government policies as a reason for pulling out of Indonesia, BHP had previously struggled in obtaining a Contract of Work permit for a notable joint venture (JV) with PT Antam and as a result had terminated the agreement. The Indonesian government was confident that it could find investors to take over BHP Billiton's projects, but such a move by one of the world's largest resource groups, would no doubt send cautious signals to other foreign investors.

The new mining law was passed in December 2008 changing the permitting structure from the long-term Contracts of Work (COW) to shorter-term permits covering different stages of the mining process. The chief regulations in the new mining bill would see closer involvement and more power of overseeing the mining projects by the government, and new rules of divestment. The new law states that a 5% stake in projects established by foreign investors should be sold each year. After five years, 20% of shares must be divested to the government, state-owned enterprises or domestic private companies. The previous law did not stipulate an obligation to divest shares, although some companies had agreed to do so although this often sparked long disputes over the terms of divestment.

In March 2009, following a protracted dispute, Denver-based mining giant Newmont Mining was ordered by an arbitration court in Indonesia to sell 17% of shares in its copper gold Batu Hijau mine within six months. Newmont owns the mine in a JV with Japan's Sumitomo. The JV, called PT Newmont Nusa Tengarra (PTNNT), initially signed an agreement in December 1986 that 51% of the company's shares would be sold to local firms or the government over stages in accordance to an agreed schedule.

The new mining law also comes at a time when investors are hesitant about launching new ventures due to the current economic climate. Investors will be looking for additional security and stability to counter the effects of the global economic downturn, and the new regime of permits and licenses may act as a deterrent. A criticism of the shorter permit length is that it does not afford the mining companies the flexibility they need to respond to the dynamic changes in the commodity market such as rapid fluctuations in price. The various stages of mining in reality may not match those outlined on paper in the new mining law. There is also some concern that five years is too short a period before divestment should take place, with analysts pointing out that the mining industry is slow to develop and takes time to break even and make a profit. For established mining companies this may not be a concern but it could deter new investors into the country.