Bauxite Mining and Alumina Refinery Investment Environment in · PDF fileBauxite Mining and Alumina Refinery Investment Environment in Indonesia Michael Scott Carl [email protected]

Bauxite Mining and Alumina Refinery Investment Environment in Indonesia

Michael Scott Carl

[email protected]

June 14-15, 2017 3rd Global Bauxite Conference 2017 Jakarta, Indonesia

Expected Policy Developments

7 SSEK INDONESIAN LEGAL CONSULTANTS

Draft of New Mining Law A. Progress - Part of the National Legislation Program 2015 – 2019, on the

initiative of the Indonesian Parliament (DPR) - Government is still preparing the draft of new mining law - Focus group discussions with mining associations and experts of

Commission VII of DPR, meetings with local governments, and public consultations (Balikpapan, Medan, Surabaya, and Makassar) have taken place*

* Source: Directorate General of Mineral and Coal, “Strategic Issues and Subsector Regulations of Mineral and Coal”, February 2, 2017, https://www.minerba.esdm.go.id/publikasi/Paparan_Dirjen_Coffee_Morning.pdf

https://www.minerba.esdm.go.id/publikasi/Paparan_Dirjen_Coffee_Morning.pdf



Draft New Mining Law B. Expected Changes - Authorities: to be consistent with the Regional Governments Law - Adjustment with Constitutional Court decision: stipulation of

mining area, deletion of minimum area of exploration mining business license, community involvement in the stipulation of mining area

- Simplification of licensing - Increase of added value of mineral - Adjustment of COW and Coal Contract of Work - Share Divestment - Supervision*

* Source: Directorate General of Mineral and Coal, “Strategic Issues and Subsector Regulations of Mineral and Coal”, February 2, 2017, https://www.minerba.esdm.go.id/publikasi/Paparan_Dirjen_Coffee_Morning.pdf



Bauxite Mining in Indonesia

By 2016, the known total resources of bauxite ore in Indonesia was 3.787 million tonnes and the total reserves was 1.282 million tonnes.*

* Source: Directorate General of Mineral and Coal, Performance Report - 2016


Bauxite Mining in Indonesia

There is only one alumina processing facility in operation in Indonesia (PT Well Harvest Winning Alumina Refinery in Ketapang, West Kalimantan)*

* Source: Directorate General of Mineral and Coal, Performance Report - 2016

Existing Bauxite Mines: Riau Islands, West Kalimantan Existing Bauxite Smelter/Alumina Processing Facility: West Kalimantan


New Regulations

Mineral Processing & Refining, Exports, and Benchmark Price • Minister of Energy and Mineral Resources (MEMR) Regulation No. 5 of

2017 regarding Increase of Mineral Added Value through Domestic Mineral Processing and Refinery Activities (January 11, 2017), as amended by MEMR Regulation No. 28 of 2017 (March 31, 2017) (MEMR Reg 5, as amended)

• MEMR Regulation No. 6 of 2017 regarding Procedures and Requirements to Grant Export Recommendation for Processed and Refined Minerals (January 11, 2017), as amended by MEMR Regulation No. 35 of 2017 (May 15, 2017) (MEMR Reg 6, as amended)

• MEMR Regulation No. 7 of 2017 regarding Procedures for the Stipulation of the Benchmark Price for the Sale of Metal Minerals and Coal (January 11, 2017) (MEMR Reg 7)


New Regulations

Mining Investment and Licensing • MEMR Regulation No. 13 of 2017 regarding the Amendment of MEMR

Regulation No. 15 of 2016 regarding 3-Hour Licensing for Infrastructure in the Energy and Mineral Resources Sector (February 7, 2017) (MEMR Reg 13)

• MEMR Regulation No. 34 of 2017 regarding Licensing in Mineral and Coal Mining (May 9, 2017) (MEMR Reg 34)

• Government Regulation No. 1 of 2017 regarding the Fourth Amendment to Government Regulation No. 23 of 2010 regarding Mineral and Coal Mining Business Activities (January 11, 2017) (GR 1 of 2017)

• MEMR Regulation No. 9 of 2017 regarding Shares Divestment Procedures and the Mechanism for the Stipulation of the Price of Divested Shares in Mineral and Coal Mining Business Activities (January 20, 2017) (MEMR Reg 9)

• MEMR Regulation No. 15 of 2017 regarding Procedures for the Granting of Special Operation Production Mining Business License as the Continuity of Operation of Contracts of Work or Coal Contracts of Work (February 10, 2017)

Current Policy on Export & Benchmark Pricing

of Bauxite and Alumina


Export Ban • MEMR Reg 5, as amended: Mining companies must perform domestic

processing and refining of mining commodities in accordance with minimum thresholds: – Processing: the product has unchanged physical and chemical characteristics

as the original mineral – Refining: extraction and refining to produce products that have different

physical and chemical characteristics from the original mineral – Exception: mining companies that sell their mining commodities to be

directly used for domestic interest

• Domestic processing and refinery activities may be done by: – Constructing and owning a smelter; or – Entering into a cooperation with other mining/smelter companies, in the

form of: • Sale and purchase of ore/raw material or concentrate; or • Joint construction of smelter facility

• Any cooperation must be approved by MEMR or Governor


Minimum Refining/Processing Threshold for Bauxite

Commodity Minimum Threshold

Ore

Mineral

Processing Refinery

Product Quality Product Quality Bauxite a. Gibbsite

b. Diaspore c. Boehmite

- - Oxide Metal/ Hydroxide and Metal

a. Smelter grade alumina ≥ 98% Al2O3;

b. Chemical Grade Alumina ≥ 90% Al2O3 ≥ 90% Al(OH)3;

c. Alumina Hydrate ≥ 90% Al(OH)3;

d. Proppant: 1) Al2O3 ≥ 70% (granulated); 2) may crack in 7,500 psi

pressure, fraction size: -20+40 mesh ≤ 5.2% -30+50 mesh ≤ 2.5%; or -40+70 mesh ≤ 2.0% 3) Apparent Specific Gravity

(ASG) 3.15 e. Metal Al ≥ 99%


Relaxation of Export Ban

• MEMR Reg 5, as amended: Export of washed bauxite (Al2O3 ≥ 42%) in certain amount is allowed until January 11, 2022

• Mining or smelter company is allowed to conduct such exports on the following conditions: – It has constructed or is constructing a refinery facility, whether on its

own or in cooperation with another party; – It pays export duties as per the applicable regulation; and – It obtains recommendation for export from the MEMR (c.q.

Directorate General of Mineral and Coal) and approval of export from the Ministry of Trade.

Note: Holder of a Contract of Work (COW) must convert its COW to an IUPK to conduct such exports


Reasons for Relaxation of Export Ban

• Companies are facing difficulty constructing smelter facilities: high cost and high risk

• Decline in global mining commodity prices • Export of raw materials can be used to help fund the

construction of smelters • Export relaxation is expected to increase the value of

exported concentrate and improve the trade balance


Procedure for Export of Washed Bauxite

• MEMR 6/2017:

• MEMR Recommendation period: 1 year and renewable

MEMR Recommendation

MOT Export Approval


Procedure to Obtain MEMR Recommendation for Export of Washed Bauxite

• The requirements to obtain MEMR recommendation to export washed bauxite emphasize the commitment to construct a smelter. Requirements include: – Pact of integrity to construct a domestic smelter facility; – Construction plan for refinery facility, verified by an Independent

Verifier, or if the smelter construction is through a cooperation, a copy of the cooperation agreement;

– Report on the physical progress of the construction, verified by an Independent Verifier, for the mining/smelter company that has constructed or is constructing the refinery facility;

– Recent Report of Analysis and Certificate of Analysis from an independent surveyor appointed by MEMR proving that the product has met minimum processing threshold;

– Evidence of payment of royalty (PNBP) for the past one year; and – Export plan, including the type and amount of metal mineral, loading

and discharge ports, and country of destination.


Security Deposit for Export • Previously, a security deposit was required for an MEMR

Recommendation for Export (Article 15 of MEMR Regulation No. 5 of 2016): – 5% of the total new investment or 5% of the remaining investment for

construction of refinery facility – Security deposit may only be disbursed if construction of the refinery facility

reaches 35% of planned construction by no later than January 12, 2022 – If the targeted construction period is not achieved, the security deposit is

forfeited to the state treasury through a perception bank by no later than 3 months from the above date

• The security deposit no longer applies by virtue of MEMR Regulation No. 6 of 2017, as amended by MEMR Regulation No. 35 of 2017


Benchmark Pricing

• MEMR Reg 7: Any sale of bauxite or alumina shall refer to the benchmark price of the metal mineral set by the Directorate General of Mineral and Coal (DGMC)

• The benchmark price is used as the floor price in the calculation of royalty payment by mining companies

• The benchmark price formula will be stipulated by the DGMC (and will be evaluated semi-annually)

• DGMC has not issued a regulation to implement MEMR Reg 7

Investing in Bauxite Mining and/or Alumina Refinery


Foreign Shareholding Limitation and Divestment Requirement

Smelter Companies • 100% open for foreign ownership • No share divestment requirement Mining Companies (IUP and IUPK holders) • 100% open for foreign ownership if establishing a new company to bid for a

mining license • Divestment requirement after 5 years of commercial production • Divestment requirement is gradual from 6th through 10th year after commercial

production • Divestment procedures and the stipulation of the price of divested shares are set

out under MEMR Reg 9 Acquiring Existing Mining Company • 75% maximum foreign ownership if acquiring an existing mining company in

the exploration stage • 49% maximum foreign ownership if acquiring an existing mining company in

the operation production stage Note: Foreign ownership includes both foreign companies and Indonesian companies with direct or indirect foreign shareholders



• Divestment Requirement to sell shares to Indonesian parties, which include: – Central Government – Regional Governments – State-Owned Enterprises – Regional-Owned Enterprises – Indonesian private business entities (in the form of limited liability

company) • Divesting party cannot provide loan to the Indonesian parties to purchase

the divested shares • Prohibition on pledging shares that must be divested • Stipulation of the price of divested shares: fair market value and without

consideration of the mineral reserve at the time of divestment



Year after commercial production

Mining Companies (IUP or IUPK holders)

6th 20% 7th 30% 8th 37% 9th 44%

10th 51%

Gradual divestment from the 6th through 10th year after commercial production for Mining Companies owned by foreigners:


Issuance of Mining Licenses by BKPM

• MEMR Regulation No. 25 of 2015 regarding Delegation of Authority for Granting Mineral and Coal Business Licenses in the Framework of Integrated Licensing System at the BKPM

• MEMR has delegated the issuance of the following mining licenses to BKPM: – Exploration License – Operation Production License and its extensions – Trading License and its extensions – Smelter License and its extensions – Principal License for Smelter – Temporary License for transportation and sale – Mining Service License


3-Hour Licensing Process by BKPM Head of BKPM Regulation No. 8 of 2016 stipulates a three-hour investment licensing process whereby applicants will be able to obtain 8 products in at least three hours, namely:

– Investment License – Company Deeds and MOLHR Legalization – Taxpayer Registration Number (NPWP) – Company Registration Certificate (TDP) – Use of Foreign Workers Plan (RPTKA) – License to Hire Foreign Workers (IMTA) – Production Import Identification Number (API-P) – Customs Number (NIK) – Statement Letter on Map Information of Land Availability (if

applicable)


3-Hour Licensing Process by BKPM

To be eligible for 3-hour BKPM licensing, an investor must meet these requirements:

– Minimum investment amount of IDR 100 billion and/or requires a minimum of 1,000 workers

– Investor appears at BKPM in person or is represented by one of the investors with a power of attorney

SSEK INDONESIAN LEGAL CONSULTANTS

Smelter Licenses (MOI vs. MEMR)

Difference

Smelter licensed by MOI Smelter licensed by MEMR

Location Must be located in an industrial estate or an area zoned for industrial activities, unless due to its raw materials and/or production process, a special location is required (i.e., if the smelter is to be located near the mining area)

Must be located in an area zoned for mining activities

Minimum amount of investment

Minimum investment (equity and loan): • IDR 10 billion and up

Minimum equity: • IDR 5 billion and up

Minimum investment (equity and loan): • IDR 10 billion and up

Minimum equity: • IDR 5 billion and up

Reporting obligation

Only periodic reports (LKPM) to BKPM

Besides LKPM, there are additional reporting obligations to MEMR:

• Annual Work Plan and Budget

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• A smelter may be licensed by the Minister of Industry (MOI) or the Minister of Energy and Mineral Resources (MEMR)

• The principal differences are as follows:

SSEK INDONESIAN LEGAL CONSULTANTS

Smelter Licenses (MOI v MEMR) Difference

Smelter licensed by MOI Smelter licensed by MEMR

• Monthly, Quarterly and Annual reports • Term sheet/MOU for any mineral sale

agreement

Term

As long as the smelter company continues in business

30 years and can be extended, each for a maximum 20 years

Transfer of shares

Does not require recommendation from MOI

Requires recommendation from MEMR

Application procedures

Additional requirements: • MOU or cooperation agreement with

ore supplier • Experts in mining or metallurgy having

at least 3 years experience • MOU with the refined products

purchaser • Feasibility study approved by MEMR or

Governor • Corporate documents and mining

license of ore supplier

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Documents

Bauxite Mining and Alumina Refinery Investment Environment in · PDF fileBauxite Mining and Alumina Refinery Investment Environment in Indonesia Michael Scott Carl [email protected]