April 2012

REPORTThe

May 2012

Kalimantan - Black Gold on a Green Agenda The Indonesian portion of the island of Borneo, known as Kalimantan, is the country’s largest coal producing region, accounting for 93% of Indonesian thermal coal production in 2011.

Continued growth in Kalimantan coal production is under threat from two sets of Indonesian environmental policy and

mining legislation:

� Kalimantan Spatial Planning Regulation;

� Reducing Emissions from Deforestation and forest Degradation (REDD), including the two year moratorium on clearing primary forests and peatland (REDD+).

Continues on following page.

Infrastructure 11

Coal.Power.InfrastructureIndonesia

Cover Article 2Continued growth in Kalimantan coal production is under threat from its recent spatial plan

Coal Production 4Indonesia produced 90 Mt of coal in Q1 2012, a q-o-q decrease of 11%

Coal Demand 6Central Java Power Plant Project, laying the groundwork for future private infrastructure projects.

Coal Export 7What is the scenario for coal exports to China under the country’s lowered economic growth projections?

Policy and Regulation 8Updates on Indonesia’s low-value coal export ban and new divestment scheme for FDI in mining.

Infrastructure 9Cautious coal barging in the Barito River.

Coal Mining in Forest AreasAccording to Greenpeace, coal concessions account for 12% of Kalimantan’s forested area (see chart below). In addition, many existing mines and most proposed mines lie in forest areas.

In 2004, a “rent use permit” for forest utilisation was introduced. Except in very limited situations, permits for coal mining and related activities in forest areas were issued by the Minister of Forestry (MoF) with the recommendation of the governor or regent. On May 26, 2011 the Minister of Forestry issued the implementing regulations for rent use permits in forestry areas, replacing the earlier regulation. This MoF Regulation stipulates that a rent use permit (above 1 ha in size) no longer needs local recommendation, leaving the MoF with the sole right to issue or reject a permit.

With respect to mining activities, open cut mining is prohibited in protected forests (although underground mining is still allowed), whereas both open cut and underground mining are allowed in production forests. At present, it is hard to foresee that underground mining, which currently hardly occurs in Indonesia, will develop first in protected forests. A separate regulation on underground mining in protected forests has been issued, however, some areas that are mapped as protected forest by the MoF are already in use for other purposes (eg: palm oil plantations). Today, it appears that both MoF and the local forestry institutes (BLHD) are

committed to cleaning up miners that are operating without a rent use permit.

According to Walhi (Indonesian environmental activist organisation), in the Tanah Bumbu district of South Kalimantan, there are eleven coal mining companies in the production stage without a permit from the Ministry of Forestry. Recently, the South Kalimantan Environmental Agency (BLHD) urged the Tanah Bumbu Regent to close four coal ports operating in a conservation forest and on coral reefs in the Bunati area. These four ports are operated by PT Rindu Alam Raya, PT Tunas Inti Abadi (Trakindo Group), PT Berkat Borneo Coal, and PT Borneo Indobara (Sinarmas Group).

In summary, a major lack of coordination exists among regulators in permit issuance for coal mining and associated activities in forest areas. As a result, there is added uncertainty for both miners and the authorities. With the MoF solely in charge of issuing rent use permits, it is unclear how long new permits can be delayed, even though the regulations do specify maximum timelines for each step in the permit process.

Kalimantan Spatial Planning RegulationThe spatial planning regulation reserves around 45% of the island as tropical forest area, to be the “lungs of the world”, where mining is restricted (see map). Under the regulations, the Government of Indonesia (GoI) also seeks to control Kalimantan’s energy, electricity, mining, plantation, forestry, transportation, defence and other developments.

As a result of the current regulation confusion that is outlined in this article, it appears certain that in seeking to reinforce its environmental integrity, the GoI will introduce some mining restrictions and the costs of coal production will increase. Such conditions may inhibit the mining investment climate in Kalimantan. However, any clarification may be better than the current state of confusion where few mining concessions feel confident of their legal right to mine.

All opinions and conclusions expressed in this publication are of a general nature and do not constitute specific advice. Salva Report Pty Ltd expressly disclaims any implied warranty or representation about the completeness, accuracy, reliability or suitability of any conclusion or opinion expressed in this publication as well as any liability for any loss incurred by any person or persons as a result of any

reliance upon these opinions and conclusions. Any views or conclusions expressed by a third party contributor to this publication remain the property of that contributor and do not necessarily reflect those of Salva Report Pty Ltd.

EmailGeneral Enquiries: info@salvareport.com Website: www.salvareport.com

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IndiaPh: +91 (0) 33 6522 1030 Fax: +91 (0) 33 4001 6882

REPORTIndonesia

Ph: +62 21 789 0269 Fax: +62 21 789 0274

United KingdomPh: +44 (0) 203 427 3252 Fax: +44 (0) 203 427 3253

Source: Greenpeace, 2012

2009 Kalimantan Forest Analysis by Industry (%)

Coal Mining,

12%

Palm Oil plantation, 20%

Forest , 23%Industrial Forest , 10%

Non Concession,

35%

REPORT

Ahead of the curve - Indonesian coal production, demand and exports.

May 2012

222

Overview of REDD and Associated RegulationsPrior to outlining the new strategy, Indonesia signed a Letter of Intent (LoI) with Norway to jointly promote REDD+ (REDD+ refers to REDD plus conservation of existing carbon stocks and enhancement of carbon stocks”). In this LoI, Norway promised US$ 1 bill to Indonesia if all requirements of the LoI are met. To implement the LoI, President Susilo Bambang Yudhoyono created the REDD+ Task Force and selected Central Kalimantan as a REDD+ pilot province.

The regulations for Kalimantan are part of the broader Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (locally known as MP3EI) which includes the development of the Kalimantan corridor. It is also related to Indonesia’s commitment to cut carbon emissions by 26% based on projected emissions for 2020, while aiming to achieve a 7% economic growth rate. Of the emissions reduction, 14% will have to come from REDD+ with external investments in REDD+ expected to raise total emission reduction from 26% to 41%. REDD+ is central to this new strategy.

A two-year moratorium on clearing primary forests and peatland, including land used for mining purposes was one of the agreed outcomes of the LoI. The Presidential Instruction has two parts: (i) a main document describing actions to be taken by GoI, and (ii) an indicative map of the areas over which such actions will be applied. The moratorium is not intended to prevent all exploitation of peatlands and natural forest from this point forward, but rather to provide “breathing space‟ for the GoI to develop detailed, coherent plans among numerous ministries and agencies, whilst preventing irreversible activities occurring. This process will bring regional (provincial) and local (district/regency/municipality) spatial planning, into line with the GoI spatial plan. During the two year moratorium period from May 2011, applications for new coal mine concessions are being delayed, especially in Central Kalimantan.

Nevertheless, some regional governments are still issuing permits, although even these are becoming harder and more expensive to obtain.

No New Kalimantan Coal Exploration Permits from 2013?Kalimantan has come under pressure to better regulate huge and overlapping licenses awarded to coal mining companies. East Kalimantan has 19.8 million hectares of land, but regional chiefs have granted in excess of 21.7 million hectares worth of permits, mainly to coal mining and plantation firms. Therefore, there is an opportunity to tidy up the current mining concession mess with numerous coal concession areas overlapping and barely 40% of all mining concessions registered as ‘clean and proper’ on the GoI database. This clean-up operation is one that the GoI currently claims to be pursuing vigorously.

Putting REDD+ on the agenda (with the added lure of US$ 1 bill from Norway), the proposed spatial plan will give more power to MoF for controlling local governments in coal mining license issuance in forest areas. Moreover, the President is actively participating in the forestry debate in Kalimantan and stated that the last years of his tenure (to 2014) would be dedicated to forest conservation.

However, as with any proposed policy changes, there may be a downside for coal production development and exports in Kalimantan. One school of thought is that the government will not offer any new mining exploration concessions from April 2013, when the moratorium expires, while others believe it will introduce new environmental benchmarks and will revoke existing mining land permits that fail to meet the new standards. Another scenario is the introduction of a swap mechanism, whereby if a coal mining area is affected by the regulations then the government will give the company a replacement area.

Map of Kalimantan Spatial Plan

REPORT

3May 2012

May 2012

ConclusionThe policy and regulatory environment in Indonesia is rapidly changing. Often policy announcements are released that are unclear, with implementation of regulations taking months, sometimes years following policy announcements. At present, there is no firm clarity surrounding the impact of the spatial planning regulation and REDD+, although miners seem to be relieved that the moratorium has not really taken effect. Even though the local industry is used to operating within an uncertain environment, there is rising concern among miners due to increased policy change announcements over the last 12 months.

90 Mt of Indonesian Coal Produced in Q1 2012

Indonesia produced 90 Mt of coal in the first quarter of 2012, as quoted by MEMR. While this represents a decrease of 11% q-o-q, primarily a result of lower demand from the international market, production increased 9.7% y-o-y. This increase was driven by the addition of a number of new mining sites, such as the PT Bukit Asam site in Riau, and improved production at mining sites. Salva Report agrees with the MEMR total, with our monthly production estimated at 29.7 Mt in January (+8.3% y-o-y), 30 Mt in February (+10.5% y-o-y) and 31 Mt in March (+10.4% y-o-y).

Adaro Energy to Start South Sumatran Coal Production in 2012PT Adaro Energy is to commence production at its South Sumatra operations in the second half of 2012. Adaro has completed a coal reserves survey for its subsidiary, PT Mustika Indah Permai (MIP), located in Lahat Regency, South Sumatra. As of December 2011, the total JORC Resources for MIP were estimated at 286.4 Mt, of which 272.6 Mt are JORC Reserves.

Coal production will be ramped up to 3-4 Mt per year by 2014. Adaro plans to boost MIP’s production up to 10 Mtpa within five years of production. Coal will be hauled from site to PT Servo Meda Sejahtera’s (SMS) barge loader on the Musi River via a dedicated private coal haul road operated by SMS. The coal will be barged down the Musi River for transshipment on to offshore vessels or barged direct to customers in the region.

However, PT Bukit Asam (PTBA) recently has filed a report to the Corruption Eradication Commission related to the graft allegation on the Lahat Regent’s decision to revoke PTBA’s coal mining license. Previously, a prolonged dispute taking place in the South Sumatra regency of Lahat involving PTBA and Adaro resulted with the verdict of the Supreme Court affirming the regency administration’s authority over the 24,752 ha mining site.

Coal Production News

� Borneo Resource Investments Ltd. has signed a binding letter of intent to acquire 100% of PT Bumi Energy Kalimantan. Bumi Energy holds a 3,200-ha thermal coal concession in the southeastern region of Kalimantan, containing an estimated reserve of 28 Mt of high-quality thermal coal. (Salva Report, the Indonesia Today)

� The JORC reserves and resources for PT Santan Batubara’s Separi coal concession in East Kalimantan were estimated at 17.3 Mt and 61.5 Mt. The company has also estimated the Birawa, Uskap and Santan blocks have combined non-JORC reserves of 30.6 Mt and non-JORC resources of 222.2 Mt. PT Santan Batubara is jointly owned by Indika Group and PT Harum Energy Tbk, and controls 24,390ha of CCoW in East Kalimantan. (Salva Report, the Indonesia Today)

Short term market update

ProductionProduction has slowed due to higher rainfall and weak international demand, but is expected to increase in April during the transition from wet to dry season. Demand is also anticipated to increase in May-June.

Export DemandChina’s slowing economy is estimated to drive lower than expected coal imports. However, it is expected that international demand will rise in May-June.

Domestic DemandThe current financial risks facing PLN may hinder capability to meet growing demand in electricity. Considering PLN is the largest domestic consumer of coal, its lower than expected demand will affect overall domestic coal burn.

Green indicates a bullish factor for higher iron ore exports, orange is neutral and red bearish

Coal Production Market Update

Macro Corporation Ltd is to acquire a 70% stake in PT Sarmar Jaya Cemerlang. PT Sarmar owns mining rights near South Barito, Central Kalimantan, less than 100km from the PT Adaro Energy coal deposit. The loading jetty for the current site is near the PT Adaro Energy jetty. (Salva Report, the Indonesia Today)

REPORT

Ahead of the curve - Indonesian coal production, demand and exports.

May 2012

444

Coal Production Seasonality

Extreme Weather Hits Most Parts of IndonesiaIn March, extreme weather impacted Java, Madura, Bali, Nusa Tenggara, Kalimantan, Sulawesi, Maluku, and Papua. Hurricane winds and rising sea water affected the South Kalimantan coasts.

The extreme weather was caused by tropical cyclones Irina, Koji and Lua. Bad weather with waves reaching 6 meters and 60 knot winds caused barges carrying coal to become stuck in the ocean or forced into anchorage. Three barges transporting 23,000 tons of coal from South and Central Kalimantan to the power plant at Cilacap, Central Java experienced more than 4 days delay. The same occurred for a barge supplying coal to the Labuhan II power plant in Western Java and the Paiton power plant in East Java. However, most power plants had around 15 days stock, hence the delay was of little effect to the power plants’ operations. Infrastructure development was also impacted by the bad weather. A freighter used to transport heavy equipment for construction of coal port Air Muring in North Bengkulu, ran aground in the harbor of Pulau Baai path, Bengkulu.

Dry Season to Commence in MayThe Indonesian dry season will begin in May this year, according to the Indonesian Bureau of Meteorology and Geophysics (BMKG). The dry season will be experienced in many regions of Sumatra and Kalimantan from May to July. The transitional period from the rainy season to the dry season occurs one to two months prior.

Rainfall during March was slightly higher than February, in the medium range (on average in the range of 100 - 300 mm/month), which is conducive for coal production. Hence, lower coal exports and production during this period have been mostly driven by lower demand.

In March, Central Kalimantan had the highest rainfall recording 296 mm, up from 248 mm in February. Whilst East Kalimantan recorded 269 mm and South Kalimantan recorded 219 mm (see chart below). Across all three regions, March rainfall was significantly lower y-o-y.

South Sumatra recorded 271 mm of rain in March, up 41 mm m-o-m but down 137 mm y-o-y. Jambi had significantly less rain, 213 mm in March down just 1 mm m-o-m and 83 mm y-o-y (see chart below).

Indonesian Coal Benchmark Price: How Low Can It Go?The Indonesian coal benchmark price (HBA) in April reached its lowest level since January 2011. It dropped 6.4% m-o-m to US$ 105.61, down 13.4% y-o-y. This decline was consistent with coal prices decreasing globally.

Lower coal demand, negative sentiment over Chinese economic growth and decreasing oil prices contributed to the HBA drop. Early April saw the Newcastle coal price index decrease by more than US$ 1. Salva Report believes this trend will continue until the month’s end, and that the HBA will also continue to fall.

The Indonesian coal market remained quiet, with the low calorie coal market (<4200 GAR coals) most affected by the price drop. Indonesian traders and miners opened the price on 4000 GAR coal at US$ 43 - US$ 44 FOB mother vessel, for shipment in April – May 2012, a decrease of 9 % from the previous month. Prices for coals between 5000 quality also decreased, down 7% to US$ 72.50 – US$ 71 FOB mother vessel.

Source: BMKG, Salva Report

Kalimantan Rainfall (mm/month)

0

50

100

150

200

250

300

350

400

450

500

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep-

10O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1Se

p-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

East Kalimantan South Kalimantan Central Kalimantan

Source: BMKG, Salva Report

Sumatra Rainfall (mm/month)

0

100

200

300

400

500

600

Mar

-10

Apr-1

0M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10O

ct-1

0No

v-10

Dec-

10Ja

n-11

Feb-

11M

ar-1

1Ap

r-11

May

-11

Jun-

11Ju

l-11

Aug-

11Se

p-11

Oct

-11

Nov-

11De

c-11

Jan-

12Fe

b-12

Mar

-12

mm

Jambi South Sumatra

Source: Salva Report, MEMR

HBA/Newc/RBCT Index Price Comparison (US$/t) - FOB

100

105

110

115

120

125

130

135

HBA (GCV 6322 kcal/kg GAR) Newcastle FOB marker Richards Bay FOB marker

REPORT

5May 2012

May 2012

Delay in the Rise of Subsidised Fuel Prices and its Impact on the Electricity Sector

The government has accepted the decision of the annual plenary session of the House of Representatives to delay the rise in subsidised fuel prices and allow an adjustment if the average price of crude oil deviates more than 15% in a 6 month period.

Potential Impact on PLNIn order to pay debts and secure market trust, PLN needs additional government funding. The government initially proposed an additional IDR 26 trillion for fiscal-risk reserves, in the scenario of the rise of subsidised fuel price. Without the additional funding, PLN faces the risk of decreasing its debt service coverage ratio (DCSR) to just 0.34, below the minimum limit of 1.5, resulting in the potential inability to service their debts. Due to financial constraints stemming from lower than expected subsidies, PLN may not be able to meet growing electricity demands.

Impact on Electricity InvestmentThe government is losing credibility due to its failure to raise fuel prices and might lose out on accelerating infrastructure development as energy subsidies continue to strain the state budget. The country is still relying on foreign direct investment and overseas loans to develop its electricity sector. The domestic financing capacity, although increasing, is too small to catch up with the growing electricity demand for the country. (Salva Report)

First Public Private Partnership Power Plant to Commence Construction in 2012On October 6th 2011, PT Bhimasena Power Indonesia (BPI), a company established by JPower-Adaro-Itochu consortium, signed a Power Purchase Agreement (PPA) with PLN for the 2,000 MW Central Java Power Plant (CJPP) project worth approximately US$ 4 billion. Construction is expected to commence in 2012 with commercial operations by 2016-2017. The project, located in Batang, will account for 10% of Java’s existing power capacity. The power plant will utilise around 7 Mtpa of Indonesian sub-bituminous coal as fuel, with Adaro Indonesia as the primary supplier.

The state infrastructure guarantee fund (IIGF) has agreed to provide financial guarantees to investors in the CJPP, covering financial risks if PLN fails to meet its financial obligations. The project was the first to be implemented under the country’s new PPP and guarantee regulations, laying the groundwork for future private infrastructure projects. PLN

proposes four more coal-fired power plants to be built under the same PPP scheme. The proposed projects are located in four different locations with a combined investment cost of around US$ 3 billion and designed capacity of 2,200 MW per unit. (Salva Report)

Domestic Demand News

� China’s largest cement maker, Anhui Conch Cement, plans to begin construction of a US$ 400 million cement plant with a production capacity of 2.5 Mtpa in South Kalimantan later this year. The plant is to be equipped with a power plant, port, and other supporting facilities. (Salva Report, the Jakarta Post, Bisnis Indonesia).

� Siam Cement Group, a Thai group engaged in selling construction materials, plans to build a cement factory with capacity of 1.6 Mt in Sukabumi, West Java. Construction will commence this year and will take 30 months for completion. (Salva Report, the Indonesia Today)

� Indonesia’s second largest cement producer, PT Indocement Tunggal Prakarsa, is in the final planning stage of establishing a new 4.4 Mtpa brown-field cement factory and a 1.9 Mtpa cement mill in Citeureup, West Java. Indocement also plans to add two new cement mills outside Citeureup with a combined capacity of 2-2.5 Mtpa. (Salva Report, the Indonesia Today)

� PLN recorded coal consumption of 6.9 Mt in February 2012, or about 17 % of the company’s target of 39.4 Mt. This consumption excludes coal used for generators which are run by independent power producers (IPPs), amounting to 14.66 Mt. (Salva Report, the Indonesia Finance Today)

Domestic Demand Market Update

In September 2012, state utility firm PLN will invite bids for three public private partnership mine-mouth power plants, with total electricity generation of 2,600 MW. The plants are PLTU Jambi, PLTU Sumsel 9 and PLTU Sumsel 10. The Jambi power plant is expected to start operation in 2018-2019, Sumsel 9 in 2017 and Sumsel 10 in 2018. (Salva Report, Bisnis Indonesia)

REPORT

Ahead of the curve - Indonesian coal production, demand and exports.

May 2012

666

Indonesia Exports 78 Mt in Q1 2012

Salva Report estimates that Indonesia exported 78 Mt of coal in Q1, dropping by 13.4% q-o-q but increasing 6.5% y-o-y. With exports of 25.3 Mt in January (up 4.6% y-o-y), preliminary monthly estimates for February are 25.9 Mt (up 6.9% y-o-y) and 26.6 Mt in March (up 7.9% y-o-y).

India was the largest importer of Indonesian coal in Q1 2012, importing an estimated 19.1 Mt, a y-o-y increase of 4.2%. China was the second largest importer of Indonesian coal during this period, importing an estimated 11.7 Mt, a y-o-y increase of 15.2%. Compared to January 2012, Indonesia’s February coal exports to China dropped 3.6% and dropped 18.4% to India. However, exports to India rose 26.8% m-o-m in March, while export to China dropped by 14.7%.

Proposed Indonesian Thermal Coal Export Ban Worries IndiaIndia is already among the largest buyers of coal from Indonesia, and is expected to maintain this position considering the growth in domestic demand and stagnating domestic production. In early March 2012, Coal Minister Sriprakash Jaiswal said India might have to import 142 Mt of the fuel in the next financial year, up from the earlier estimates of 104 Mt. An Indonesian export ban would have an overall impact on the Indian power sector, as currently about 60% of India’s total thermal coal imports are from Indonesia.

To meet rapidly increasing coal demand, Indian companies have heavily invested in the Indonesian coal industry. Over 40 Indian companies are currently mining or exploring coal blocks in Indonesia, and interest in Indonesian coal assets remains strong. There have been big-ticket buys, such as Tata Power’s purchase of a substantial stake in two of Indonesia’s largest coal mines, along with proposed infrastructure investments, including the Adani Group’s US$ 1.65 billion for rail, port and power projects. However, some players, including the state-run Coal India and the RPG Group’s flagship CESC, have been unable to secure assets. For more information on the Indian coal industry, please review The Salva Report India. (Salva Report, Business Standard)

Indonesian Businesses Expect Higher Coal Exports to ChinaA number of business players predict coal exports to China will continue to grow despite the country’s lowered economic growth projections. Indonesia is also predicted to maintain its status as China’s largest coal supplier. Based on data from China’s Customs, the country imported 64.7 Mt of coal from

Indonesia last year, increasing 18% from 2010.

Recently, China reported economic growth of 8.1% in the first three months of 2012, its slowest pace in nearly three years, driven by weak demand in the nation’s key export markets. This growth was well below the 8.9% recorded in the last quarter of 2011, and marked the fifth consecutive quarterly slowdown as domestic demand weakened and Europe’s debt woes curbed business activity. Previously, China had revised its economic growth projection for 2012 to 7.5% from a prior estimate of 8%. Last year, China’s economy grew 9.2%, lower than in 2010, which reached 10.4%. The projection of slowing growth has led to speculation that China will decrease its coal demand.

Squeezed by regulated electricity prices and looking to minimise costs, many Chinese buyers may import heavily when international prices are relatively low and rely on domestic coal when international prices are relatively high. Indonesian coal producers run at low cost, and are a decent distance from China. If coal prices slightly fall, Indonesian coal producers have a competitive advantage. However, if coal and freight prices significantly fall, distance ceases to be a major economic factor and Indonesian low rank coal becomes less competitive. Despite this possibility, major coal miners in Indonesia hope that China’s coal imports from indonesia continue to grow. (Salva Report, Indonesia Finance Today)

Export Demand News

� Bayan and Thermal Powertech Signed Coal Contract. PT Bayan Resources signed a coal sales purchase contract with Thermal Powertech Corporation India Ltd (TPCIL) on February 23rd 2012. The company will supply 1 Mtpa of low-calorie coal to TPCIL for a 10 year period. Shipments will commence in 2014. (Salva Report, The Indonesia Today)

Export Demand Market Update

Bumi Resources Plans to Boost Japan Coal Sales 17%. PT Bumi Resources, Indonesia ‘s biggest coal producer, plans to increase sales to Japan by 17% this year. Shipments may rise to 14 Mt in 2012, compared with an estimated 12 Mt in 2011. Japan has increased thermal electricity generation to replace nuclear power since the Fukushima nuclear accident in March 2011. (Salva Report, Bloomberg)

REPORT

7May 2012

May 2012

Uncertainty Plagues Foreign Direct Investment Ruling Change

Recent regulatory changes in Indonesia provide a further example of challenges facing foreign investors in the region. The overnight change stipulating that all IUP’s must have a majority Indonesian ownership (51%) after ten years of production has raised market anxieties about the potential unfair treatment of foreign investors. It has been met with some concern from existing license holders, industry groups and potential investors. At a recent Indonesian Coal Mining Association meeting, members raised the need for further clarification on the reasons for these amendments.

The key criticism surrounds the requirement to relinquish control following only 10 years of production, which is an insufficient period to make a return on their investment. This is particularly the case for large projects that require significant upfront capital expenditure. Most of the concerns appear to be from the metals sector, given that Indonesia’s largest coal mines are already predominantly controlled by Indonesian investors. Coal mining projects also tend to have lower upfront capital expenditures and shorter payback periods than large-scale mineral projects.

The key issue of pricing the divested shares and divestment procedures still remains uncertain. Mining stakeholders are awaiting the release of implementing regulations from the MEMR, and there has been no update on when these will be released. (Salva Report)

Indonesia’s 2014 Low Rank Coal Export Ban on Hold?The plan for a ban on exports of low-calorie coal from 2014 is still only a “concept” in the MEMR, and is not yet final. The government needs to further refine the draft plan, notably the type of coal that will be affected. At present, the draft decree prohibits the export of coal with a heating value of less than 5,700 kcal/kg adb. In previous drafts this has been as low as 5,100 kcal/kg adb.

If implemented, producers will have to upgrade the calorific value of the coal prior to export. However, based on a 2012 Perhapi and ICMA study, there is no proven economically viable coal upgrading technology that can operate on a commercial scale. One view is that the government will delay the implementation of the ban until the technology exists. The domestic market would not be able to absorb the low-rank coal that would be banned from export. The government is eagerly awaiting the results of the Pendopo experiment in South Sumatra.

According to the Indonesian Mining Expert Association (Perhapi), based on 2011 price calculations, banning the export of coal with 5,100 kcal/kg adb and lower could result in losses of up to US$ 79.9 million in state revenues. If the export ban is applied on coal with 5,700 kcal/kg adb or lower, revenue losses would reach US$ 916 million. (Salva Report, Bloomberg)

Policy News

� The Energy and Mineral Resources Ministry revealed that it will issue a regulation on a mineral ore export duty before May 6. According to Thamrin Sihite, director general for mineral and coal, it will not be an export tax, but rather an export duty. The new export duty put forward by the energy ministry would be 15%, and is being discussed by the finance ministry. The export duty is a supplement to the 2012 ministerial regulation on a raw material export ban issued on Feb. 6. Miners are required to develop business plans for building smelters, as exporting unprocessed ores will be prohibited from May. (Salva Report, the Jakarta Post)

� Biofuel for Mining Operations by 1st July 2012. The Government has given an ultimatum to mineral and coal producers to use 2% biofuels of their total fuel for operations by no later than July 1, 2012. Until this time, no sanction will be applied to the industry. There are 25 mineral and coal mining industries that must use the biofuel. (Salva Report, Kontan)

Policy Update

FDI Dilution Ruling to Increase Stock Exchange Listings. Following the contentious foreign direct investment ruling in February, many believe there will be more mining companies listed on the Jakarta stock exchange in a bid to escape the compulsory dilution clause. It is believed that listing a foreign owned IUP holding company on the Indonesia Stock Exchange (IDX) will result in treatment as a local company. Once listed, such a company will cease to have the status of a foreign investment company regulated by the Indonesian Investment Coordinating Board (BKPM) and, instead, become a public company regulated by Capital Market and Financial Institution Supervisory Agency. (BAPEPAM). (Salva Report, Bisnis Indonesia, Coal Asia)

REPORT

Ahead of the curve - Indonesian coal production, demand and exports.

May 2012

888

Barito River Recedes Leaving Barges and Ships Stranded

The Barito River water level in the district of North Barito and Murung Raya, Central Kalimantan, recently dropped suddenly, trapping a number of high tonnage ships and barges. The vessels ran aground in Teweh Tengah or near the KH Hasan Basri bridge in Muara Teweh. The trapped empty ships and barges are largely owned by PT Marunda Graha Mineral, who operate a coal mine in Murung Raya and a number of other companies in the district of North Barito. The height of the Barito River is now difficult to forecast, but only intensive rain in the upstream region will make the water rise again. (Salva Report, Kompas)

Restricted Operations for Coal Barging Under the Barito River Kalahien BridgeOn February 17th the Central Kalimantan government issued a mandate stipulating that ships and barges can only pass under the Kalahien Bridge between 5:00am - 5:00pm. The bridge is located around 15 km from Buntok, South Barito regency, and spans 620 meters across the Barito River. In addition, vessels are to navigate the river only when the weather is good, with no fog or heavy rain, and in normal flow conditions. Coal barges are also required to use an assisting boat. A set of sanctions has not yet been included. The regulation was devised to avoid the collapse of the Kalahien bridge (as was the case of the Mahakam II bridge in Kutai Kartanegara) after an incident on 2 February 2012 at 3:15 am, when the fender of the Kalahien bridge was hit by a barge carrying 4,000 tons of coal for PT Marunda Graha Mineral (see photo below).

Infrastructure News

� Citra Marga Works on Integrated Infrastructure Project for Coal Transport. PT Citra Marga Nusaphala Persada Tbk has announced plans for a US$ 763 million integrated infrastructure project for coal transport in South Sumatra. The toll road will span the coal mining area in South Sumatra, starting from Tanjung Enim, Muara Enim, Lahat to Tanjung Siapi-Api Port,and is conducting a feasibility study of the project. The company will also build a transit port at the end of the toll road. (Salva Report, Indonesia Finance Today)

� Cokal to Develop two River Ports & Power Plants in Murung Raya. Cokal Ltd signed an MoU with the Regency of Murung Raya in Central Kalimantan to develop two river ports and two small coal-fired power stations. The MoU is recognized as a significant step towards Cokal’s aim to be exporting coal from the region by mid-2013. (Salva Report, The Indonesia Today)

� American investor interested in building seaport in Jambi. An investor from the US has declared its intention to build a deep seaport for ocean-going vessels in Jambi because of its abundant natural resources. The seaport, with a depth of 24 meters, will be located to the east of Jambi at Ujungjabung beach in Tanjungjabung Timur regency. Once finished, any vessel of any tonnage will be able to moor in the seaport, providing improved transportation for coal and plantation companies. Jambi is currently constructing a port at Muarasabak, in addition to an existing port at Talangduku. (Salva Report, The Jakarta Post)

Infrastructure Update

Bukit Asam to raise investment in railway project. PT Bukit Asam (PTBA) is planning to upsize its investment in the 270 km Tanjung Enim-Tanjung Siapi-api port railway project to US$ 2.4 bn, from an initial US$ 1.5 bn. The estimation of the investment funds was obtained following a review conducted by Adani Global. PTBA will build a coal terminal near Tanjung Siapi-api port to increase coal distribution through the route. PT Bukit Asam Transpacific Railway is targeted to start the construction of coal railroad in the second half of 2013 and to operate commercially in 2016. PTBA plans to increase its share in PT Bukit Asam Transpacific Railway to 30% from 10% this year. (Salva Report, Bisnis Indonesia)

The Kalahien Bridge hit by a coal barge Source: Salva Report, Kalteng Post

REPORT

9May 2012

May 2012