Special Issue: Curtains closed on Indonesian ore exports

The following article is printed with permission from Hadiputranto, Hadinoto & Partners.(ed)

On 6 February 2012, the Minister of Energy and Mineral Resources issued Ministerial Regulation No. 7/2012 regarding the value added enhancement of minerals through mineral processing and purification activities (Regulation 7/2012), which became effective on its issuance date.

Regulation 7/2012 is the key regulation which implements the provisions of the 2009 Mining Law which require minerals processing to be carried out in Indonesia.

Regulation 7/2012 in essence imposes:
(i) obligations on mining companies to carry out onshore processing (either by themselves or through cooperation with appropriately licensed third parties); and
(ii) a ban on the export of ore/raw materials, but provides for different deadlines as to when these two distinct requirements must be met (with the ban on exports applying almost immediately, but the obligations to process apparently being delayed for a number of years depending on the development stage of the relevant mine). The industry is a little perplexed as to why a distinction has been drawn between the two aspects (i.e. ore export ban and processing obligation requirement) when these things are very much viewed as two sides of the same coin. Put simply, if the Government has imposed an immediate ban on exports, they have effectively imposed an immediate obligation on mining companies to ensure their ore/raw materials are processed onshore.

However, as explained below, based on recent discussions with the Ministry of Energy and Mineral Resources, it appears that (despite the wording of the new regulation not being very clear on this point) the Ministry has created this dichotomy to allow for the continued export of intermediate products (e.g. concentrates) prior to the obligations for full onshore processing coming into effect. The approach of the Ministry, based on our discussions with them, is that they want mining companies to approach the Ministry, explain their situation, and then the Ministry will give them directions on how to satisfy their onshore processing obligations.

Key Features

The key features of Regulation 7/2012 include:
− Exports of ore/raw materials to cease by 6 May 2012. Any person holding an IUP Operation Production or an IPR (People's Mining Right) are prohibited from exporting ore/raw minerals after 6 May 2012.

The commencement of this ban from 6 May 2012 would, on first glance, appear to be in direct contrast with the provisions of (the higher ranking) Government Regulation 23/2010 which provided that IUP holders would have until January 2014 to conduct processing and refining in-country. However, as mentioned above, in discussions with the Ministry, they have indicated that although a ban on ore becomes effective from 6 May 2012, the requirement to process the relevant minerals to the levels of processing/refining required by Regulation 7/2012 does not similarly become effective on that date, but is instead is deferred (as further discussed below), and accordingly as Government Regulation 23/2010 refers to the obligation to process by 2014, not the restriction on shipping ore, the Ministry believes that the two regulations are not contradictory.

There are no exceptions to the ban on exports of ore. Unlike previous regimes introduced under the framework of the 2009 Mining Law, noncompliant structures are not given any meaningful transition period to restructure the arrangements. Accordingly, the continued performance of any ore export contracts will put the relevant mining company in breach of this regulation (and therefore its mining licence). Depending on the governing law of existing offtake contracts for ore, and their particular force majeure provisions, mining companies now subject to these requirements may be able to rely on force majeure relief to excuse them from continuing to supply ore, or may be able to assert that the contracts have been brought to an end through frustration of contract. Clearly, affected parties should review the terms of their respective contracts and arrangements that they have entered into to better understand the ramifications of this regulation on its contractual obligations.

It is interesting to note though that a similar prohibition on the export of ore is not expressed to apply to the holders of Contract or Work. One reason for this may be the Government's implicit acknowledgement that any controls or restrictions imposed on Contract of Work holders must be imposed through amendments to the Contracts of Work themselves, and not through regulations. Another reason may be that the majority of the Contracts of Work already contain provisions which impose some obligations (some weak, some strong, depending on the generation of Contract of Work) on the Contract of Work holder to process onshore.

− Minimum Prescribed Processed Minerals. Minerals covered under Regulation 7/2012 include metal-based minerals, non-metal based minerals and rocks. The schedules of Regulation 7/2012 provide for the form of minimum processed minerals which may be exported to offshore destinations. Mineral mining companies must adjust their existing onshore mineral processing plans to meet the minimum thresholds of processed minerals set out under Regulation 7/2012.

The levels of processing for metallic minerals set out in the schedules to Regulation 7/2012 require processing through to almost finished product, for example copper (copper cathode 99.9% Cu), bauxite (smelter-grade alumina), iron ore (85% Fe or 94% pig iron) and nickel (nickel matte >70%).

− Mining companies must process themselves if economical. There is some suggestion in the wording of Regulation 7/2012 which suggests that an IUP Production Operation holder is only entitled to have third parties conduct the processing or refining if it would be uneconomical for the IUP Production Operation holder to implement the processing and refining itself. There is no definition of "uneconomical", and arguably on its plain meaning, simply because it may be more economical for a mining company to outsource this processing/refining would not make the processing/refining project "uneconomical". However as the focus and intent behind this regulation is merely to ensure that the processing/refining is done onshore in Indonesia, we would not expect the Government to be too concerned about whether the mining company itself or a third party processor/refinery is the one carrying out the value adding activities.

In any event, where a mining company does not wish to do its own processing/refining and wishes to appoint a third party to do this (either by selling ore to a refinery, or tolling ore through a refinery etc), the regulation requires that the mining company obtain approval from the Ministry of Energy and Mineral Resources for these arrangements. So in any event where a mining company does not wish to do its own processing, it will necessarily need to obtain the blessing of the Ministry.

− Transition Period for Finished Product Processing.

Separately to the ban on ore exports, in respect of the obligations of mining companies to process minerals to the levels required by Regulation 7/2012, different transitional provisions are afforded depending on what stage of mine development the relevant mining company is in:
− For Exploration IUP holders or Contract of Work holders in the exploration or feasibility stages, those companies must comply with the onshore processing requirements by 6 February 2015. If the mining company cannot meet these requirements (either through developing its own plant or cooperating with third parties), then it is required to consult the Director General.
− For Production Operation IUP holders carrying out construction activities, or Contract of Work holders in construction stage, those companies must comply with the onshore processing requirements by 6 February 2016. Again, if the mining company cannot meet these requirements (either through developing its own plant or cooperating with third parties), then it is required to consult the Director General.
− For Production Operation IUP holders already in production or Contract of Work holders in the production stage, those companies must comply with the onshore processing requirements by 9 January 2014 (i.e. 5 years after the passing of the 2009 Mining Law). Again, if the mining company cannot meet these requirements (either through developing its own plant or cooperating with third parties), then it is required to consult the Director General.

It is odd to note that a mining company that is still in its feasibility or construction stage is given more time to comply with the onshore processing requirements than a mining company already in production.

As mentioned above, based on recent discussions with the Ministry, it appears that if the Ministry is satisfied that a company has a plan in place to meet these deadlines, the mining company will be permitted to export intermediate products until that plan is implemented.

− Consultation for uneconomic arrangements. Companies which can demonstrate that it is uneconomical for them to do their own processing and it is similarly uneconomical for them to meet their onshore processing requirements through cooperation with a third party are entitled to consult with the Ministry of Energy and Mineral Resources. In these circumstances, the Ministry may, amongst other things, appoint another processing licence holder (whether a mine with a processing facility or a stand-alone processing facility), although it is not clear whether this power means that the Ministry can impose such a duty on the owner of these processing facilities without their prior agreement (and we would be very surprised if this is what was intended, as to give the Government such powers to unilaterally impose such a duty would be unprecedented).

In terms of other actions the Government may take in these circumstances, it is not clear whether or not the Ministry can simply give a dispensation from the onshore processing requirement as a means to solve a situation where it is simply not economical for a mine to process onshore in Indonesia (either by itself or through third parties).

− Licensing and Approvals. Regulation 7/2012 provides for a number of licensing and approval requirements from the relevant authorities for a number of matters, including:
(a) establishment of a stand-alone onshore mineral processing facility; and
(b) cooperation arrangements in connection with onshore mineral processing activities (e.g. sale and purchase of ore or concentrates, tolling arrangements, share-ownership by holders of IUP/IUPK Operation Production in an onshore mineral processing facility).

− Sanctions. Violation of Regulation 7/2012 provisions is subject to administrative sanctions from warning letters, temporary suspension up to revocation of licenses.

Conclusion
The issuance of Regulation 7/2012 has certainly created significant uncertainty for existing and potential investors in Indonesia's minerals sector. In essence, the regulation requires mining companies to plead their case to the Ministry of Energy and Mineral Resources regarding the feasibility of implementing onshore processing, and then wait for the guidance given by the Ministry. For those companies that have already invested significant funds in developing a mine in Indonesia, there may be no other choice than to go through this consultation process. However for new investors looking to develop mines in Indonesia, the uncertainty created by this new onshore processing regime may be of itself sufficient to deter investment.

How the Ministry exercises these very wide discretionary powers given to it under Regulation 7/2012, and how strictly the Ministry enforces the ban on export of ores from 6 May 2012, is yet to be seen.

Please feel free to contact any one of our Indonesian Energy, Mining & Infrastructure team members should you require further details.

Contact Information:
Luke Devine
+62 21 515 4909
luke.devine@bakernet.com

Norman Bissett
+62 21 515 5350
norman.bissett@bakernet.com

Milan Radman
+65 6434 2641
milan.radman@bakermckenzie.com

Muhammad Karnova
+62 21 515 4869
muhammad.karnova@bakernet.com

Reggy Firmansyah
+62 21 515 5138
reggy.firmansyah@bakernet.com