Member Article

The New Mining Law

After almost four years of discussions, the Bill on Minerals and Coal Mining was finally passed by the House of Representatives on 16 December 2008 and signed by the President on 12 January 2009 as Law No. 4 of 2009. The enactment of the New Mining Law brings mining under a new licensing regime whereas for the last 40 years, foreign investors have had to sign a Contract of Work to engage in mining. Besides this, the New Mining Law introduces many other important changes and some new provisions.

The New Mining Law seems not to differentiate between mining licenses for domestic and foreign investors. All investors must have either a Mining Business Permit (Izin Usaha Pertambangan-“IUP”), a People’s Mining Permit (Izin Pertambangan Rakyat-“IPR”) or a Special Mining Business Permit (Izin Usaha Pertambangan Khusus-“IUPK”) to engage in mining activities. An IPR will only be given to an individual (for a maximum of 1 Ha), a group of people (for a maximum of 5 Ha) and a cooperative (for a maximum of 10 Ha). An IUP and IUPK can be given to private companies with the size limitation explained below. The IUP/IUPK is divided into an Exploration and a Production Operations IUP or IUPK. The Exploration IUP/IUPK covers general surveys, exploration and feasibility studies, and the Production Operations IUP/IUPK covers construction, mining, processing and refining activities as well as transportation and sales. Each type of IUP/IUPK has its own term and area limitation

The following are the key features of the new Mining Law:
Term for the Exploration IUP: Metal: up to 8 years for a concession area of between 5,000 Ha and 100,000 Ha; Non-metal: up to 3 years for a concession area of between 500 Ha and 25,000 Ha; Specific non-metal: up to 7 years; Rocks: up to 3 years for a concession area of between 5 Ha and 5,000 Ha; and Coal: up to 7 years for a concession area of between 5,000 Ha and 50,000 Ha. While for the Production Operations IUP: Metal: up to 20 years for a concession area of up to 25,000 Ha, extendible for 10 years a maximum of twice; Non-metal: up to 10 years for a concession area of up to 5,000 Ha, extendible for 5 years a maximum of twice; Specific non-metal: up to 20 years extendible for 10 years a maximum of twice; Rocks: up to 5 years for a concession area of up to 1,000 Ha, extendible for 5 years a maximum of twice; and Coal: up to 20 years for a concession area of up to 15,000 Ha, extendible for 10 years a maximum of twice.

An IUPK is granted for a National Mining Reserve Area. The following are the terms and concession areas of IUPK: for the Exploration IUPK: Metal: up to 8 years for a concession area of up to 100,000 Ha; and Coal: up to 7 years for a concession area of up to 50,000 Ha. For the Production Operations IUPK: Metal: up to 20 years for a concession area of up to 25,000 Ha, extendible for 10 years a maximum of twice; and Coal: up to 20 years for a concession area of up to 15,000 Ha, extendible for 10 years a maximum of twice.
 
The relevant regional government issues a WIUP (Wilayah Izin Usaha Pertambangan/Mining License Business Area) to a business entity, a cooperative or an individual. A Metal minerals or Coal WIUP can be issued through public tender, while a Non-metal minerals and Rocks WIUP can be issued through an application for a reserve area.

State Reserve Areas (Wilayah Pencadangan Negara-“WPN”) are to be determined by the Central Government with prior approval from the House of Representatives. These areas may be exploited under an IUPK which may be issued to an Indonesian legal entity including a State Owned Enterprise, Regional Owned Enterprise or private sector entity. State/Regional Owned Enterprises are given priority in obtaining IUPK and if not taken up, the private sector can obtain it through public tender.

An IUP/IUPK cannot be transferred, but the ownership or shares in a company holding an IUP/IUPK can. The transfer of ownership or shares on the Indonesian stock exchange is only allowed if (i) the company has found two prospective areas during the exploration period, and (ii) there is prior notification to the Minister, Governor, or Regent/mayor in accordance with their authorities and the transfer is not contrary to the prevailing laws and regulations. The New Mining Law does not include any provision regarding a transfer of shares among unlisted/private companies. However, from a seminar on the new Mining Law, we understand that this provision is intended to apply to a transfer of shares among unlisted/private companies.

Under the New Mining Law, the Central Government, after consultation with the House of Representatives, can determine policy on giving priority to minerals and coal for domestic interests, including the authority to determine production levels for each commodity in each year on a Province-by-Province basis. This provision may have an impact on the annual production limit of a company holding a license to export to the international market. Further implementation and technicalities will be regulated by government regulations.

Holders of IUP and IUPK must increase the value of their minerals and/or coal resources through mining, processing and refining, and the use of the minerals and coal. They must process and refine the minerals and coal domestically. A license holder can cooperate with other holders of Production Operations IUPs for the same minerals and coal processing and refining. The companies can either build their own processing/smelting facilities or use existing processing/smelting facilities in Indonesia owned by other parties. Existing Contracts of Work (CoWs) which are already in the production phase, have a 5 year grace period to comply with this obligation.

After 5 years of production, all companies must divest any shares owned by foreign parties to the Central/Regional Government, a State/Region owned enterprises or local companies. This provision will be regulated further in a government regulation. The current provision is silent on whether the divestment requirement only applies to mining companies which are 100% owned by foreign shareholders.

Holders of Production Operations IUPKs for metal minerals and coal must pay a production fee of 10 % of their net profits as of production, with 4 % going to the Central Government and 6 % being shared between the relevant province and regencies.

A temporary suspension can be granted to a holder of an IUP/IUPK, in case of force majeure, or conditions which hamper mining activities, cause some or all mining activities to cease or the environment can no longer support the mineral and/or coal production activities. A temporary suspension will not reduce the term of the IUP. The duration of a temporary suspension may be up to 1 year and is extendable once for 1 year.

Holders of IUPs or IUPKs must use local and/or national mining services companies. If no local companies are available, foreign companies whom are deemed as Indonesian legal entities may be used. Holders of IUPs and IUPKs may not use subsidiaries or affiliates to provide mining services, unless Minister of Energy and Mineral Resources approval is obtained.
The New Mining Law recognizes the concept of corporate crime. Sanctions may be imposed on contractors as legal entities. If the crime is committed by a legal entity, the legal entity and/or its management will be charged with the crime and, if found guilty, ordered to pay the regulated fine plus an additional 1/3. Besides the criminal sanctions, the legal entity may have its business license and legal entity status revoked.

Any dispute arising from the implementation of an IUP, IPR or IUPK is to be settled through the courts and arbitration domestically under the prevailing laws.

Existing CoWs and CCoWs remain valid until the expiration of their terms. However, the contract terms and conditions must be adjusted to the provisions of the New Mining Law within 1 (one) year of the enactment of the New Mining Law i.e. 12 January 2010 except regarding state revenue.

The New Mining Law does not contain any transitional provision for KPs (Mining Authorizations) issued to Indonesian companies regarding whether KPs already issued will remain valid and whether they must be adjusted to the New Mining Law, as is the case with existing CoWs and CCoWs. This may be regulated in the implementing regulations.

The implementing regulations (Government Regulations, Ministerial Decrees and directives) for the implementation of the provisions of the New Mining Law are to be promulgated within 1 year of its enactment.

 

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