New Indonesian Mining Regulation Demands 51% Local Project Stake in 10 Years

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--Following the trend toward "resource nationalism" in developing countries, Indonesia's Energy Ministry has posted new rules that require foreign firms to sell down stakes in mines by the 10th year of production and increase Indonesian ownership to at least 51%.

"Regulation 24," which was issued in February, implements divestment requirements for foreign investors in Indonesian mining projects and proclaims that the prohibition on the transfer of Indonesian mining licenses (IUPs) has been overturned, with limitations.

The change brought about by Regulation 24 is the requirement for foreign investors in the country's mining sector to divest a minimum of 51% of the equity in IUP-holding entities by the 10th year of production, in accordance with a divestment schedule. This requirement applies to IUP license holders with any level of foreign shareholding.

Five years after the commencement of production, a foreign IUP holder is required to divest shares in accordance with the divestment schedule, so that at the end of the tenth year of the mining operation, a minimum of 51% in the project will be owned by an Indonesian participant.

The divestment schedule for each year following the fifth year is: 20% for the sixth year, 30% for the seventh, 37% for the eighth, 44% for the ninth and 51% for the 10th year.

The Indonesian participants under Regulation 24 are the central government; the provincial, regency or municipal government; state-owned enterprises or regional-owned enterprises; and a private national business entity.

A spokesman for the Indonesian Coal Mining Association said that the new regulation would not affect existing contracts, according to the Jakarta Post.

That means that major miners still operating under the previous dispensation, including Freeport Indonesia, which is a subsidiary of Freeport-McMoRan Copper and Gold (NYSE:FCX) (Phoenix, Arizona), and Newmont Nusa Tenggara, which is a subsidiary of Newmont Mining Corporation (NYSE:NEM) (Greenwood Village, Colorado), will not experience any impact on their current operations.

Indonesia's need for foreign investment in mining means that the new regulations may need re-calibration from both sides of the mine-funding equation. The divestment period may not be long enough to allow for profits on project investment.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.