American mining giant Freeport McMoRan Copper & Gold may dominate headlines for its endless negotiations with the Indonesian government over the fate of its rich Grasberg mine, but spare a thought for the small foreign mining firms who are getting trampled in the process.
The Ministry of Energy and Mineral Resources has recently sent an ultimatum to eight Contract of Work (CoW) holders that it will be “unable to provide any services to company activities” if the hold-outs fail to sign a 37-page amended contract by the end of the year.
Riding a wave of resource nationalism that began at the start of the commodity boom in the mid-2000s, the ministry has already rejected one firm’s request for an extended feasibility study and turned down another’s 2018 work program, both of which are needed to raise additional finance.
There are no winners here. In one case, the ultimatum means laying off 150 local workers and the cancellation of a planned UD$150 million mine development that would have employed as many as 600 extra staff and generated US$20 million a year in taxes.
What baffles the mostly Australian concession holders is that at a meeting some weeks before the November 2 letter from mineral development director Bambang Susigit, Deputy Energy and Mineral Resources Minister Archandra Tahir assured them that rumors of a pending ultimatum were unfounded.
The mixed messages suggest not everyone in government is on the same page. Although the letter was copied to minerals and coal director-general Bambang Gatot Ariyono, it was unusual the warning would be entrusted to a second-tier official when it will likely raise the country’s risk premium for all future investments, mining or otherwise.
Indonesian and foreign mining sources believe the driving force behind the ultimatum is the ministry’s legal office where, unlike other departments, the staff is not subject to regular rotation. As such, it has become a powerful force that allows little room for compromise.
Indeed, in the years between 2015 and early 2017, small miners were compelled to negotiate with a low-ranking, nationalist-minded bureaucrat who appeared to have more power than his position suggested. He is now gone, but his inflexible approach is not.
So far, the companies have settled for a low-key response, simply expressing disappointment at the ministry’s action. But the letter is the first time they have been presented with something specific that lawyers say opens the door for potential arbitration.
Although they have not followed Freeport in using the “A” word as a threat, the ultimatum is what one executive calls “a fundamental breach that shows bad faith” and could well be deployed in tandem with Freeport if its negotiations collapse.
The eight firms all hold 6th and 7th generation contracts, approved by the House of Representatives and the President in the late 1990s and with a force of law that is not present in the newly-introduced mining licenses, or so-called IUPKs, which they are essentially being asked to submit.
The government has said all along it will honor the existing contracts, but in forcing companies to adhere to the terms of the 2009 Mining Law, under which the IUPKs were introduced, it is creating business conditions that were never there when they were appealing for investors.
The revised CoW repeats the demands the government has always stuck to, including limits on the size of a concession, a requirement for more state revenues, and undertakings to divest 51% after 10 years of production, build refining capacity and use local content and labor.
But it also contains 22 changes to the original draft, one an overarching provision which says they must follow “prevailing laws.” That is what converts contracts to the status of an IUPK, removing all business certainty and the ability of a contractor to either negotiate or seek recourse in offshore arbitration.
This directly contravenes Article 23 of their contract, which says in part: “Both parties shall ensure that no revision of this agreement shall prejudice the company’s ability to retain financial credibility abroad and to raise finance by borrowing internationally in a manner and on terms normal to the mining industry.”
As a generic document, the amendment also ignores the very different business and technical circumstances of each company and is little unchanged, in substance at least, from the shorter 22-page draft they were first asked to sign in 2015 after nine years of on-off negotiations.
Four of the companies are gold operations in Sumatra and Sulawesi — two of which are in production — two firms are looking for financial backers to exploit promising copper discoveries in Central Kalimantan and Sumbawa, and one is a mineral sands concession on Papua’s northern coast.
The world-class Weda Bay nickel deposit in Halmahera, the main island in the Moluccan chain, may be an exception with French mining company Eramet recently entering into a partnership with China’s Tsingshan Group, the world’s largest steel producer.
In what the Indonesians hold up as the first big success story of its value-added mineral policy, Tsingshan is building what will eventually be a US$6 billion nickel pig iron and carbon steel complex in Morowali, Central Sulawesi, which lies conveniently across the Molucca Sea from Halmahera.
The 51% divestment requirement itself makes further investment difficult, especially when it is not provided for in either the 6th or 7th generation contracts when they were approved by the Indonesian government 20 years ago.
Each of the contractors has a different negotiating approach. One has refused to divest until the end of 30 years of production, as set out in its contract. Others are proposing only a 30% divestment, while another is suggesting a 51% divestment after 15 years, instead of a progressive drawdown after five years.
More to the point, foreign mining executives contend that the actual concept of divestment may, in fact, generate less income for the state given the recurring capital expenditure involved, higher operating costs and the long wait for dividends.
Typically, as is the case with the current mining policy itself and also eastern Indonesia’s now-stalled Masela gas-field project, the government has never done a thorough economic valuation to justify claims that it will bring greater benefits to its people.