Investment in Indonesias mineral refining and processing

sector: value-added regulations and industrial policy

July 2012

Further information
If you would like further information on any aspect of this client
note, please contact a person mentioned below or the person
with whom you usually deal.
Singapore
James Harris
Managing Partner, Hogan Lovells
T +65 6302 2552
james.harris@hoganlovells.com
Brad Roach
Partner, Hogan Lovells
T +65 6302 2556
brad.roach@hogalovells.com
Justin Patrick
Associate, Hogan Lovells
T +65 6302 2578
justin.patrick@hoganlovells.com
Jakarta
Irawati Hermawan
Managing Partner, Hermawan Juniarto
T +62 21 5795 7095
ihermawan@hermawanjuniarto.com
Tokyo
Anthony Raven
Partner, Hogan Lovells
T +81 3 5157 8302
anthony.raven@hoganlovells.com
This note is written as a general guide only. It should not be
relied upon as a substitute for specific legal advice.

Contents

Abbreviation table

Background

Existing smelter facilities

Contracts of Work

Other announced projects

Value-added requirements

Project financing

Project implementation

Obtaining approval for ore and raw material exports

Registered exporter and export approval

Potential divestment requirement

Hogan Lovells and Hermawan Juniarto

Appendix A: Announced smelter and metal processing plants projects

Abbreviation table

Abbreviation

Meaning

2009 Mining Law

Law No. 4 of 2009 on Mineral and Coal Mining

Antam

PT Aneka Tambang (Persero) Tbk.

ASX

Australian Securities Exchange

COW

Contract of Work (Kontrak Karya)

FCX

Freeport-McMoran Copper & Gold Inc.

IDX

Indonesia Stock Exchange

Inalum

PT Indonesia Asahan Aluminium

IUP

Mining business licence (izin usaha pertambangan)

MEMR

Ministry of Energy and Mineral Resources

MEMR Reg. No. 7/2012

Minister of Energy and Mineral Resources Regulation No. 7 of 2012 on

Increasing the Value of Minerals through the Activities of Mineral
Purification and Processing

MEMR Reg. No. 11/2012

Minister of Energy and Mineral Resources Regulation No. 11 of 2012 on

Amendment to Minister of Energy and Mineral Resources Regulation No.
7 of 2012 on Increasing the Value of Minerals through the Activities of
Mineral Purification and Processing

MOT Reg. No. 29/2012

Minister of Trade Regulation No. 29 of 2012 on Provisions on the Export

of Mining Products

MP3EI

Master Plan for the Acceleration and Expansion of Indonesia's Economic

Development (Masterplan Percepatan dan Perluasan Pembangunan
Ekonomi Indonesia)

PMA company

Foreign investment (penanaman modal asing) company

Reg. No. 574.K

Director General of Minerals and Coal Regulation No. 574.K/30/DJB/2012

on Provisions on the Methods and Requirements for Mining Product
Export Recommendation

Investment in Indonesias mineral refining and processing sector: valueadded regulations and industrial policy

BACKGROUND

PT Aneka Tambang (Persero) Tbk.

On 6 February 2012, Indonesias Minister of Energy and

Mineral Resources promulgated Regulation No. 7 of 2012
("MEMR Reg. No. 7/2012") on increasing the value of
minerals through the activities of mineral purification and
processing. This regulation, which applies to metals (such as
bauxite, copper, gold, iron, nickel and tin), non-metal minerals
and rocks (but not to coal), implements the requirement of
Law No. 4 of 2009 on Mineral and Coal Mining ("2009 Mining
Law") that mining companies process minerals and coal
domestically prior to export. Due to concerns voiced from
both mining companies and trading partners, the
implementation of the ban on unprocessed exports originally
scheduled for 6 May 2012 has been deferred until 2014, so
long as the proposed exporter can fulfil certain conditions.
These conditions provided in Regulation No. 11 of 2012
("MEMR Reg. No. 11/2012") and related regulations
promulgated by the Director General of Minerals and Coal
and the Minister of Trade are intended, among other things,
to prevent ore exports by illegal miners. Reportedly, smaller
Indonesian mining operations, which operate pursuant to a
mining business license (izin usaha pertambangan or "IUP"),
have been the most immediately affected by these new
requirements (although "Contracts of Work" are potentially
affected as well).

PT Aneka Tambang (Persero) Tbk. ("Antam"), Indonesias

65% state-owned integrated mining company (listed on the
Indonesia Stock Exchange ("IDX") and the Australian
Securities Exchange ("ASX")), has three ferronickel smelters
in Pomalaa, Southeast Sulawesi (FeNi I, FeNi II and FeNi III),
for a total capacity of 26,000 tpy. Antam is developing a
fourth ferronickel smelter to be located in Buli, East
Halmahera, North Maluku. (Antam also operates a precious
metal refinery in East Jakarta through its subsidiary PT
Logam Mulia.)
Antams other announced projects in
development are described in Appendix A.

The domestic processing obligations have the potential to

encourage large-scale investments in smelters and other
processing facilities, and the perceived need for investment in
such facilities has been increased by the promulgation of
MEMR Reg. No. 7/2012 and related regulations. Indeed, the
Master Plan for the Acceleration and Expansion of Indonesia's
Economic Development (Masterplan Percepatan dan
Perluasan Pembangunan Ekonomi Indonesia or "MP3EI"), for
the period 2011 to 2025, includes as goals the development
of an integrated aluminium industry, the strengthening of
downstream nickel industries, and the further development of
steel smelting and stainless steel production capacity.

PT Smelting, which is 25% owned by PT Freeport Indonesia,

operates Indonesias first and only copper smelter, a 270,000
tpy copper smelter in East Java. PT Smelting processes
copper concentrate from Freeports Grasberg Mine (located in
Papua) and Newmont's Batu Hijau mine (located in
Sumbawa). The other shareholders in PT Smelting are
Mitsubishi Materials Corporation (60.5%), Mitsubishi
Corporation Unimetals Ltd. (9.5%) and Nippon Mining &
Metals Co., Ltd. (5%).

Many Indonesian mining companies have, however, been

negatively impacted by the value-added policy, with some
companies ceasing operations completely and many laying off
workers. The value-added policy has also received criticism
from both China and Japan, which have smelting and
processing industries that rely heavily on imports of raw
materials from Indonesia. As of 12 June 2012, the Japanese
government had indicated that it may make a complaint to the
World Trade Organization regarding the policy.
EXISTING SMELTER FACILITIES
With the exception of tin smelters (Indonesia is the worlds
largest refined tin exporter), existing smelter facilities in
Indonesia are limited.

PT Indonesia Asahan Aluminium

PT Indonesia Asahan Aluminium ("Inalum") operates the only
aluminium smelter in Indonesia, a 225,000 tpy aluminum
smelter in North Sumatra. Inalums facility was established
pursuant to a 1976 joint venture between the Indonesian
government (holding 41.12% of Inalum), and Nippon Asahan
Aluminium (which is 50% owned by the Japan International
Cooperation Agency, with 11 other firms holding the
remainder) (holding 58.88% of Inalum). This joint venture is
1
due to expire in October 2013.
PT Smelting

CONTRACTS OF WORK
Generally, existing large metal mining operations in Indonesia
are conducted under a "Contract of Work" ("COW") with the
Indonesian government, based on the predecessor mining
law. Under the 2009 Mining Law, it intended that these
COWs are to be adjusted based on renegotiation (except for
terms relating to state revenues). It is unclear how and to
what extent the value-added requirements will impact these
negotiations, as each company has unique operations.
1

In 2011, the Government Investment Center (Pusat Investasi Pemerintah

or PIP) announced its intention to acquire the remaining shares in Inalum
at the conclusion of the joint venture, although other parties had expressed
interest in acquiring a stake in the company as well. In March 2012, the
government confirmed its intention to acquire the project, indicating a
rejection of the proposal from the Japanese consortium for a 30-year
extension of the joint venture tied to additional investment and an
expansion in capacity. "Govt to take over Inalum for $700m, Hatta says,"
The Jakarta Post (3 March 2012). National Aluminium Company Limited of
India had also reportedly expressed interest in acquiring a stake in Inalum.
"Nalco in talks to buy Indonesian firm Inalum," The Hindu Business Line
(15 July 2012).

PT Vale Indonesia Tbk.

PT Vale Indonesia Tbk., the IDX-listed subsidiary of Brazil's
Vale S.A., and Indonesias largest nickel miner, has domestic
processing operations and produces nickel matte, an
intermediate product. PT Vale Indonesia Tbk. has already
announced the planned construction of a smelter, as well as
additional production furnaces and electricity generation
infrastructure.
PT Freeport Indonesia
PT Freeport Indonesia, an affiliate of Freeport-McMoran
Copper & Gold Inc. ("FCX"), processes a portion of its copper
concentrate through PT Smelting, but has also exported
copper concentrate from the Grasberg mine to the smelting
unit of Atlantic Copper S.L.U., a Spanish subsidiary of FCX,
and to customers under long-term contracts. Reportedly, PT
Freeport Indonesia intends to supply concentrates for
domestic processing to PT Indosmelt and PT Nusantra
Smelting, both of which are constructing new projects
(detailed in Appendix A).
PT Newmont Nusa Tenggara
PT Newmont Nusa Tenggara, the copper and gold mining
company and affiliate of Newmont Mining Corporation,
exports copper concentrate and also processes a portion of
its copper concentrate through PT Smelting. As of February
2011, PT Newmont Nusa Tenggara had concluded that
construction of copper and gold smelters was not
economically feasible. Reportedly, the company also plans to
supply concentrate to PT Indosmelt and PT Nusantara
Smelting.
PT Weda Bay Nickel
PT Weda Bay Nickel, the development phase nickel mining
company, owned by Strand Minerals Pte. Ltd (90%) (a
Singapore-based company owned by ERAMET S.A.,
Mitsubishi Corporation and Pacific Metals Co. Ltd.) and
Antam (10%), has included a hydrometallurgy and processing
plant for production of a nickel product and cobalt sulphide in
its planned project. Construction of the project is expected to
commence in 2013.
PT Jogja Magasa Iron
PT Jogja Magasa Iron, a joint venture between Indo Mines
Limited (listed on the ASX, 19.9% of which had been acquired
by the Rajawali Group as of February 2012) (70%) and PT
Jogja Magasa Mining (reportedly owned by the Sultan of
Jogjakarta and other individuals) (30%), is developing a
2 million tpy iron concentrate mine and processing facility in
Kulon Progo Regency, Yogyakarta.

Sumatra. The mine was reportedly expected to commence

commercial production of gold in July 2012 and is anticipating
production of 250,000 ounces per annum of gold and 2-3
million ounces per annum of silver for a minimum of 10 years.
G-Resources has reportedly entered into an agreement with
Antam's subsidiary, PT Logam Mulia, to purify gold and silver
from the Martabe mine.
OTHER ANNOUNCED PROJECTS
Numerous investors have announced intentions to build
smelters in Indonesia in anticipation of the 2014 deadline to
comply with the value-added requirements. Details of the
various projects that have been announced, based on media
reports and other public information, are contained in
Appendix A. Reportedly, as of 9 July 2012, 185 companies
had made proposals for smelter projects to the Ministry of
2
Energy and Mineral Resources ("MEMR").
VALUE-ADDED REQUIREMENTS
MEMR Reg. No. 7/2012 restricts the ability of holders of an
IUP to export ore and other unprocessed minerals, and
provides the minimum levels of processing and purification
(for both IUP holders and COW contractors) that each type of
mineral is required to undergo prior to export.
MEMR Reg. No. 7/2012 also provides that, with government
approval, mining companies may cooperate with each other to
fulfill the processing and purification requirements through the
domestic buying and selling of unprocessed minerals, jointly
processing minerals, constructing shared facilities or
establishing a joint venture to construct the required facilities.
Additionally, mining companies that have obtained temporary
licenses to sell minerals recovered during exploration and
feasibility stages, and holders of mineral sales licenses that
are not licensed mining companies, are only permitted to sell
minerals domestically.
Programs for complying with the value-added requirements
are to be reported to the relevant authorities (the applicable
mayor, regent, governor and/or the Director General of
Minerals and Coal) for evaluation. Sanctions for failure to
comply with MEMR Reg. No. 7/2012 include license
revocation and administrative sanctions. Requirements vary,
depending on the phase of the mining activity.
Exploration Phase
Existing exploration IUP holders and contractors under COWs
that are conducting exploration or preparing a feasibility study
are required to adjust their processing program to comply with
the value-added requirements no later than 6 February 2015
(three years after the promulgation of MEMR Reg. No.
7/2012).

PT Agincourt Resources
PT Agincourt Resources, a subsidiary of G-Resources Group
Limited (listed on the Hong Kong Stock Exchange), is
developing the Martabe gold and silver mine project, in North

Ignasius Laya and Nurseffi Dwi Wahyuni, "185 Companies Apply

for Smelter Construction Permit," Indonesia Finance Today (9
July 2012).

Construction Phase

Government Reports and Consents

Existing IUP production operation holders and contractors

under COWs that are engaged in mine and infrastructure
construction are required to adjust their processing program
to comply with the value-added requirements no later than
6 February 2016 (four years after the promulgation of MEMR
Reg. No. 7/2012).

Existing IUP production operation holders and contractors

under COWs that have commenced production are required
to adjust their processing program to comply with the valueadded requirements no later than 12 January 2014 (five years
after the promulgation of the 2009 Mining Law).

Financial obligations of Indonesian companies and individuals

in favour of offshore entities may require reporting to Bank
Indonesia (the central bank), the Ministry of Finance and the
PKLN Team (Tim Koordinasi Pengelolaan Pinjaman
Komersial Luar Negeri or Offshore Commercial Loan
Team). Numerous reports to the MEMR, the relevant regional
government and, for projects in forest areas, the Ministry of
Forestry will also be required during preparation, construction
and operational stages. Moreover, under some structures,
consents from the MEMR relating to commercial contracts
may also be required; an IUP production operation typically
contains a term requiring ministerial approval of any long-term
3
sales contract (duration of 3 years or more).

PROJECT FINANCING

Use of Domestic Accounts

Smelter and processing plant projects provide a potential

basis for limited recourse project financing, with a revenue
stream to be provided by either off-takers purchasing
processed materials from the smelter company or by mining
companies paying a processing fee to the smelter company
under a tolling arrangement. For smelter projects intended to
derive significant feedstock directly from numerous small
mines, project financing based on the long-term commitments
of creditworthy off-takers may be a viable option. Projects
with feedstock from established large Indonesian mines, or
from a credit worthy commodity trader aggregating feedstock
from small mines, could potentially use a tolling arrangement.
The availability of export/import credit support (from countries
seeking to export goods and services for the project and/or to
import the resulting products), and hedges for commodity
price and interest rate fluctuations, will also be fundamental
for the preparation of a bankable project.

Account controls and related security devices under proposed

financing structures must comply with Bank Indonesia
Regulation No. 13/20/PBI/2011 concerning Receipt of Export
Proceeds and Withdrawal of Foreign Exchange from External
Debt, which generally requires that, from 2 January 2012:

Production Phase

Additional issues relating to financing a project in Indonesia

include:
Security Package
Financing of smelter construction may be secured by a
customary Indonesian security package (fiduciary security
over movables, receivables and eligible intangibles, land and
building mortgages, pledges of shares and pledges of
accounts). The collateral package generally cannot include,
however, the mining licenses, any minerals for which royalties
have not yet been paid (and therefore to remain state
property), any land areas controlled or owned by the state
(such as forest areas used pursuant to a "borrow use" license
(izin pinjam pakai)), and benefits of contractual obligations
other than the right to receivables.
Corporate and/or
individual guarantees, and powers of attorney, conditional
novation or consents relating to commercial agreements, may
be appropriate under some structures as well.

Proceeds from exports be received in an Indonesian

foreign exchange bank; and

Proceeds from a non-revolving loan agreement not used

for refinancing, and certain other types of credit
obligations to offshore creditors, be received in an
Indonesian foreign exchange bank.

This regulation limits the use of offshore accounts in a

financing structure.
PROJECT IMPLEMENTATION
Issues to consider in the formulation and implementation of
smelter and processing plant projects include:
Environmental Issues
Generally applicable considerations relating to environmental
impact assessment (known in Indonesia as AMDAL) will
naturally be relevant to smelter projects, including the
potential for significant electricity and water needs and NOx,
H2S, SO2 emissions. Many by-products from a smelter may
be classified as B3 (bahan beracun dan berbahaya) waste
(toxic and hazardous waste) under prevailing environmental
regulations, and therefore require specific programs for the
storage, transportation and disposal of such wastes and
related licenses.
3

Pricing formulas under long-term contracts may also be

constrained by policies requiring sales to be completed with
reference to a metal mineral and non-metal mineral reference
price (under Minister of Energy and Mineral Resources
Regulation No. 17 of 2010 on the Procedure for Determining the
Reference Price for Sales of Minerals and Coal). Unlike the
reference price policy for coal, the reference price policy for metal
minerals and non-metal minerals has not yet been implemented.

Electricity
Many smelter projects have been proposed for areas that may
have only limited access to electricity. In June 2012, PT PLN
(Persero) (Indonesia's state-owned electricity company)
announced that it had received 16 proposals for electricity
4
connections for processing plants and smelters.
Other
investors reportedly intend to construct their own captive
power plants.

Some of the key results of the various recommendations,

approvals and requirements are as follows:

a mining company will be required to demonstrate

compliance with the various regulatory requirements
imposed on it and some efforts towards fulfilling the
value-added requirements by the applicable deadline;

a mining company will be required to disclose the

underlying contract with the offshore purchaser of the
commodity; and

Technical evaluation of the status of the proposed project site

including whether it is subject to customary land rights
(adat) and whether it contains forest areas will be
necessary. Any rural land acquisition program will require
coordination with local authorities and communities and
experienced representatives.

mining companies that are authorised to export ore and

raw materials will be subject to a 20% export duty (based
on
Minister
of
Finance
Regulation
No.
75/PMK.011/2012).

Fiscal incentives

MEMR Reg. No. 11/2012 provides that an IUP holder may

export ore or raw materials if the IUP holder obtains a
recommendation from the Director General of Minerals and
Coal. Under MEMR Reg. No. 11/2012, in order to receive
such a recommendation, a mining company that holds an IUP
6
production operation must fulfil the following requirements:

Land acquisition and land use restrictions

Projects may potentially benefit from various fiscal incentives

provided by the Indonesian government, such as:

an import duty exemption for capital goods and materials

or raw materials that are to be used as materials or
components to produce finished goods;

income tax incentives, including a corporate income tax

holiday for investments in certain "pioneer industries";
and

restitution of import duties paid on the importation of

goods and materials needed to manufacture exported
finished products.

OBTAINING APPROVAL FOR ORE AND RAW MATERIAL

EXPORTS
Recognizing that smelter and processing facilities require time
to develop, finance, construct and commission, the
government has provided IUP production operation holders
with the option to continue to export raw materials until 2014,
so long as various conditions are fulfilled. Reportedly, as of
11 July 2012, the MEMR had announced the issuance of
5
export permits to 36 mineral mining companies.
Ore and raw material exports are subject to the authority of
the MEMR (as the regulator of mining activities), the Ministry
of Trade (as the regulator of trading and export activities), and
the Ministry of Finance (as the regulator of export duties).
Each of these regulators has contributed to the regime for
obtaining approval for ore and raw material exports.
4

Novan Dwi Putranto and Nurseffi Dwi Wahyuni, "PLN Kantongi 16

Proposal Suplai Listrik untuk Smelter," Indonesia Finance Today
(12 June 2012).

Ignasius Laya and Wilda Asmarini, "Gov't issues 36 Mineral

Export Permits," Indonesia Finance Today (11 July 2012).

General Requirements for Export Recommendation

the IUP production operation must be deemed "clear and

clean";

the IUP holder must have fulfilled all financial obligations

to the state;

the IUP holder must deliver a work plan or cooperation

plan for domestic processing and/or refining; and

the IUP holder must sign an integrity pact.

These requirements have been supplemented by the Director

General of Minerals and Coal in Regulation No.
574.K/30/DJB/2012 ("Reg. No. 574.K"). This regulation
provides different criteria for a recommendation to become a
registered exporter and a recommendation for export
approval, under regulations promulgated by the Minister of
Trade. The requirements for a recommendation for export
under MEMR Reg. No. 11/2012 do not purport to apply to
COW contractors (although the Minister of Trade regulations
described below do).
"Clear and Clean" Status
Based on presentation materials of the Directorate General of
Minerals and Coal, dated 8 June 2012, an IUP holder will be
deemed "clear and clean" if the IUP holder can provide the
following:
6

Requirements for holders of a special IUP for transportation and

sales and a special IUP for processing and refining differ from the
requirements applicable to holders of IUP production operation.

evidence of no overlapping;

the required permits;

the required exploration report;

progress of the facility development every 3 months to

the Director General of Minerals and Coal;

to comply with the total amount of export sales of raw

material/ore that is permitted by the government;

the required feasibility study;

to prioritize the fulfilment of domestic supply needs;

an approved environmental document; and

evidence of dead rent and royalties having been paid.

to pay the export duty in accordance with the tariff as

stipulated by the government;

to fulfil the obligation to pay tax and non-tax state

revenue in accordance with applicable laws and
regulations;

to fulfil the requirements as stipulated during consultation

with the Director General of Minerals and Coal;

if the party intends to conduct an initial public offering, to

conduct such offering in Indonesia;

to protect and maintain the environment; and

to encourage the development and empowerment of

society.

Except for evidence of no overlapping, a mining company

that is in compliance with prevailing regulations should have
fulfilled these requirements in the ordinary course of business.
As of 21 May 2011, the MEMR had deemed 3,971 mining
companies clear and clean. On 28 February 2012, the
MEMR announced that an additional 373 mining companies
had received the designation; on 9 May 2012, another 235
mining companies; and on 30 May 2012, another 211 mining
companies.
Based on Reg. No. 574.K, in order to qualify for a
recommendation letter for export, an IUP holder's "clear and
clean" status must be evidenced by a copy of a clear and
clean certificate. Reportedly, as of 19 July 2012, the MEMR
announced that 392 mineral IUP production operation holders
(around 50.3% of the 778 nickel, iron, bauxite, copper and
manganese mining companies in Indonesia) have not yet
8
obtained a clear and clean certificate.
Terms of the Integrity Pact
The terms of the Integrity Pact, as stipulated in Reg. No.
574.K, provides that the signatory undertakes to do the
following:

to improve the applicable commodity value by developing

a processing and refining facility or cooperating with other
parties (holders of IUP production operation, special
mining business license (izin usaha pertambangan
khusus) production operation or special IUP for
processing and refining) in relation to processing and
refining, in accordance with the minimum standards in
MEMR Reg. No. 7/2012;
to fulfil the obligation to provide processing and refining
facilities at the latest by 12 January 2014 and report the
The requirement that there be no overlapping may require further
clarification from the Directorate General of Minerals and Coal.
Under the 2009 Mining Law, it is legally possible for a mining area
for one mineral to overlap with the mining area of another, with
the relevant companies remaining in compliance with regulatory
requirements. Additionally, mining areas may overlap due to a
legitimate boundary dispute between regencies and/or provinces
or a technical error.
Novan Dwi Putranto, 392 Mining Permits Fail to Meet Clean and
Clear Status, Indonesia Finance Today (19 July 2012).

REGISTERED EXPORTER AND EXPORT APPROVAL

The Minister of Trade has required that the proposed exporter
become a registered exporter of mining products (eksportir
terdaftar produk pertambangan or ET Produk Pertambangan)
and to obtain an approval to export the mining products,
based on Minister of Trade Regulation No. 29 of 2012 ("MOT
Reg. No. 29/2012"). Both COW contractors and IUP holders
are required to comply with these requirements in order to be
authorized to export ore or raw materials. The requirements
for obtaining status as a registered exporter and approval to
export include respective recommendations from the Director
General of Minerals and Coal (as well as various
administrative documents). Status as a registered exporter is
to be valid for two years. MOT Reg. No. 29/2012 also
requires that the ore or raw materials to be exported must be
subject to a technical survey by a qualified surveyor.
Recommendation for Becoming a Registered Exporter
Reg. No. 574.K provides that in order to receive a
recommendation to become a registered exporter of mining
products, in addition to the general requirements required by
the MEMR Reg. No. 11/2012:

the IUP holder must provide a copy of a memorandum of

understanding with other IUP holders for purposes of
cooperation for the construction of processing and
refining facilities; and

the IUP holder must provide a copy of the sale and

purchase agreement with the end user (purchaser).

Recommendation for Export Approval

In order to receive a recommendation for an export approval,
Reg. No. 574.K requires that a mining company that holds an
IUP production operation must provide:

a copy of evidence of status as a registered exporter;

an export plan, which includes, among other things, the

type and amount of mineral commodities than are going
to be exported, the category of goods (for purposes of
export duty), the port of loading, the port of unloading and
the destination country;

data regarding resources, reserves and production;

a copy of the sale and purchase agreement with the end

user (purchaser);

a copy of evidence that the required reclamation

guarantee for the mining area has been put in place; and

a copy of evidence that dead rent and royalties (and for

non-metal minerals and rocks, certain taxes) have been
paid for the last year.

POTENTIAL DIVESTMENT REQUIREMENT

The 2009 Mining Law provides that mining companies will be
subject to some level of share divestment, i.e., a requirement
to sell a portion of share capital to domestic investors over a
certain time period. The requirement of share divestment has
long been found in the terms of COWs, but it was only in
February 2010 that the government presented a generally
applicable divestment requirement for mining companies
operating pursuant to an IUP (20% domestic ownership after
the fifth year of production). In February 2012, these
divestment requirements were increased to 51% domestic
ownership by the 10th year of production, with divestment
starting gradually after the fifth year of production (at least
20% by the sixth year; at least 30% by the seventh year; at
least 37% by the eighth year; at least 44% by the ninth year;
and at least 51% by the tenth year after the commencement
of commercial production).
These stricter divestment requirements are controversial
when considered with reference to mining operations only.
However, a separate issue is whether these requirements will
apply to companies that operate smelters independent of a
mine.
The regulatory framework contemplates that
companies could operate such projects pursuant to an IUP for
processing and refining, such as through a joint venture
among various mining companies. As of 6 June 2012,
numerous press reports contained statements that the MEMR
would impose the divestment framework applicable to mining
operations to smelter projects as well, despite subsequent
statements to the contrary by the Minister of Trade, Gita

Wirjawan, and the Coordinating Minister for Economic Affairs,

9
Hatta Rajasa .
The 2009 Mining Law provides that processing and refining of
minerals are part of mining business activities. On that basis,
a smelter project may be legally included under the
governments divestment requirements. Numerous factors,
however, suggest that the MEMR should adopt a special
divestment policy, or completely waive the divestment
requirement, for companies that engage in processing and
refining without actually owning a mine:

the current divestment requirements are tied to the

operational age of a mine and therefore are not
appropriate for an independent smelter project;

an independent smelter projects capital requirements

and expected revenues will be different from that of an
integrated mine and smelter project; because these
projects will require large up-front capital expenditure for
construction, without any revenue source during the
construction phase, a divestment requirement could
undermine the financial feasibility of some projects; and

share capital held by foreign investment companies

("PMA companies") is deemed to be foreign share
capital; in the event that two or more PMA companies
establish an independent smelter project through a joint
venture company, the joint venture company should not
be subject to another level of divestment after the mining
company partners have fulfilled their respective
divestment requirements.

The 2010 Negative List of Investment (based on Presidential

Regulation No. 36 of 2010) does not include any restrictions
on mineral processing and refining (except for lead smelting,
which requires a special approval from the State Minister for
the Environment and the Minister of Industry). Therefore,
initially, any independent smelter project could be 100%
foreign owned. The divestment policies do, however, fall
within the regulatory authority of the MEMR.
Investor
feedback is therefore critical to promote the establishment of
policies that are consistent with the governments industrial
development goals.

Novan Dwi Putranto and Nurul Fitriani, "Investasi Smelter Tidak

Dibatasi," Indonesia Finance Today (8 June 2012).

HOGAN LOVELLS
Hogan Lovells is one of a handful of truly international law
firms operating in Asia with a long history of advising on
transactions originally from or going to Indonesia.
We offer our clients an efficient and competitive service in all
areas of business law. We operate as one team across Asia
and worldwide and seek to provide clients with seamless
advice wherever required. We have one of the strongest
networks among law firms in Asia, with offices in Singapore,
Abu Dhabi, Beijing, Dubai, Hanoi, Ho Chi Minh City, Hong
Kong, Shanghai, Tokyo and Ulaanbaatar (and associations in
Jakarta, India, Jeddah and Riyadh).
Given the importance of the Indonesian market in terms of
both inbound and outbound investment, we have entered into
an association with the Indonesian law firm, Hermawan
Juniarto, as part of our focused development in the SouthEast Asia region.
Worldwide, we have around 2,600 lawyers and more than 40
offices.
HERMAWAN JUNIARTO
Hermawan Juniarto is a Jakarta-based law firm dedicated to
providing a full range of corporate and commercial legal
services in Indonesia. The firms practice covers regulatory
compliance, natural resources, infrastructure, construction,
capital markets, M&A and general commercial matters.
Widely regarded as one of Indonesias leading emerging
firms, Hermawan Juniarto comprises five partners and 17
associates.

Appendix A

Announced Smelter and Metal Processing Plant Projects

Projects mentioned in a presentation of Indonesia's
Directorate General of Minerals and Coal of the
MEMR during the Australian Mining Exhibition &
Conference held on 17 April 2012

Other projects mentioned in the media

No.

Company

Product

Capacity

Location

Planned
Operation Date

1.

PT Indosmelt

Copper cathode

100,000 tpy

Maros,
South Sulawesi

2016-2017

2.

PT Meratus Jaya Iron

1
& Steel

Direct reduced iron

(sponge iron)

315,000 tpy

Kapet Batulicin,
South Kalimantan
Province

2014

3.

PT Delta Prima Steel

Direct reduced iron

(sponge iron)

100,000 tpy

Tanah Laut, South

Kalimantan

2012

4.

PT Sebuku Iron
Lateritic Ores (PT Silo
Group)

Direct reduced iron

(sponge iron)

1,000,000 tpy

Sebuku, South
Kalimantan

2014

5.

PT Jogja Magasa Iron

(subsidiary of Indo
Mines Ltd.)

Pig iron

1,000,000 tpy

Kulon Progo,
Yogyakarta

not available

6.

PT Indoferro (Growth
Steel Group)

Direct reduced iron

(sponge iron)

500,000 tpy

Cilegon, Banten
Province

2012

7.

PT Indonesia Chemical
2
Alumina

Chemical grade
alumina

300,000 tpy

Tayan, West
Kalimantan

2014

8.

Antam

Ferronickel (FeNi)

27,000 tpy

East Halmahera,
North Maluku

2014

9.

Antam

Nickel pig iron

120,000 tpy

Mandiodo, North
Konawe in
Southeast Sulawesi

2014

10.

Antam

Smelter grade
alumina / low grade
FeNi

1,000,000 tpy

Mempawah, West
Kalimantan

2014

11.

PT Vale Indonesia Tbk.

Nickel hydroxide

48,800 tpy

Pomalaa, Southeast
Sulawesi

2017

12.

PT Weda Bay Nickel

Nickel hydroxide

60,000 tpy

Halmahera, North
Maluku

2016

Joint venture between PT Krakatau Steel Tbk. and Antam.

Joint venture among Antam, Showa Denko K.K. and Marubeni Corporation.

According to the official web site of PT Weda Bay, PT Weda Bay is owned by Strand Minerals Pte. Ltd (which is owned by ERAMET S.A.
and Mitsubishi Corporation) and Antam.

10

No.

Company

13.

PT Krakatau Posco

Product

Capacity

Location

Planned
Operation Date

Steel plate

3,000,000 tpy at
2014

Cilegon, Banten

2014

Dairi, North
Sumatra

2014

South Tapanuli,
North Sumatra

2014

Slab
Hot rolled coil
14.

15.

6,000,000 tpy at
phase 2 of project

PT Dairi Prima Mineral

5
(DPM)

Lead concentrate
and zinc

110,000 tpy

PT Agincourt
6
Resources

Dore bullion (gold

and silver)

250,000 oz per
year of gold

220,000 tpy

2,500,000 oz per
year of silver
16.

PT Jinguang
7
Indonesia

Sponge FeNi

2,000,000 tpy

Morowali, Southeast
Sulawesi

(not available)

17

PT Timah (Persero)
Tbk.

Tin chemicals

500,000 tpy

Cilegon, Banten

2015

18.

PT Timah (Persero)
Tbk.

Tin chemicals

(not available)

Bangka Belitung

(not available)

19.

PT Harita Prima Abadi

Mineral

Smelter grade
alumina

1,000,000 tpy

Ketapang, West
Kalimantan

2012

20.

PT Nusantara Smelting

Copper cathode

200,000 tpy

Bontang, East
Kalimantan

2014

21.

MEC Coal and National

Aluminium Company
Ltd. (NALCO)

Alumina

500,000 tpy

Muara Wahau, East

Kalimantan

2012

22.

PT Delma Mining
Corporation

Pig iron

not available

Bulungan, East
Kalimantan

2013

23.

PT Tiga Baji Mining

and Energy Resources

FeNi

100,000 tpy

Matarape, Morowali,
Central Sulawesi

(not available)

24.

PT Sinosteel

Nickel pig iron

(not available)

(not available)

2014

25.

PT Batutua Tembaga
Raya (Finders
Resources Limited)

Copper cathode

(not available)

Wetar, Maluku

(not available)

26.

PT Global Perkasa
Investindo

Copper cathode

400,000 tpy

Timika, Papua

2015

Joint venture between PT Krakatau Steel Tbk. and POSCO Korea.

According to the official website of DPM, DPM is owned by PT Bumi Resources Minerals Tbk. (80%) and Antam (20%).

According to the official website of G-Resources Group Limited, PT Agincourt Resources is a subsidiary of G-Resources Group Limited, an
Asia-Pacific gold company, based and listed in Hong Kong.

According to internet sources, PT Jinguang Indonesia is a subsidiary of Sichuan Jinguang Industrial Group Co., Ltd.

11

No.

Company

Product

Capacity

Location

Planned
Operation Date

27.

PT Nabire Bhakti
Mining

Dore bullion

500,000 tpy

Nabire, Papua

(not available)

28.

PT Sumber Bumi
Kalbar

Manganese

(not available)

Mempawah, West
Kalimantan

(not available)

29.

PT AGB Mining /
Hyundai

Iron-siliconmanganese

60,000 100,000 tpy

Kupang, East Nusa

Tenggara

(not available)

30.

PT Central Omega
Resources Tbk.

(nickel smelter)

(not available)

Central Sulawesi

(not available)

31.

PT Jasindo Utama

Ferromanganese
and silicon
manganese

24,000 ton per

month

Kupang, East Nusa

Tenggara

2016

32.

Jilin HOROC
Nonferrous Metal
Group Co., Ltd. and PT
Billy Indonesia

(nickel smelter)

100,000 tpy

North Konawe,
Southeast Sulawesi

2012

33.

Ning Xia Hengshun

Smelter Group Co., Ltd.

(nickel smelter)

100,000 tpy

(not available)

(not available)

34.

PT Position (Solway
Group)

FeNi

40,000 tpy

East Halmahera,
North Maluku

2014

www.hoganlovells.com

www.hermawanjuniarto.com

Hogan Lovells has offices in:

Abu Dhabi
Alicante
Amsterdam
Baltimore
Beijing
Berlin
Brussels
Budapest*
Caracas

Colorado Springs
Denver
Dubai
Dusseldorf
Frankfurt
Hamburg
Hanoi
Ho Chi Minh City
Hong Kong

Houston
Jakarta*
Jeddah*
London
Los Angeles
Madrid
Miami
Milan
Moscow

Munich
New York
Northern Virginia
Paris
Philadelphia
Prague
Riyadh*
Rome
San Francisco

Shanghai
Silicon Valley
Singapore
Tokyo
Ulaanbaatar
Warsaw
Washington DC
Zagreb*

"Hogan Lovells" or the "firm" is an international legal practice that includes Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses.
The word "partner" is used to describe a partner or member of Hogan Lovells International LLP, Hogan Lovells US LLP or any of their affiliated entities or any employee
or consultant with equivalent standing. Certain individuals, who are designated as partners, but who are not members of Hogan Lovells International LLP, do not hold
qualifications equivalent to members.
For more information about Hogan Lovells, the partners and their qualifications, see www.hoganlovells.com.
Where case studies are included, results achieved do not guarantee similar outcomes for other clients. Attorney advertising.
Hogan Lovells 2012. All rights reserved.
*Associated offices