Mining in Indonesia: Newmont and Government Agree on Renegotiations

The subject of dispute between the Indonesian government and NNT is Law No. 4 of 2009 on Mineral and Coal Mining (the “New Mining Law” of Indonesia), which replaced its 1967 predecessor. This New Mining Law implied several drastic changes in the country’s mining business, some of which are not in line with the existing Contract of Work that had been signed between the government and NNT previously. Moreover, some changes conflict with the bilateral investment agreement between the Indonesian and Dutch governments (NNT is majority-owned by Netherlands-based Nusa Tenggara Partnership BV). Perhaps most importantly being the ban on exports of unprocessed minerals (implemented on 12 January 2014). Through this ban the government aims to boost domestic processing facilities in order to add value to mining products, thus increasing state revenue from the mining sector. Being a major copper concentrate exporter, NNT was hit hard by this new rule. In fact, the company declared a force majeure at its Batu Hijau copper and gold mine in Sumbawa (West Nusa Tenggara) in June 2014 as exports ceased, while the company’s storage depots were full (and thus mining activities at the Batu Hijau mine had to stop as well). The company said that 80 percent of the company’s workers would be put on leave with reduced salaries due to the government’s export ban. Tensions heightened after NNT threatened to file for international arbitration at the Washington-based Centre for Settlement of Investment Disputes (ICSID). In a response to this threat, the Indonesian government said it would revoke the mining permit of NNT based on the claim that NNT did not meet production targets according to the contractual agreement between both sides.

However, after seeing that fellow mining giant Freeport Indonesia obtained a permit from the government to resume copper concentrate exports, NNT decided that international arbitration would only worsen the situation and thus dropped the case. Freeport Indonesia, which operates the world's largest gold mine and third-largest copper mine (Grasberg mine in Papua), was allowed to resume copper concentrate exports but in exchange has to pay higher taxes and royalties as well as to start construction of smelting facilities.

President Director at NNT Martiono Hadianto said that in principle an agreement has been reached between the Indonesian government and NNT but a MoU still needs to be signed. This may happen on Wednesday (03/09). Before exports can be resumed, NNT still needs to obtain the Export Approval Letter (Surat Persetujuan Ekspor) from Indonesia’s Trade Ministry. The company can obtain this letter after it has received a recommendation from the country’s Ministry of Energy and Mineral Resources. However, in order to obtain the recommendation, NNT first has to make a USD $25 million payment to the government as a deposit for the construction of smelting facilities.

Six points of the renegotiation package that - reportedly - have been agreed upon are:

Renegotiations Newmont Nusa Tenggara (NNT) and Indonesian Government

Downsizing the mining concession area of NNT (in accordance with the New Mining Law) from 87,000 to 66,000 hectares

Extend the contract of NNT but also change the contract from a Contract of Work (Kontrak Karya, KK) to a Special Mining License (Izin Usaha Pertambangan Khusus, IUPK)

NNT is required to pay higher royalties; 4 percent for copper, 3.75 percent for gold, and 3.25 percent for silver

NNT is required to process its mineral ore domestically

Divest a portion of the foreign stake in NNT to the Indonesian government or an Indonesian private company

Increase usage of locally-produced goods and services in NNT’s mining activities in Indonesia

Regarding domestic processing of NNT’s mineral output, the company is expected to cooperate with Freeport Indonesia to establish a smelter in Gresik (East Java).

Both NNT and Freeport Indonesia are required to pay 7.5 percent export duties. However, after the smelting facilities have been completed for 30 percent, then export duties can be reduced to 0 percent until 2017 (when all mineral ore exports from Indonesia are prohibited).

For Indonesia, Southeast Asia’s largest economy, it is important that NNT and Freeport Indonesia resume exports of copper concentrate as this will help to reduce the country’s wide current account deficit. Although Indonesia’s trade balance swung back to a USD $124 million surplus in July 2014, the current account balance has shown a structural deficit since late 2011, mainly caused by expensive oil imports to supply fuel to the Indonesian people (as the government generously subsidizes fuel, domestic fuel demand is rising continuously). Indonesia’s current account deficit widened to USD $9.1 billion, or, 4.27 percent of the country's gross domestic product (GDP) in the second quarter of 2014. This figure meant a sharp widening from (a revised) 2.05 percent of GDP deficit recorded in the previous quarter.

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