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Mining Law & RegulatoryPractice in Indonesia

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Mining Law & RegulatoryPractice in Indonesia

A Primary Reference Source

BILL SULLIVANand

Christian Teo Purwono & Partners(in association with Stephenson Harwood LLP)

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Copyright © 2013 by Bill Sullivan and Christian Teo Purwono & Partners

Published by John Wiley & Sons Singapore Pte. Ltd.

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Contents

Foreword xi

Preface xiii

Acknowledgments xvii

CHAPTER 1 Overview of Mining Regime 1

I Prevailing Laws and Regulations 1II Former Mining Regime 3III CoWs/CCoWs 3IV Regional Autonomy 5V Mining Activities 6VI Mining Areas 6VII Mining Licenses 7VIII Procedures for Obtaining WIUPs and IUPs 11IX Rights and Obligations of IUP Holders 12X Domestic Market Obligation 15XI Divestiture of Shares Requirement 16XII Procedures for Minerals and Coal Benchmark

Price Determination 17XIII Domestic Processing and Refining 19XIV Direction and Supervision of the Management

and Implementation of Mining Business 22XV Transitional Provisions for Existing KPs, CoWs,

and CCoWs 23XVI Mining Services 24

CHAPTER 2 2009 Mining Law 25

I Executive Summary 25II Details of Main Provisions 26

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v

CHAPTER 3 Mining Area Determination 43


CHAPTER 4 Mining Services Regulation 53


CHAPTER 5 Affiliated Mining Services Provider Regulation 65


CHAPTER 6 Prioritization of Domestic Interest Regulation 71


CHAPTER 7 Domestic Coal Supply Decree 2013 79


CHAPTER 8 Coal and Mineral Mining Enterprise Activities Regulation 83


CHAPTER 9 Mining Direction and Supervision Regulation 107


CHAPTER 10 Benchmark Price Determination Regulation 117


Appendix 1: Coal Adjustment Cost for HPB RESales of Coal by Way of FOB Barge 131

Appendix 2: Cost Adjustment for HPB RE Sales ofCoal in One Island to the End User 132

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vi Contents

CHAPTER 11 Benchmark Price Formulae Regulation 135

I Executive Summary 135II Details of Main Provisions 136Appendix 1: Formula for Steaming CoalBenchmark Price 139

Appendix 2: Coal Benchmark Price ReferenceFormula for Steaming Coal Based on Brand Name 142

Appendix 3: Formula for Coking CoalBenchmark Price 145

CHAPTER 12 Reclamation and Post-Mining Activities Regulation 147


CHAPTER 13 CoW and CCoW Change of Investment Regulation 159


CHAPTER 14 Extractive Industry Income Transparency Regulation 167


CHAPTER 15 Increase of Added Value of Minerals throughProcessing and Refining of Minerals Regulation 173

I Executive Summary 173II Details of Main Provisions 177Appendix 1: Minimum Processing and RefiningSpecifications for Metal Mineral Products 188

Appendix 2: Minimum Processing and RefiningSpecifications for Nonmetal Mineral Products 191

Appendix 3: Minimum Processing and RefiningSpecifications for Rock Mineral Products 192

CHAPTER 16 Regulation Amending Mineral and Coal MiningEnterprise Activities Regulation 193


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Contents vii

CHAPTER 17 Mineral Products Export Requirements Regulation 201

I Executive Summary 201II Details of Main Provisions 202Appendix 1: Certain Mineral Products Subject toMOTR 29/2012 210

CHAPTER 18 Export Tax Regulation 213

I Executive Summary 213II Details of Main Provisions 214III Attachment IV of MoFR 75/2012: Certain

Mineral Products Subject to Export Tax 216

CHAPTER 19 Regulation Amending Mining Services Regulation 219

I Executive Summary 219II Details of Main Provisions 221Appendix 1A: Types, Sectors, and Subsectors ofMining Services Business Activities 229

Appendix 1B: Types of Non-Core Mining ServicesBusiness Activities 232

CHAPTER 20 Acceleration of Domestic Processing andRefining Instruction 233


CHAPTER 21 Draft Procedures for Issuing Special Production IUPsfor Processing and Refining and Transportation andSales Regulation 239


CHAPTER 22 Draft Guidelines for Licensing of Metal Mineraland Coal Business Activities Regulation 267


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viii Contents

CHAPTER 23 Draft Guidelines for Licensing of Nonmetal Mineraland Rock Mining Business Activities Regulation 323


CHAPTER 24 Draft Mining Business Employees, Goods, andServices Procurement Regulation 347


CHAPTER 25 Draft Community Development and EmpowermentRegulation 363


CHAPTER 26 Draft Coal Value Added Regulation 373

I Executive Summary 373II Details of Main Provisions 375Appendix 1: Minimum Calorific Requirement 381

CHAPTER 27 Overview of the Forestry Regime 383

I Relevant Laws and Regulations 383II Categorization of Forest Areas in Indonesia 384III The Key Definitions for Forest Areas 385IV Key Licenses for Forest Activities 386V Carrying on Mining Activities in a Forest Area 386VI General Description of Rent Use Permits 387VII Steps Involved in Obtaining a Rent Use

Permit and Related Licenses 388

CHAPTER 28 Forest Area Function and Purpose Regulation 405


CHAPTER 29 Forest Area Utilization Regulation 419


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Contents ix

CHAPTER 30 Rent Use Permit Regulation 429


CHAPTER 31 Forest License Moratorium Instruction 451


CHAPTER 32 Forest Area Utilization for Underground MiningActivities Regulation 455


CHAPTER 33 Procedures for Alteration of the Usage andFunction of Forest Areas Amendment Regulation 463


CHAPTER 34 Usage of Forest Areas Amendment Regulation 467

I Executive Summary 467II Detail of Main Provisions 468

CHAPTER 35 Second Amendment Regulation re Guidelines forRent Use of Forest Areas 471


Glossary of Defined Terms 481

Index 491

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x Contents

Foreword

In January 2009 the Indonesian government introduced a new mining lawfor the development of mines in Indonesia. This new law replaces the 1967

law that was designed to attract large international mining companies todevelop large world-scale mines in one of the world’s most geologicallyprospective environments while smaller and medium-scale mines were theexclusive perview of Indonesian companies. The 2009 mining law does notdeal comprehensively with all aspects of the requirements for exploring,developing, and building new mines; this was deliberately left to MinisterialRegulations to be handed down at later dates. In addition, the new mining lawprovided a number of inconsistencies and contradictory statements that causedconfusion among existing and potential new mining entrants; these anomalieshave, to some extent, been dealt with by the ensuing mining regulations. Theundertaking of exploration, development, andmining is further complicated bythe deregulation of government that has taken place over the past fifteen yearswith approvals for different aspects of a development being required at multiplelevels of government, that is, central, provincial, and regency.

Sullivan’s work attempts to unravel the multicomplex rules, regulations,and reporting requirements proposed by the new mining law, and while it isstill a very dynamic situation, Sullivan’s work is extremely comprehensive inits understanding and analysis. The work is factual, with little opinion orcommentary, which is appropriate for such a work. It is essential reading, notonly for potential new entrants to Indonesian mining but also to thosealready operating in Indonesia seeking to understand the new landscape andthe complexity of all the rules and regulations that can be somewhat con-fusing. Sullivan’s work, while written from a legal perspective, is easy to read,thorough in its analysis, and provides clarity and understanding to the reader.

Indonesia is geologically one of the most prospective environments onthe planet. The Indonesian government recognizes this and recognizes thetremendous potential that sensible and sustainable mining can bring to theeconomy, the local communities, and the long-term strategic goals of thecountry. The new mining law, while not perfect, is a significant step forwardin the long-term development of this strategic industry. Sullivan’s work will

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xi

contribute significantly to the understanding and the ability for companies tosteer and maneuver their way through the multiplicity of regulations thatcurrently exist.

This book will be a mandatory textbook for those involved in the miningindustry, probably for years to come. Although it will undoubtedly requirerevisions as new regulations are issued in an attempt to deal with the con-tinuing uncertainty in a number of areas, it will be the reference text of choicefor anybody interested in the Indonesian mining industry.

—Peter AlbertCEO of G-Resources

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xii Foreword

Preface

This book is the first comprehensive survey of Indonesia’s legal and reg-ulatory regime in respect of mining. It is intended to provide a basic

reference source for business people, legal and other professional advisers,and others interested in understanding the complex and sometimes confus-ing regulatory environment that domestic and foreign participants in theIndonesian mining industry face.

This book has been authored, prepared, and edited by Bill Sullivan(BCom (with merit), MCom and LLB (University of New South Wales), LLM(Harvard Law School), MBA and SJD (University of Sydney)), and LicensedForeign Advocate with Christian Teo Purwono & Partners (in association withStephenson Harwood LLP).

Christian Teo Purwono & Partners is a leader in Indonesian mininglaw and regulatory practice. Our firm acts as Indonesian legal counsel fora wide cross-section of foreign and domestic business interests in theIndonesian mining industry, including mining project owners, investors,and financiers; mining product traders; mining services providers; andmining equipment suppliers.

Christian Teo Purwono & Partners operates in association with interna-tional law firm Stephenson Harwood LLP, which has eight offices across Asia,Europe, and the Middle East in Singapore, Hong Kong, Guangzhou,Shanghai, London, Paris, Athens, and Dubai.

This book reflects our firm’s current understanding only of Indonesia’slegal and regulatory regime in respect of mining, which is still very much awork in progress. Accordingly, the law and regulation summaries and detailthat follow are subject to change as that understanding develops and evolves.

Many of the points made in this book are necessarily speculative innature and subject to further clarification and confirmation. Accordingly, itwould be prudent not to rely solely on this book but, rather, to seek specificlegal advice with respect to any technical legal or regulatory issue related tomining in Indonesia before making a material business decision regardingthe same. Christian Teo Purwono & Partners would be pleased to assist youin this regard. Our contact details are set out below.

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xiii

Address:CHRISTIAN TEO PURWONO & PartnersThe Indonesia Stock Exchange BuildingTower II Floor 16 Suite 1605Sudirman Central Business DistrictJalan Jenderal Sudirman Kav. 52—53Jakarta 12190IndonesiaTelephone: [62–21] 515 0280Facsimile: [62–21] 515 0281

Please contact, in the first instance, Bill Sullivan, Licensed ForeignAdvocate (e-mail: [email protected] and mobile: [62–21] 81585060978)or Nurvita K. Siregar, Senior Associate (e-mail: [email protected] andmobile [62–21] 818482777).

▪ ▪ ▪The current legal and regulatory regime for mining in Indonesia has its basisin Law No. 4 of 2009 re Minerals & Coal Mining (“2009 Mining Law”),which was introduced in January 2009 after many years of debate anddiscussion.

The 2009 Mining Law is augmented by (i) six basic implementing reg-ulations on mining area determination, (ii) mining services, (iii) prioritizationof domestic interest, (iv) coal mining enterprise activities, (v) mining directionand supervision, and (vi) reclamation and post-mining activites (“Basic MLImplementing Regulations”) as well as various other decrees, guidelines,regulations, and other instruments (“ML Supporting Materials”).

As of the date of publication of this book, the Basic ML ImplementingRegulations have been finalized and issued. However, the ML SupportingMaterials have not been finalized, and a significant number of additional MLSupporting Materials are expected to be issued in 2013 and subsequent years.

The use of implementing decrees, guidelines, regulations, and otherinstruments to augment a law is a very common practice in Indonesia. Lawsare passed by the Indonesian Parliament with the intention they will set outthe broad parameters only of a new regulatory regime. Meanwhile the detailsof the new regulatory regime will be provided in one or more implementingdecrees, guidelines, regulations, and other instruments issued by the Ministryand/or officials of the Ministry with primary responsibility for overseeing theapplication of the new regulatory regime.

This book (i) provides an overview of the Indonesian legal and regula-tory regime for mining and (ii) summarizes, in detail, the principal provisionsof the 2009 Mining Law and each of the Basic ML Implementing Regulations

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xiv Preface

as well as a number of the more important ML Supporting Materials some ofwhich are currently only available as drafts.

Forestry issues assume great importance in many Indonesian miningprojects because, notwithstanding a valid mining license, additional for-estry permits are required to carry out mining activities on any part of amining concession that is a designated forest area. Accordingly, this bookalso (1) provides an overview of the Indonesian legal and regulatoryregime for forestry and (2) summarizes, in detail, the principal provisionsof the various forestry regulations that are particularly relevant to mining.

The objective of this book is to, for the first time, (1) bring together in onepublication, (2) all or, at least, most of the laws and regulations relevant tomining, (3) in English and (4) in a format that is user friendly for all English-speaking participants in the Indonesian mining industry whether profes-sionals, business people, academics, government officials, journalists, or justinterested observers.

In the case of individual regulations and where appropriate only, literaltranslation of the relevant articles has been forsaken in favor of an aug-mented translation, which is intended to assist the reader in understandingthe presumed intention of the drafter of the relevant articles. This approach isdesirable and arguably, necessary because of the serious deficiencies,inconsistencies, and confusion evident in the drafting of the Basic MLImplementing Guidelines and the ML Supporting Materials. Where the pre-sumed intention is particularly uncertain, square brackets [ ] are used tobracket the augmented translation.

A glossary of the more important defined terms used in this book is alsoprovided in the last chapter so as to avoid the need to repeatedly provide thedefinitions of those terms that appear in multiple chapters.

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Preface xv

Acknowledgments

I gratefully acknowledge that much work and otherwise invaluable con-tributions in respect to this book have originated from various lawyers and

staff of Christian Teo Purwono & Partners without whom this book would nothave been possible. I wish to acknowledge, in particular, the contributionsof Senior Associates Nurvita K. Siregar and Claudius Novabianto as well asof Associates Denny Ngadimin, Anton Lai, Anya Y. Aritonang, and DevytaWijaya. I am also indebted to my secretary, Vony Marbun, and to Januar Gulofor their good humor and patience in making the endless changes and editsrequired to bring this book to fruition.

Bill SullivanMarch 31, 2013

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xvii

CHAPTER 1Overview of Mining Regime

Chapter 1 provides an overview of Indonesia’s legal and regulatory regimefor mining business activities.

I. Prevailing Laws and Regulations

The more important laws and regulations currently governing Indonesianminerals and coal mining and their related activities are as follows:

a. Law No. 4 of 2009, dated January 12, 2009, re Minerals and Coal Mining(“2009 Mining Law”);

b. Minister of Energy and Mineral Resources (“MoEMR”) Regulation No. 18of 2009, dated August 19, 2009, re Procedures for Amendment ofInvestment in relation to Contracts of Work and Coal Contracts of Work(“MoEMRR 18/2009”);

c. MoEMR Regulation No. 28 of 2009, dated September 30, 2009, reMinerals and Coal Mining Services Business (“MoEMRR 28/2009”);

d. MoEMR Regulation No. 34 of 2009, dated December 31, 2009, re Pri-oritization of Coal and Mineral Supply for Domestic Interest (“MoEMR34/2009”);

e. Government Regulation No. 22 of 2010, dated February 1, 2010, reMining Area Determination (“GR 22/2010”);

f. Director General of Minerals and Coal (“DGoMC”) Regulation No. 376of 2010, dated May 10, 2010, re Affiliated Mining Services Providers(“DGoMCR 376/2010”);

g. Government Regulation No. 23 of 2010, dated February 1, 2010, reMinerals and Coal Mining Enterprise Activities (“GR 23/2010”);

h. Government Regulation No. 55 of 2010, dated July 5, 2010, re Directionand Supervision of the Management and Implementation of MiningBusiness (“GR 55/2010”);

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1

i. MoEMR Regulation No. 17, dated September 23, 2010, re Procedures forMinerals and Coal Benchmark Price Determination (“MoEMRR 17/2010”);

j. Government Regulation No. 78 of 2010, dated December 20, 2010, reReclamation and Post-Mining Activities (“GR 78/2010”);

k. Presidential Regulation No. 26 of 2010, dated April 23, 2010, reExtractive Industry Income Transparency (“GR 26/2010”);

l. MoEMR Decree No. 617 of 2011, dated March 3, 2011, re Coal Prices forPLN Operated Power Plants (“MoEMRD 617/2011”);

m. DGoMC Regulation No. 999 of 2011, dated August 26, 2011, re Proce-dures for Determining Cost Adjustments to Coal Benchmark Price(“DGoMCR 999/2011”);

n. Presidential Decree No. 3 of 2012, dated January 10, 2012, re Estab-lishment of Evaluation Team for Renegotiation of Contracts of Work andCoal Contracts of Work (“PD 3/2012”);

o. MoEMR Regulation No. 7 of 2012, dated February 6, 2012, re LocalProcessing and Refining of Minerals (“MoEMRR 7/2012”);

p. Government Regulation No. 24 of 2012, dated February 21 2012, reAmendment of GR 23/2010 (“GR 24/2012”);

q. Minister of Trade (“MoT”) Regulation No. 29 of 2012, dated May 7,2012, re Mining Product Export Requirements (“MoTR 29/2010”);

r. Minister of Finance (“MoF”) Regulation No. 75 of 2012, dated May 16,2012, re Export Tax on Export Goods (“MoFR 75/2012”);

s. MoEMR Regulation No. 11 of 2012, dated May 16, 2012, re Amendmentof MoEMRR 7/2012 (“MoEMRR 11/2012”);

t. MoEMR Regulation No. 24 of 2012, dated October 8, 2012, re Amend-ment of MoEMRR 28/2009 (“MoEMRR 24/2012”);

u. MoEMR Decree No. 2934 of 2012, dated October 8, 2012, re DomesticCoal Supply Quota for 2013 (“MoEMRD 2934/2012”);

v. Presidential Instruction No. 3 of 2013, dated February 13, 2013, reAcceleration of Domestic Processing and Refining (“PI 3/2013”); and

w. DGoMC Regulation No. 644 of 2013, dated April 23, 2013, re Amend-ment of DGoMCR 999/2011 (“DGoMCR 644/2013”).

There are also a number of advanced drafts of other regulations availablewhich, if and when finalized and issued, will significantly impact mineralsand coal mining activities in Indonesia. These draft regulations relate, amongother topics, to (i) coal upgrading (ii) the procedures for issuing new mininglicenses, (iii) procurement of goods and services, and (iv) communitydevelopment and empowerment.

Each of the above referenced laws and regulations (including some ofthe draft regulations but excluding MoEMRD 617/2011, DGoMCR 999/2011,MoEMRR 11/2012, DGoMCD 644/2013 and DGoMCR 614/2013) is the subject

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2 Mining Law & Regulatory Practice in Indonesia

of a separate chapter that sets out the details of the main provisions of therelevant law or regulation as well as provides an executive summary ofthe relevant law or regulation.

II. Former Mining Regime

Under Law No. 11 of 1967 re the Main Provisions of Mining (“Old MiningLaw”), foreign parties could participate in large-scale mining projects throughContracts of Work (“CoWs”) and Coal Contracts of Work (“CCoWs”) whilstrelatively small- and medium-scale mining projects could only be conductedby Indonesian national parties by virtue of Mining Licenses (“KPs”).

In other words, neither (i) a foreign entity nor (ii) an Indonesian foreigninvestment company, in which a foreign party is able to legally hold shares(“PMA Company”), could hold a KP under the Old Mining Law. A PMACompany could, however, hold a CoW or a CCoW.

On January 12, 2009, the Old Mining Law was replaced by the 2009Mining Law. Unlike the Old Mining Law, the 2009 Mining Law allows aMining Business License (“IUP”) to be held by any type of Indonesianbusiness entity, including a PMA Company, without any initial restriction orlimitation on share ownership.

The Indonesian Government has issued Presidential Regulation No. 36 of2010 dated May 25, 2010, on the List of Business Fields Closed and Open forInvestment with Requirements for Investment (“Negative List 2010”).Negative List 2010 confirms that general mining is open for 100% foreigninvestment. This has also been verbally confirmed by the Capital InvestmentCoordinating Board (“BKPM”). In other words, PMA Companies (whollyowned by foreigners), are now allowed to engage in general mining businessactivities in Indonesia (“PMA Mining Companies”).

III. CoWs/CCoWs

1. Nature of CoWs/CCoWs

A CoW/CCoW is a contract between the Government of Indonesia (“GoI”)and an individual mining company, which contract has been individually (i)approved by the Indonesian Parliament (“DPR”) and signed by the Presidentof Indonesia.

Over time, GoI decided that CoWs/CCoWs were unduly favorable tomining companies and overly restrictive on GoI. Accordingly, in the 1990sGoI stopped entering into CoWs/CCoWs and all new mining concessionswere, henceforward, granted on the basis of KPs.

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Overview of Mining Regime 3

GoI considered itself obliged, however, to honor and otherwise allow tocontinue until the end of their term those CoWs/CCoWs already in existence.Although CoWs/CCoWs contemplate the possibility of extensions, GoI hasindicated it will not agree to any further extensions of CoWs/CCoWs.

There are approximately one hundred and eighteen CoWs/CCoWs still inexistence.

There are seven generations or versions of CoWs/CCoWs. Each of the 7generations or versions of CoWs/CCoWs has somewhat different provisionsreflecting the evolution, over time, of GoI’s thinking as to what should beincluded in a CoW/CCoW.

2. Impact of 2009 Mining Law

The 2009 Mining Law contemplates a twelve-month deadline for bringingCoWs/CCoWs into line with IUPs except with regard to matters related tostate revenue. Although this twelve-month deadline has been well and trulymissed, GoI has consistently pressed for amendments to CoWs/CCoWs sincemid 2009 when MoEMR presented all CoW/CCoW holders with a list ofproposed amendments which CoW/CCoW holders were asked to considerand agree to.

3. Renegotiation of CoWs/CCoWs

In early 2012, GoI used PD 3/2012 to form an Evaluation Team for thepurpose of overseeing the adjustment of CoWs/CCoWs and with the statedduties of:

a. evaluating CoWs/CCoWs for the purpose of determining which provi-sions need to be amended in order to bring the CoWs/CCoWs into linewith IUPs;

b. determining the necessary steps for finalizing GoI’s position on themaximum permitted area for CoWs/CCoWs and the applicable taxes androyalties to be paid by CoW/CCoW holders; and

c. determining the necessary steps for the carrying out of the proposeddomestic processing and refining obligation to be imposed on CoW/CCoW holders.

The list of issues which GoI has with regard to CoWs/CCoWs has variedsomewhat over time but now comprises six substantive or “strategic issues”being:

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a. submit an action plan for the utilization of all the contract area up to theexpiry of the CoW/CCoW, failing which there will be an automaticreduction in the CoW/CCoW area to 50,000 HA by year four in the caseof exploration stage CoWs/CCoWs and to 25,000 HA by year eight in thecase of production stage CoWs/CCoWs;

b. no extensions of CoWs/CCoWs beyond the end of the current term andreplacement thereafter of the CoWs/CCoWs with IUPs;

c. pay (i) regional taxes based on applicable laws and regulations and(ii) royalties at rates determined by regulation from time to time, therebyending certainty of applicable royalties and taxes;

d. carry out local processing and refining;e. in the case of foreign owned CoW/CCoW holders, a 51% divestiture

requirement to be implemented in stages starting in year six of com-mercial production with 20% of issued shares and ending in year tenwith 51% of issued shares; and

f. (i) prioritize the use of local and national mining services providers and(ii) not use affiliated mining services providers without prior MoEMRapproval (together, the “Outstanding Strategic Issues”);

In early 2013, MoEMR held meetings with individual CoW/CCoW holdersregarding the Outstanding Strategic Issues and presented CoW/CCoW hold-ers with draft CoW/CCoW Amendment Agreements reflecting MoEMR’sposition on each of the Outstanding Strategic Issues.

IV. Regional Autonomy

In 1998, Indonesia introduced “regional autonomy” pursuant to which GoI, asthe central government, retained control of only six specific areas of gov-ernment activity while control over all other areas of government activity wasdevolved to the Provincial Governments and the Regional Governments.Among the areas of government activity, control over which devolved to theProvincial Governments and the Regional Governments, was the licensing ofactivities taking place exclusively within a particular Province or Regency. Inthe case of mining, regional autonomy meant that (i) where a mining con-cession was located wholly within a particular Regency, the relevant RegionalGovernment now had the authority to issue a KP and (ii) where a miningconcession crossed the borders of two or more Regencies in the sameProvince, the relevant Provincial Government now had the authority to issuea KP. GoI only retained the authority to issue KPs in the case of those miningconcessions which crossed the borders of two or more Provinces.

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V. Mining Activities

Pursuant to the 2009 Mining Law, mining activities are divided into the fol-lowing categories:

a. Minerals mining, which includes the mining of (i) radioactive minerals,(ii) metal minerals, (iii) nonmetal minerals, and (iv) rocks; and

b. Coal mining.

See Chapters 8 and 16 for further details of the different categories ofmining activities.

VI. Mining Areas

Mining Areas (“WPs”) are areas determined to have mineral and coalpotential. WPs are divided into three categories, namely (a) Mining BusinessAreas (“WUPs”), (b) Community Mining Areas (“WPRs”), and (c) StateReservation Areas (“WPNs”).

WPs are to be determined by coordination between the relevant Gov-ernment authorities, being the relevant Regent/Mayor, Governor, or MoEMRin accordance with their respective authority (“Relevant GovernmentAuthority”) and following consultation on the same with the DPR.

A WUP is that part of a WP in respect of which there is available sufficientgeological data or information regarding local mineral potential to enablemining business activities to proceed. WPs include Mining Business LicenseArea (“WIUPs”).

In the case of radioactive minerals, MoEMR will determine the WUPs andthe mining activities that may be carried out in respect of the same.

WIUPs will be granted in the following manner:

a. WIUPs for nonmetal minerals and rocks will be granted on the basis ofan application; and

b. WIUPs for metal minerals and coal will be granted on the basis of atender.

A WPR is that part of a WP where community mining business activitiestake place.

A WPN is that part of a WP reserved for the purpose of national strategicinterests. The DPR will determine that part of the WPN that can be utilized forcertain minerals such as copper, tin, gold, iron, nickel, bauxite, and coal. Thestatus of this part of the WPN will then be converted to become a SpecialMining Business Area (“WUPK”). Any mining activities carried out in a

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WUPK must be on the basis of a Special Mining Business License (“IUPK”).A WUPK may consist of one or more Special Mining Business LicenseAreas (“WIUPKs”).

See Chapter 3 for further details of the determination of WPs.

VII. Mining Licenses

1. Mining Business Entities

An IUP is a mining license granted by the Relevant Government Authority to(i) a business entity (A) engaged in mining activities, (B) domiciled inIndonesia, and (C) established under Indonesian law (“Business Entity”);(ii) a cooperative; or (iii) an individual, for the purpose of carrying on miningbusiness activities.

A Business Entity, cooperative, or individual, intending to carry onmining business activities, must fulfill all applicable administrative, environ-mental, financial, and technical requirements.

2. Mining Business License

There are two types of IUPs being:

a. Exploration IUP: An Exploration IUP enables the holder to carry outpreliminary mining activities, being general survey, exploration, andfeasibility study activities; and

b. Production Operation IUP: A Production Operation IUP enables theholder to carry out various main mining activities such as development,mining, processing, refining, transportation, and sales activities.

The Exploration IUP will be granted by:

a. The relevant Regent/Mayor of the relevant Regency/City, if the area tobe covered by the IUP falls within one Regency or City;

b. The relevant Governor if the area to be covered by the IUP falls partlywithin the boundaries of one Regency and partly within the boundariesof another Regency as long as both Regencies are in the same Province.The Governor will grant the IUP on the basis of a recommendation fromthe relevant Regents/Mayors; and

c. MoEMR if the area to be covered by the IUP falls partly within theboundaries of one Province and partly within the boundaries of anotherProvince. MoEMR will grant the IUP on the basis of a recommendationfrom the relevant Governors.

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The Production Operation IUP will be granted by:

a. The relevant Regent/Mayor of the relevant Regency/City, if the area ofthe mining, processing and refining activities, and the relevant port, fallwithin one Regency or City;

b. The relevant Governor if the area of the mining, processing, and refiningactivities, and the relevant port, fall partly within the boundaries of oneRegency and partly within the boundaries of another Regency as long asboth Regencies are in the same Province. The Governor will grant theIUP on the basis of a recommendation from the relevant Regents/May-ors; and

c. MoEMR, if the area of the mining, processing, and refining activities, andthe relevant port, fall partly within the boundaries of one Province andpartly within the boundaries of another Province. MoEMR will grant theIUP on the basis of a recommendation from the relevant Governors.

In addition to IUPs, there are also Special Mining Business Licenses fornational and strategically important mining projects (“IUPKs”) and Com-munity Mining Licenses for local community mining projects (“IPRs”).

The following is a summary of the key features of each type of Explo-ration IUP:

No.ExplorationIUP Type

MinimumArea perExplorationIUP

MaximumArea perExplorationIUP Term

1 ExplorationIUP for metalminerals

5,000hectares

100,000hectares

Maximum period of 8 years,which consists of (i) 1 yearfor general survey activities;(ii) 3 years for explorationactivities, extendable twice, eachfor a maximum period of 1 year;and (iii) 1 year for feasibilitystudy activities, extendable oncefor a maximum period of 1 year.

2 ExplorationIUP fornonmetalminerals

500 hectares 25,000hectares

Maximum period of 3 yearswhich consists of (i) 1 yearfor general survey activities;(ii) 1 year for explorationactivities; and (iii) 1 year forfeasibility study activities.

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No.ExplorationIUP Type

MinimumArea perExplorationIUP

MaximumArea perExplorationIUP Term

3 ExplorationIUP for certaintypes ofnonmetalminerals


Maximum period of 7 years,which consists of (i) 1 yearfor general survey activities;(ii) 3 years for explorationactivities, extendable once for amaximum period of 1 year; and(iii) 1 year for feasibility studyactivities, extendable once for amaximum period of 1 year.

4 ExplorationIUP for rockminerals


Maximum period of 3 years,which consists of (i) 1 yearfor general survey activities;(ii) 1 year for explorationactivities; and (iii) 1 year forfeasibility study activities.

5 ExplorationIUP for coal

5,000hectares

50,000hectares

Maximum period of 7 years,which consists of (i) 1 yearfor general survey activities;(ii) 2 years for explorationactivities, extendable twice, eachtime for a maximum period of 1year; and (iii) 1 year for feasibilitystudy activities, extendable oncefor a maximum period of 1 year.

The following is a summary of the key features of each type of Pro-duction Operation IUP:

No.ProductionOperation IUP Type

Minimum Areaper ProductionOperation IUP Term

1 Production OperationIUP for metal minerals

25,000 hectares Maximum period of 20 years,including 2 years for constructionactivities, extendable twice, each timefor a maximum period of 10 years.

(Continued)

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No.ProductionOperation IUP Type

Minimum Areaper ProductionOperation IUP Term

2 Production OperationIUP for nonmetalminerals

5,000 hectares Maximum period of 10 years,extendable twice, each time for amaximum period of 5 years.

3 Production OperationIUP for certain types ofnonmetal minerals

5,000 hectares Maximum period of 20 years,including 2 years for constructionactivities, extendable twice, eachtime for a maximum period of 10years.

4 Production OperationIUP for rock minerals

1,000 hectares Maximum period of 5 years,extendable twice, each time for amaximum period of 5 years.

5 Production OperationIUP for coal

15,000 hectares Maximum period of 20 years,including 2 years for constructionactivities, extendable twice, eachtime for a maximum period of10 years.

3. Expiration and Revocation of IUPs

An IUP will expire if (i) the term of the IUP comes to an end, (ii) the IUPis returned by the holder to the Relevant Government Authority, (iii) the IUP isrevoked by the Relevant Government Authority, or (iv) in the case of a Pro-duction Operation IUP, the IUP is not renewed before its term comes to an end.

An IUP may be revoked by the Relevant Government Authority if any ofthe following events occur:

a. The IUP holder does not fulfill its obligations as provided for in the IUPor is not otherwise in compliance with the prevailing laws andregulations;

b. The IUP holder is guilty of certain criminal acts, which are specified inthe 2009 Mining Law; or

c. The IUP holder is declared bankrupt.

The temporary cessation of mining activities does not reduce the validityperiod of the IUP.

See Chapters 8 and 16 for further details of the regulation of mininglicenses.

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VIII. Procedures for Obtaining WIUPs and IUPs

In order to obtain an IUP, a party must, first, obtain a WIUP. A WIUP for metalmineral and coal mining business activities is obtained by way of tender, withthe tender winner being directly issued with an Exploration IUP. A WIUP fornonmetal mineral and rock mining business activities is obtained by way ofapplication.

A Business Entity, cooperative or individual, having the intention to carryout minerals and coal mining activities, may only hold one WIUP while apublicly listed company may hold more than one WIUP.

The presently contemplated tender procedures and requirements forWIUPs in respect of metal mineral and coal mining business activities are asfollows:

a. The Relevant Government Authority will (i) announce a WIUP tender toBusiness Entities, cooperatives, and individuals not later than threemonths prior to the tender date and (ii) form a tender committee that willact as implementer of and handle the carrying out of the tender pro-cedures (“Tender Committee”).

b. For the purpose of the WIUP tender:i. MoEMR must, first, obtain a recommendation from the relevant

Governor and Regent/Mayor; andii. The Governor must, first, obtain a recommendation from the relevant

Regent/Mayor.c. The tender procedure consists of the following stages:

i. Prequalification announcement;ii. Procurement of prequalification documents;iii. Submission of prequalification documents;iv. Evaluation of prequalification documents;v. Clarification and confirmation of prequalification documents;vi. Determination of prequalification result;vii. Announcement of prequalification result;viii. Invitation to participants that have passed the prequalification stage;ix. Procurement of tender documents;x. Tender explanation;xi. Submission of price offering;xii. Cover opening;xiii. Determination of tender rankings;xiv. Stipulation/announcement of tender winner based on price

offering and technical considerations; andxv. Opportunity for challenge to the tender winner stipulation.

A Production Operation IUP will be granted to an Exploration IUPholder, without any tender, on the basis of an application and after fulfilling

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all the administrative, technical and financial obligations attached to theExploration IUP.

The activities covered by the Production Operation IUP include (i)construction, (ii) mining, (iii) processing and refining, and (iv) transportationand sales.

In the event the holder of a Production Operation IUP does not wish tocarry out its own (i) transportation and sales activities or (ii) processing andrefining activities, such activities may be carried out by another party thatholds:

a. A Special Production Operation IUP for Transportation and Sales only;b. A Special Production Operation IUP for Processing and Refining only; orc. A Production Operation IUP.

Special Production Operation IUPs for Transportation and Sales will begranted by:

a. The Regent of the relevant Regency, if the transportation and salesactivities are to be carried on within one Regency;

b. The Governor of the relevant Province, if the transportation and salesactivities are to be carried on across Regencies or cities in one Province;or

c. MoEMR, if the transportation and sales activities are to be carried onacross two or more Provinces or countries.

See Chapters 8, 22, and 23 for further details of the procedures forobtaining WIUPs and IUPs.

IX. Rights and Obligations of IUP Holders

The rights of an IUP holder are as follows:

a. An IUP holder may carry on the designated mining business activities, inwhole or in part, whether exploration activities or production operationactivities.

b. An IUP holder may use public facilities (e.g., roads, bridges, railroads)for the purpose of carrying on its mining activities subject to compliancewith the provisions of the relevant regulations.

c. An IUP holder has the right to sell the minerals derived from its IUP areaand in accordance with the prevailing laws and regulations although theminerals belong to the State until all applicable royalties and taxesare paid.

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d. In the event that an IUP holder determines there are minerals present in itsIUP area, other than the minerals specified in its IUP, the IUP holder has afirst-priority right to exploit these other minerals by obtaining from theRelevant Government Authority a separate IUP for these other minerals.

e. Subject to certain limited exceptions, an IUP holder may not transfer itsIUP to another party.

f. The most important exceptions to (e) above are (i) where the IUP holderhas found at least two prospective mining sites in its IUP area during thecourse of its exploration activities and (ii) transfers to subsidiary com-panies, the issued shares of which are owned as to not less than 51% bythe transferor.

The obligations of an IUP holder are as follows:

a. An IUP holder is obliged to:i. Apply good technical mining principles;ii. Manage its finances in accordance with the Indonesian accounting

system;iii. Add value to its mineral resources;iv. Assist with local community development; andv. Protect the environment.

b. In applying good technical mining principles, the IUP holder is obligedto ensure:i. The health and safety of workers;ii. General mining operational safety;iii. The proper management and surveillance of the mining environ-

ment, including the activities of reclamation and post-mining;iv. Mineral and coal resources conservation; andv. The proper management of mining residue from the mining busi-

ness activities, whether in the form of solids, liquids, or gases, andto comply with prevailing environmental standards before releasingmining residue into the environment.

c. An IUP holder must guarantee the implementation of all applicableenvironmental quality standards.

d. An IUP holder is obliged to preserve the availability and quality of localwater resources in accordance with the prevailing laws and regulations.

e. An IUP holder is obliged to prepare and submit a Reclamation and Post-mining Plan when applying for the Production Operation IUP.

f. The activities of reclamation and post-mining must be conducted inaccordance with the Land Utilization Agreement between the IUPholder and the relevant land owner.

g. An IUP holder must provide a Reclamation and Post-Mining GuaranteeDeposit. The Relevant Government Authority may appoint a third party

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to carry out the reclamation and post-mining activities using the Rec-lamation and Post-Mining Guarantee Deposit. This, however, will onlyapply if the IUP holder does not carry out the necessary reclamation andpost-mining activities.

h. An IUP holder is obliged to carry out the processing and refining ofmining products in Indonesia. The IUP holder may also process andrefine mineral products that are produced by other IUP holders.

i. In carrying out the activities of processing and refining, the ProductionOperation IUP holder is allowed to cooperate with a Business Entity orcooperative holding an IUP for processing and refining.

j. i. A Business Entity that wishes to sell mineral products, but is nototherwise engaged in mining activities, is obliged to obtain a Spe-cial Operation Production IUP for sales.

ii. The specified Special Operation Production IUP will usually begranted by the Relevant Government Authority for a single saleonly.

iii. The mineral product that is sold will be subject to a specifiedproduction fee.

iv. The Business Entity holding the Special Operation Production IUPmust submit a report on the mineral product sales proceeds to theRelevant Government Authority.

k. The IUP holder must give priority to the utilization of local employeesand domestic goods and services in accordance with the prevailing lawsand regulations.

l. In order to conduct operational production activities, the BusinessEntity holding an IUP must also allow participation by local entrepre-neurs in accordance with the prevailing laws and regulations.

m. An IUP holder is obliged to prepare a Community Development andEmpowerment Program for the local community surrounding the mine.This Program must be discussed with the Relevant GovernmentAuthority and the local community.

n. An IUP holder must submit to the Relevant Government Authority allinformation derived from the activities of exploration and productionoperation.

o. An IUP holder is obliged to submit a periodic written report regarding itswork plan and the implementation of its mining activities to the Rele-vant Government Authority.

p. Commencing in the fifth year of production, an IUP holder must divest,in annual installments, part of its foreign shareholding (if any) to theGovernment, Regional Government, BUMN, BUMD, or BUMS (notincluding PMA Companies) such that local parties hold not less than51% of the issued capital of the IUP holder by the end of the tenth yearof production.

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q. i. The IUP holder is obliged to contribute to State Revenue andRegional Revenue by way of a tax on its net profits.

ii. The Production Operation IUP holder, in the case of the mining ofmetal minerals and coal, is obliged to pay 4% of its net profits to theCentral Government and 6% of its net profits to the RegionalGovernment.

iii. The IUP holder is only liable to pay a production fee in the case ofmineral products derived from its mining activities if it intends tofurther utilize or sell the same.

iv. The amount of nontax State Revenue to be derived from the IUPholder will be subsequently stipulated in accordance with theprevailing laws and regulations.

See Chapters 8, 22, and 23 for further details of the obligations of IUPholders.

X. Domestic Market Obligation

The 2009 Mining Law differentiates between three different mining businessactors, as follows:

a. Mineral and Coal Mining Entity (“Mining Entity”). A Mining Entity isa business entity carrying out mining activities in respect of minerals orcoal by virtue of a CoW, CCoW, Production Operation IUP, or Produc-tion Operation IUPK.For the purpose of prioritizing the supply of minerals and coal to satisfy

domestic needs, a Mining Entity is obliged to fulfill any specified annualminimum domestic selling percentage by selling the specified percentageof its mineral or coal production to domestic mineral users or coal users(“Domestic User”) before it can export the minerals or coal production(“Minimum Selling Percentage”) (“Domestic Market Obligation”).

The Minimum Selling Percentage obligation only applies to MiningEntities and not to Domestic Users or Traders.

b. Domestic Users: GR 34/2009 divides Domestic Users into two cate-gories, namely (i) Domestic Mineral Users and (ii) Domestic Coal Users.A Domestic Coal User is an entity or individual that utilizes coal as rawmaterial or fuel.

GR 34/2009 highlights that a Domestic Coal User, utilizing coal asa raw material, may be engaged in the following business activities:(i) production of coal briquettes; (ii) metal processing, (iii) coal lique-faction, (iv) coal gasification, or (v) coal upgrading.A Domestic User is restricted from directly exporting the mineral ore or

newly mined coal that it purchased from the Mining Entity. The main

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purpose of this export restriction is to ensure that Domestic Usersactually carry out the processing and refining of mineral ore or newlymined coal in Indonesia.

c. Minerals and Coal Trading Business Entity (“Trader”): A Trader is abusiness entity carrying out the sale and purchase of minerals or coal inIndonesia. A Tradermay only export processed or purifiedminerals or coal.

Sales to Traders are not considered to be part of Domestic MarketObligation sales except where all the following conditions are met:i. Sales to Traders are conducted between June and November of the

relevant year;ii. The Traders hold valid mineral or coal trading licenses (i.e., Pro-

duction Operation IUPs for transportation and sales); andiii. The relevant sale and purchase agreements between the mining

companies and the Traders are attached to the annual Budget PlanReport of the Mining Entity for the relevant sale year.

The 2009 Mining Law also recognizes Domestic Market ObligationCredits Trade (“Credits Trade”), which is intended to enable an otherwiselikely noncompliant Mining Entity to fulfill its Domestic Market Obligation.

The Credits Trade principle refers to the following:

a. If there is a Mining Entity that has exceeded its Domestic Market Obli-gation in a relevant year; and

b. There is another Mining Entity that is likely to be unable to fulfill itsDomestic Market Obligation commitment for the relevant year; then

c. The first Mining Entity may sell and transfer its excess Domestic MarketObligation commitment (i.e., the “credits”) to the second Mining Entity.

The purchase price of the Domestic Market Obligation credit is subject tocommercial agreement between the relevant Mining Entities provided thatthe maximum price of the Domestic Market Obligation credit is equal to thereferenced or minimum sale price of the relevant mining product applicablein the current month (i.e., the month in which the transaction involving theDomestic Market Obligation credits occurs).

See Chapters 6 and 7 for further details of the Domestic MarketObligation.

XI. Divestiture of Shares Requirement

After five years of production, a PMA Mining Company must begin to divestsome of its shares (“Divestiture Shares”) to Indonesian parties, so that theIndonesian parties (being GoI, Regional Government, BUMN, BUMD orBUMS (not including PMA Companies)), hold not less than 51% of the PMA

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Company’s issued shares by the end of the tenth year of production(“Divestment Requirement”).

The Divestiture Shares must be offered, in the first instance, to GoI. In thisregard, GoI may appoint a BUMN to acquire the Divestiture Shares. If GoI isnot interested in acquiring the Divestiture Shares, the Divestiture Shares mustthen be offered to the Regional Government. If there is no Regional Gov-ernment that is interested in acquiring the Divestiture Shares, the DivestitureShares must then be offered to BUMN and BUMD by way of tender. If there isno BUMN or BUMD that is interested in acquiring the Divestiture Shares, theDivestiture Shares must then be offered to BUMS (not including PMA Com-panies) by way of tender.

By implication, the Divestment Requirement is only applicable to theholders of Production Operation IUPs.

If, prior to the end of the tenth year of production, a PMA MiningCompany already has a shareholding composition that includes Indonesianparties holding not less than 51% of the issued shares, the DivestmentRequirement is no longer applicable.

Generally, the holder of a Special Production Operation IUP (i.e., fortransportation and sales or for processing and refining) does not indepen-dently produce its own minerals or coal. Therefore, the DivestmentRequirement will only bind the holder of a Production Operation IUP thatdevelops its own mining concession.

See Chapters 8 and 16 for further details of the divestiture requirement.

XII. Procedures for Minerals and Coal BenchmarkPrice Determination

The benchmark price for mining products must be determined pursuant to amarket mechanism and/or in accordance with prevailing prices in interna-tional markets. In selling mining products, Production Operation IUP/IUPKsholders are obliged to comply with the benchmark price, which is applicableto sales made to either domestic parties or foreign parties (pursuant to exporttrading activities) and any sales made to affiliates of the Production OperationIUP/IUPK holders.

The Relevant Government Authority will determine the benchmark pricefor mining products on a monthly basis.

The coal benchmark price distinguishes between:

a. The coal benchmark price for steam (thermal) coal, namely coal used asfuel for power plants and steam machines in industries (“SteamingCoal”); and

b. The coal benchmark price for coking (metallurgical) coal, being coalused in iron smelting industries or metallurgy (“Coking Coal”).

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DGoMC, on behalf of MoEMR, shall, on a monthly basis, determine thecoal benchmark prices for Steaming Coal and Coking Coal based on calcu-lations made with reference to the average coal price index as determined inaccordance with the market mechanism and/or the prevailing prices in theinternational market (“Coal Benchmark Price”).

The Coal Benchmark Price must be used as the price setting reference byholders of Production Operation IUP/IUPKs for coal in carrying out coalselling activities. The Coal Benchmark Price is the price of coal at the salepoint and Free on Board (“FOB”) vessel.

Coal sales must comply with the Coal Benchmark Price and may beconducted on the basis of:

a. FOB vessel;b. FOB barge;c. Sales to domestic end consumers (in the same island);d. Cost Insurance Freight (“CIF”) or Cost and Freight (“C&F”).

The calculation of the coal selling price, as mentioned above, mustcomply with the Coal Benchmark Price subject to cost adjustment (either byway of addition or reduction) as approved by DGoMC on behalf of MoEMR,which shall include the following components:

a. Transportation cost (barge cost);b. Surveyor cost;c. Transshipment cost; and/ord. Insurance cost.

Production Operation IUP/IUPK holders must reset metal mineral andcoal prices, in the case of term sales, once a year.

Production Operation IUP/IUPK holders must submit reports regardingsales of mining products, on a monthly basis, to the Relevant GovernmentAuthority.

Low-quality coal may be sold at a special Benchmark Price, below theCoal Benchmark Price, and in accordance with the Low-Quality CoalBenchmark Price. Certain Types of Coal and Coal for Specific Purposes maybe sold at a price below the Coal Benchmark Price following approval fromDGoMC on behalf of MoEMR.

Sellers of metal minerals and coal must use:

a. Indonesian flagged transportation services providers;b. National or domestic insurance companies in the case of CIF sales; andc. Verification surveyors approved by DGoMC.

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Violations of the benchmark price requirements may result in theimposition of administrative sanctions as follows:

a. Written warnings;b. Suspension of sales of mining products; orc. Revocation of Production Operation IUP/IUPKs.

Following the introduction of the benchmark price requirement pursuantto MoEMRR 17/2010:

a. Holders of CoWs and CCoWs must comply with all provisions ofMoEMRR 17/2010 in connection with all sales of mining products;

b. After not later than six months, spot sales contracts, which were enteredinto by the holders of Production Operation IUP/IUPK/CoW/CCoWsprior to the introduction of MoEMRR 17/2010, must be adjusted so as tocomply with MoEMRR 17/2010; and

c. After not later than twelve months, term sales contracts, which wereentered into by the holders of Production Operation IUP/IUPK/CoW/CCoWs prior to the introduction of MoEMRR 17/2010, must be adjustedso as to comply with MoEMRR 17/2010; but

d. (b) and (c) above shall not apply to existing spot sales contracts and termsales contracts to the extent that the selling price has been renegotiatedin accordance with instructions from MoEMR or DGoMC.

The benchmark price requirement applies to sales of mining products toboth arms-length buyers and to “affiliates” of the seller (i.e., related parties).

MoEMRD 617/2011 makes it clear that the state owned electricity com-pany, PT Perusahaan Listrik Negara (Persero) (“PLN”), is also obliged to paythe relevant Coal Benchmark Price for coal which it buys for PLN operatedpower plants.

DGoMCR 999/2011, as amended by DGoMR 644/2013, sets out theprocedures for making certain permitted cost adjustments to BenchmarkPrices for coal.

See Chapters 10 and 11 for further details of Benchmark Pricedetermination.

XIII. Domestic Processing and Refining

1. Background

A domestic processing and refining obligation (“DPR Obligation”), other-wise known as the “local value added requirement”, was one of the major

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changes introduced by the 2009 Mining Law (see Articles 95(c), 102, and103). Although poorly worded, not mentioning any specific mineral or coaland only expressly referring to CoWs and CCoWs, Article 170 of the 2009Mining Law was generally understood as meaning that the DPR Obligationwould become a reality in not later than five years or by 2014.

In February 2012, GoI finalised and issued MoEMRR 7/2012. MoEMRR 7/2012 deals exclusively with domestic processing and refining of metalminerals, non-metal minerals and rock minerals but not with coal. To date,GoI has not finalised and issued the proposed regulation on domestic pro-cessing and refining or upgrading of coal.

2. Parties Subject to DPR Obligation

At the moment, MoEMRR 7/2012 only applies to holders of ProductionOperation IUPs which are already producing the specified metal minerals,non-metal minerals, and rock minerals. MoEMRR 7/2012 does not currentlyapply to CoW holders.

Although the primary focus of MoEMRR 7/2012 is holders of ProductionOperation IUPs, the transitional provisions in Articles 21 to 25 of MoEMRR 7/2012 make various references to CoW holders having to eventually complywith the DPR Obligation. No doubt, this is in recognition of Article 170 of the2009 Mining Law which contemplates the DPR Obligation will apply to CoWholders by 2014.

It is, effectively, the responsibility of the exporter to ensure that theminimum level of domestic processing and refining has been carried out.MoEMRR 7/2012 contemplates the exporter will usually be the produceralthough this does not necessarily have to be the case.

3. Carrying out the DPR Obligation

It is very clear from MoEMRR 7/2012 that the producers do not have to carryout the DPR Obligation themselves but, rather, may have a third partycarry out the DPR Obligation on their behalf. More specifically, MoEMRR 7/2012 provides that:

a. Processing and refining of mineral products, produced by holders ofProduction Operation IUPs, may be carried out directly by the Produc-tion Operation IUP/IUPK holders concerned or by way of cooperationwith other holders of Production Operation IUPs and/or Special Pro-duction Operation IUPs for Processing and Refining (Article 7(3)).

b. In the event that it is not economically efficient for holders of ProductionOperation IUPs to carry out mineral product processing and refining by

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themselves, such holders may cooperate, in respect of processing and/or refining, with other parties having:i. Production Operation IUPs; andii. Special Production Operation IUPs for Processing and Refining

(Article 8(1)).c. Processing and/or refining cooperation, as mentioned in (b) above, may

be carried out in the form of:i. sale and purchase of ore or concentrate;ii. provision of processing and/or refining services; oriii. joint development of facilities and infrastructure in connection with

processing and/or refining.

In certain circumstances, DGoMC has the right to appoint a particularholder of a Special Production Operation IUP for Processing and Refining tocarry out the DPR Obligation on behalf of an IUP holder. More particularly,should a particular IUP holder believe, based on the results of a feasibility study,that it is not economically efficient to carry out domestic processing activities orthe holders of IUPs are not able to establish their own cooperation arrange-ments with a holder of a Special Production Operation IUP for Processing andRefining, the particular IUP holder is obliged to consult with DGoMC regardingimplementation of MoEMR Regulation 7/2012. Following such consultation,DGoMC may appoint holders of (i) Production Operation IUPs or (ii) SpecialProduction Operation IUPs for Processing and Refining to process and refinethe mineral products of the IUP holder which believes that it is not economicallyefficient for it to carry out its own processing and refining activities and cannotestablish its own co-operation arrangement with a third party.

4. Minerals Subject to the DPR Obligation

MoEMRR 7/2012 applies to sixty-five specified:

a. Metal minerals;b. Non-metal minerals; andc. Rocks; only.

Coal is not covered by MoEMRR 7/2012. However, a separate CoalUpgrading Regulation has been proposed which, if it is eventually issued, willprohibit the export of low calorific value coal thereby, effectively, requiringupgrading of low calorific value coal prior to export. Owing to strenuousopposition from the coal mining industry, however, it is presently uncertain ifor when the Coal Upgrading Regulation will be issued. The principal issue forthe coal mining industry is the questionable availability, cost effectivenessand reliability of coal upgrading technology in Indonesia.

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5. Requirements of the DPR Obligation

The minimum domestic and processing requirement for each of the specifiedmetal minerals, non-metal minerals and rocks is set out in a Schedule toMoEMRR 7/2012.

In the case of the specified metal minerals, the Schedule specifies theminimum purity level (stated as a percentage) which must be achievedthrough domestic processing and refining.

In the case of non-metal minerals and rock minerals, the Schedulespecifies a broader range of outcomes which must be achieved throughdomestic processing and refining including purity, size, shape, whiteness,solubility, etc.

6. Consequence of Non-Compliance with the DPR Obligation

Mineral products which do not meet the minimum processing and refiningspecifications may not be exported from Indonesia. Such mineral productsmay, however, still be sold domestically.

Producers that fail to meet the minimum domestic processing andrefining requirement are also liable to administrative sanctions which mayultimately result in the cancellation of their IUPs.

See Chapters 15 and 26 for further details of the DPR Obligation.

XIV. Direction and Supervision of the Management andImplementation of Mining Business

The Relevant Government Authority is authorized to carry out the supervisionof the implementation of IUP/IUPK holders’ mining business activities.

Supervision will be conducted at least once a year by a Mining Inspectoror a Supervision Officer.

Mining Inspectors are responsible for the supervision of:

a. Exploration techniques;b. Mining techniques;c. Resources and reserves calculations;d. Construction and testing of equipment;e. Processing and refining;f. Transportation and sales;g. Operational safety;h. Reclamation and post-mining activities; andi. Utilization of goods and services.

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Supervision Officers are responsible for the supervision of:

a. Marketing;b. Finances;c. Data processing;d. Conservation;e. Occupational safety and health;f. Worker technical skills;g. Community empowerment and development;h. Other mining business activities;i. Management of IUPs, IPRs, and IUPKs; andj. Quantity, type, and quality of mineral products.

In carrying out his duties, a Mining Inspector has the authority to:

a. Enter a mining site on any occasion;b. Order temporary cessation or closure of part or all mining activities if the

mining activities are considered to be (i) endangering the safety of mineworkers, (ii) endangering public safety, or (iii) causing pollution orenvironmental damage; and

c. Propose to the Head Mining Inspector that the temporary cessation orderbecome a permanent cessation order.

In carrying out his duties, a Supervision Officer is also authorized to entera mining site on any occasion.

The ability of a Mining Inspector to order a temporary cessation ofmining activities is a potentially worrying development because of the sig-nificance of the discretion vested in Mining Inspectors and the lack of specificguidelines as to how and when that discretion should be exercised.

See Chapter 9 for further details of the direction and supervision ofmining activities.

XV. Transitional Provisions for Existing KPs, CoWs, and CCoWs

a. CoWs and CCoWs, which were in existence as of the date of the 2009Mining Law, will continue until they expire. However, not later than oneyear after the issuance of the 2009 Mining Law, the provisions of existingCoWs and CCoWs are meant to be brought into compliance with the 2009Mining Law except for those provisions dealing with State Revenue. Thisdeadline has now been effectively extended until December 31, 2013.

b. Within one year of the enactment of the 2009 Mining Law (i.e., byJanuary 12, 2010), the holder of a CoW or CCoW, which has already

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commenced to carry out the activities of exploration, feasibility study,construction, or production operation, must submit a report on itsentire CoW or CCoW area activities for approval by the RelevantGovernment Authority. If the holder fails to submit the necessaryreport, the holder must bring the CoW or CCoW into full compliancewith the 2009 Mining Law.

c. Within five years of the enactment of the 2009 Mining Law (i.e., byJanuary 12, 2014), the holder of an existing CoW or CCoW is meant tocommence carrying out refining activities in Indonesia (if applicable/necessary). It seems likely that this deadline will be extended.

d. With regard to the existing KPs under the Old Mining Law regime, the2009 Mining Law provides a one-year deadline to convert the KPs intoIUPs (i.e., by January 12, 2010). However, this deadline was subse-quently extended to May 1, 2010. It is not clear what are the legalconsequences of not converting a KP into an IUP by May 1, 2010. It is tobe noted, however, that the Relevant Government Authorities seem tohave generally implemented a rather relaxed approach to the conver-sion deadline by accepting late conversion applications.

XVI. Mining Services

The 2009 Mining Law seeks to do away with the practice, common under theOld Mining Law, whereby the KP holder effectively outsourced all miningactivities to third-party mining services providers.

Under the 2009 Mining Law, the IUP/IUPK holder may only outsourcecertain specific activities while the actual production of minerals or coal mustbe carried out by the IUP/IUPK holder itself.

MoEMRR 28/2009, as amended by MoEMRR 24/2012, recognizes twoboard categories of mining services being (i) core mining services and(ii) non-core mining services.

All mining services providers must now be licensed with (i) miningservices business licenses (“IUJPs”) being issued to core mining servicesproviders and (ii) registration letters (“SKTs”) being issued to non-coremining services providers.

There are three categories of mining services providers, being (i) localmining services providers, (ii) national mining services providers, and (iii) othermining services providers.

PMA Companies may only operate as “other mining services providers.”IUP/IUPK holders are obliged to give priority to the use of local mining

services and national mining services providers.See Chapters 4, 5, and 19 for further details of MoEMRR 24/2012 as well as

for details of the restrictions on the use of “affiliated”mining services providers.

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“I have known Bill Sullivan for many years and admire his profound grasp of the simultaneously complex and dynamic legal system surrounding the mining sector in Indonesia, which is intertwined with forestry, land ownership, regional government, and other equally intricate matters. His incisive mind cuts through the maze and gets straight to the core of the issue. I am glad that he has now written a book for which he is immensely qualified and that is required reading for anyone interested in the

Indonesian mining industry.”-Noke Kiroyan, former CEO, Rio Tinto Indonesia, Kaltim Prima Coal and Newmont Pacific Nusantara

“…. Mining Law & Regulatory Practice in Indonesia will be the standard reference for many years.”

-James Castle, Chairman, CastleAsia, and founding President, International Chamber of Commerce in Indonesia

“Bill Sullivan disproves the theory that Indonesian law is ‘unknowable’, but he does demonstrate itscomplexity. In a very clear, methodical way, Bill sets out the layers or ‘lapis-lapis’ of laws, presidential decrees, ministerial decrees, and government

regulations that make up the Indonesian legal regime around mining, which is administered by the central government, province governors, and regencies. …”

-Andrew Wilson, Director, Robust Resources Ltd; Commissioner, PT Resource Alam Indonesia Tbk; former president director, PT BHP Billiton Indonesia

About the Author:

www.wiley.com/buy/9781118613184

Bill Sullivan is a Licensed Foreign Advocate with Christian Teo Purwono & Partners. Christian Teo Purwono & Partners is a Jakarta based, Indonesian law firm and a leader in Indonesian mining law and regulatory practice. Christian Teo Purwono & Partners operates in association with international law firm Stephenson Harwood LLP which has 9 offices across Asia, Europe and the Middle East in Singapore, Hong Kong, Beijing, Guangzhou, Shanghai, London, Paris, Dubai and Athens. The author at email: [email protected]; office: 62 21 5150280; mobile: 62 815 85060978

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