MAC: Mines and Communities

Indonesian coal battles are heating up

Published by MAC on 2011-10-25
Source: Reuters (2011-10-10)

Last year, in MAC's special report on global coal (Dark Materials: the consequences of clinging to coal), we warned of prospective investments by United Arab Emirates (UAE) companies in Indonesia's massive coal fields in Sumatra and East Kalimantan.

We also reported a plan to establish one of the world's biggest aluminium smelters in the latter province.

Now, these highly threatening projects seem to have moved closer to fruition (for more detail on the UAE plans, see below).

Meanwhile, UK-based Churchill Mining has lost its right to exploit one of Indonesia's largest and most promising new coal fields, also in East Kalimantan. 

In a complex feud between the company and its Indonesian financial backer, Churchill was accused of having taken over leases in East Kutai, officially handed to another domestic firm.

Although Churchill has filed an appeal against this decision in Indonesia's Supreme Court, it's anyone's guess as to how long it will take before being heard.

Editorial note: This specific case has generally been framed as a dispute over mining rights.

However, in April this year, Indonesia's State Administrative Tribunal upheld a decision, taken by the traditional ruler (Regent) of East Kutai, that Churchill had encroached on protected forests within its concession area [see Mining Journal, 29 April 2011].

That important ruling appears to have been disregarded in more recent reportage.

UAE to invest $9.5 bln in Indonesia aluminium smelters

Reuters

19 October 2011

JAKARTA -The United Arab Emirates (UAE) plans to make possibly the largest-ever investments in Indonesia's industrial sector by pumping $9.5 billion into aluminium smelter projects in Kalimantan, Indonesia's ambassador to the UAE said on Wednesday.

M Wahid Supriyadi was unable to give a time-scale or details on production capacity on the two smelter projects, at a news conference in Jakarta.

"Emirates Alumunium will invest $4 billion in West Kalimantan to build an alumunium smelter and a power plant ... Ras Al Khaima Investment Authority will invest $5.5 billion in East Kalimantan to build an alumunium smelter, a power plant and a railway line related to the projects," Supriyadi told reporters.

Earlier this month, Indonesia's trade minister said India's state-run National Aluminium Co Ltd (NALCO) will invest $4 billion in an aluminium smelter and power plant in Indonesia's East Kalimantan province.

"Depending on the timing it's not a very big deal," said a metals analyst, who asked not to be named. "These big projects get announced all the time and then get scrapped later."

"Indonesia has got some bauxite and it's got a lot of thermal coal, so you have the power," he added. "It all depends on the timing of the deal and how long it takes to sort out, because aluminium capacity expansion for the next decade is quite large."

Bauxite is used to make alumina which is in turn used to make aluminium, a light-weight and flexible metal used in a vast array of industrial and consumer products, from packaging and aircraft manufacturing to electrical cables and insulation.

Southeast Asia's largest economy is the world's top exporter of thermal coal, with about 99 percent of the identified coal resources located on the island of Sumatra and in the south and east Kalimantan provinces, on the Indonesian side of Borneo island.

The world's fourth most populous country drew in a record of $9.6 billion in foreign direct investment (FDI) in the first half of 2011, attracted by its relatively stable politics and economy since the 1998 financial crisis, plus abundant resources and huge consumer spending power.

Despite issues over infrastructure, corruption and labour disputes, that trend is expected to continue as global firms look to take advantage of cheap labour, and Indonesia's huge mineral wealth.

Growth prospects have been given another boost by the government's offer of a tax holiday to big manufacturers investing more than $100 million.

Other planned investments include a $6 billion joint-venture steel plant by South Korea's POSCO , the world's third-biggest steelmaker, a $4.5 billion petrochemical complex by South Korea's Honam Petrochemical Corp and a new oil refinery for $8-$9 billion from Kuwait Petroleum Corp.

"I do," the analyst said, when asked if he saw more deals similar to Wednesday's announcement. "The Asia region in general will be investing in Indonesia, and Indonesia will be investing in Indonesia."

"It is already clear they have plans to develop their resource-nationalistic policies," he added. "There is a long way to go, in terms of developing the adequate infrastructure."

In an effort to support the domestic industry and add value to its coal exports, the Indonesian energy and minerals ministry is drafting a regulation that would by 2014 require coal producers to upgrade low-quality coal to a medium-quality coal before exporting.

Supriyadi added that there was also another UAE company that will invest $100 million in a crude palm oil refinery, while a second UAE firm will invest $90 million in the tyre industry. (Reporting by Yayat Supriatna; Writing by Michael Taylor; Editing by Ramthan Hussain)

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Extracts from "Dark Materials: the consequences of clinging to coal", published by MAC in August 2010.

RAK: from coal to aluminium through Indonesia and India

In February 2008 the Dubai government's Ras Al Khaimah Investment Authority, together with RAK Minerals and Metals Investments (RIMMI) signed an MoU with the provincial government of South Sumatra that "covers the entire mining-to-export chain of the coal industry" [Gulf News 19/2/2008].

On paper this looks to become one of the most ambitious undertakings of its kind anywhere. The MoU includes: building an industrial park for metals refining, smelting and metal-based fabrication industries, bio-technology parks, palm, rubber and other agro-based industries, captive power plants and supporting infrastructure.

In addition, the government of South Sumatra will " provide sufficient land and fast-track the approval and licensing process to build new port, industrial parks and power plant, along with residences and leisure facilities". It would also "assist RMMI in getting licences and off take agreements for natural resources like coal and metallic ores, to support the raw material requirements of local industries and the planned power plant" [Gulf News op cit].

According to Madhu Koneru, RIMM's managing director:

"With the planned world class industrial city at Tanjung Api-Api, Sumatra will be able to support and attract investments in the minerals/ore dependent heavy industries, palm, rubber and other agribusinesses and bio-technology industries.

"The MoU with resource-rich Sumatra - where we plan to develop a suitable freight corridor and port infrastructure - will allow us to develop cost effective and efficient export route of thermal coal and other natural resources to Asian and Middle Eastern markets."

A year after this announcement, RAK and MEC (see below) concluded yet another agreement - with the provincial government of East Kalimantan - under which they would invest US$ 1 billion in the construction of a railway corridor to link MEC's Muara Wahau coal mine in East Kalimantan with Bengalon port. This would comprise part of a massive "integrated energy project" worth US$ 2.5 billion [WC 4/2010].

Critical to this hubristic venture is the participation of India's largest aluminium company, state-owned Nalco, which, according to a MEC spokesperson, has agreed to co-fund the East Kalimantan enterprise in return for the right to build a smelter to refine alumina imported from India itself [Reuters 9/3/2010].

MEC is the United Arab Emirates' AE-based Middle East Coal company (MEC). In late 2009 it announced plans to start operating coal mines in East Kalimantan province during 2010, with an initial production of a modest 2 million tonnes destined for India, later mounting to very substantial 32 mte per annum by 2015 [Reuters 8/12/2009].

MEC would be joining RAK Minerals (part of the UAE state investment fund) and Rak Metals Investments (RMMI), along with UAE-based mining company Trimex, to exploit MEC's "greenfield" coal concession in East Kalimantan. This vast deposit reportedly hosts resources of no fewer than 2 billion tonnes of "low-sulphur/low-ash" thermal coal [Reuters ibid;see also RAK below]. Although the exact location of this concession is not known, in April 2010 World Coal magazine reported that MEC and RAK had opened talks with PT Bhakti Energi Persada to sell 32 mt per annum of coal from their joint operations by 2013 [WC 4/2010].

In March last year RMMI also secured a license to construct a 130 km rail link to take MEC coal from its Muara Wahau mine to Bengalon port - with the intention of "commissioning the first cargo train by early 2012" as part of a Middle Eastern-Indonesian integrated energy project valued at US$5.2 billion [WC 4/2010].

The firm claimed that it has already acquired "about 80 percent of the land needed for the project" which it costed at $1 billion [Reuters op cit]. Gulf News, at the same time, claimed that "MEC...was able to purchase and clear the land for the entire 130 km corridor within a few months" [Gulf News 16/12/2009]. The newspaper said that India's IL&FS Group was providing financing to MEC for the project [Gulf News ibid].

MEC has also been "in talks" to buy equity stakes in Indian power plants in exchange for a long-term coal supply deal [Reuters op cit] which presumably could include substantial consignments from Indonesia.


Battle over huge coal deposit highlights risks in Indonesia

By Michael Taylor

Reuters

10 October 2011

Jakarta - Indonesia contains some of the world's richest mineral deposits, located tantalisingly close to the markets of China and India, but a court battle over a $1.8 billion coal mine highlights the risks foreign miners face in the country.

London-listed Churchill Mining Plc has been in dispute with Indonesia's Nusantara Group for three years over the right to develop the world's seventh-largest undeveloped coal asset. The case has reached Indonesia's highest court and could take years more to settle.

The 350-sq-km (135-sq-mile) mine site in East Kutai, a coastal district in East Kalimantan province, is said to contain 2.8 billion tonnes of coal reserves.

"It's a big medium to low-grade thermal coal deposit," Churchill Executive Chairman David Quinlivan told Reuters in a telephone interview. "That requires a substantial amount of infrastructure to be able to bring it into production.

"But once in production, it will be very much a long-term project -- 50 years or more."

Nusantara Group originally held six licences in the disputed area. According to court documents filed by Churchill, these lapsed between March 2006 and March 2007. The East Kutai government declared the area open to other companies and Indonesian firm PT Ridlatama received four mining licences, Churchill said.

Between November 2007 and February 2008, Churchill bought a 75 percent stake in Ridlatama's licences and spent about $40 million on the project. But after Churchill announced in May 2008 that the project could yield substantial coal, things turned messy.

A few weeks later, the East Kutai regional government granted extensions to the Nusantara Group mining licences that Churchill believed had lapsed.

The undeveloped and potentially highly lucrative coal mine has since become the subject of a series of legal tussles . But after a March 2011 tribunal ruling in Indonesia, Churchill and minority partner Ridlatama no longer own the East Kutai project.

Churchill filed an appeal on Sept. 26 in Indonesia's Supreme Court. It is unclear how long the court's verdict will take.

"At least months and it can be years," said Rozik Soetjipto, an Indonesia mining consultant on supreme court judgments. "About one or two years, maybe longer if something is very exceptional, but generally less than two years."

Officials at Nusantara were unavailable for comment despite repeated telephone calls and e-mails.

Legal Tussle

"I'm disappointed more than anything else -- that it had to get to this to try and maintain title," Quinlivan said, adding that Churchill may seek international arbitration. "The legal process doesn't end in Indonesia."

According to Churchill, Nusantara Group is controlled by former Indonesian army general Prabowo Subianto.

Prabowo was a former head of the Kopassus special forces and was once married to one of former strongman President Suharto's daughters. He is the son of a former Indonesian finance minister and data from Indonesia's anti-graft agency shows he had an estimated personal wealth of about $160 million as of 2009.

The legal tussle between Nusantara and Churchill also highlights the complex bureaucracy of the sprawling country of 17,000 islands.

"If you are going to be on the wrong side of a land acquisition that is in dispute, if it gets blown up in the press, then you will end up with the perception that regulatory risk is getting worse," said Andreas Bokkenheuser, an analyst at UBS. "But if you look beyond assets in dispute, I actually see the regulatory risk improving in Indonesia."

The government is drafting a rule that would, by 2014, require miners to carry out minimum processing on minerals before export -- part of a mining and coal law introduced in 2009 aimed at making life easier for investors.

Despite these changes, one Indonesia-based analyst estimated there are currently about 100 unresolved disputes involving mine ownership or licences.

"They are trying to clean up the sector," said Bokkenheuser. "We're seeing enforcement of the law, which is positive... There is still a concerted effort to make the mining environment more attractive for foreigners to come in and invest."

Indonesia's coal export growth will be fuelled in large part by China and India, where power demand is expected to lift coal imports significantly over the next five years. Output will hit 340-354 million tonnes for 2011, industry groups say.

The government has also tabled a new land bill to speed up land acquisition, but it may be not be effective until 2012 and companies still face risks.

"Number one, don't underestimate the legal due diligence," said Bokkenheuser, referring to foreign miners looking to invest in Indonesia. "Use a combination of Indonesian and foreign guys to do so because you will need local help on that issue.

"Point number two ... you need to make it clear what kind of land you have got -- because land is another regulatory issue -- we still don't have a land reform (bill) in Indonesia that empowers the government to buy land."

For Churchill, the advice may be too late.

"My advice would be, be wary and make sure you've done extensive -- and I mean extensive -- due diligence," Quinlivan said. "Even though, whilst you may have done all this due diligence, and we certainly believe we had, things can turn around that are very unexpected.

"If there is a loophole there, somebody will use it." ($1 = 8905 Indonesian Rupiah) (Reporting by Michael Taylor; Editing by Jason Szep and Raju Gopalakrishnan)

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