Changes to Government Regulation on Mineral and Coal Mining Business Activities

The President of the Republic of Indonesia issued Government Regulation No. 24 of 2012
dated February 21, 2012 (“GR 24”) to amend certain provisions of Government Regulation
No. 23 of 2010 dated February 1, 2010 regarding Implementation of Mineral and Coal
Mining Business Activities (“GR 23”). GR 24 became effective on February 21, 2012.

This newsflash looks at some of the changes which may be significant for businesses.

1. IUPs for PMA Companies Now Issued by Minister

GR 24 requires that all mining business permits (IUP) for companies with foreign
shareholdings (commonly known as PMA companies) will now be issued by the
Minister of Energy and Mineral Resources (the “Minister”). Before this, these IUPs
would be issued by the Minister, Governor, or Regent depending on the requirements
set out in GR 23. Under GR 24, all IUPs for PMA companies will be issued by the
Minister.

This change removes the authority of Regents and Governors in issuing IUPs to PMA
companies, and complements the new Article 112B (described in point No. 9 below).
We expect that Governors and Regents would object to this change.

2. Restrictions on the Transfer of IUPs

GR 24 reiterates the provisions of Article 93(1) the Mining Law (Law No. 4 of 2009)
regarding the restriction on any transfer of IUPs by the IUP holders. GR 24, in
Article 7A(1), prohibits any transfer of an IUP to any other party.

GR 24 in Article 7A(2) also provides that “any other party” includes any business
entity with 51% or more shares held by the IUP holder. This addition may create
confusion because of the way it is drafted. In this provision, it appears that now an
IUP holder may transfer its IUP to a company as long as the IUP holder holds 51% or
more of the shares in the company.

GR 24 also introduces Article 7B which allows a state-owned enterprise (BUMN) to
transfer a portion of its IUP mining area to another company provided that the BUMN
owns 51% or more shares in such company. Such transfer is subject to approval by
the Minister.

3. Additional Exemption to One IUP Per Company Rule

GR 24 provides an additional exemption to the one IUP per company rule. Under GR
24, a company may be granted multiple IUPs for non-metal minerals and/or for rocks.

4. Surrender of Mining Areas

GR 24 provides that when the IUPs expire, all mining areas have to be surrendered to
the Minister becoming areas which are reserved for the State’s strategic interests. GR

24 expressly provides that this requirement applies to mining areas under contracts of
work (COW) and coal contracts of work (CCOW).
5. Discontinuation of Mining Activities due to Interruptions

Prior to GR 24, one of the reasons for discontinuation of mining activities was due to
an interruption based on any regulation issued by the Minister. GR 24 now provides
that such interruption may be caused by any regulation issued by the Central
Government.

The new elucidation of Article 76 stipulates that the IUP/CCOW/COW validity
period shall not be shortened by temporary suspensions of activities caused by the
issuance of regulations by the Central Government that interrupt activities for a
limited period. For instance, the Presidential Instruction No. 10 of 2011 regarding the
moratorium on the issuance of forestry and relevant regional government permits
within primary forest and peatland areas.

6. Divestment Requirements

GR 24 substantially changes the divestment requirements. Under GR 24 all foreign
shareholders in mining companies must divest their shares in the mining companies in
stages commencing from five years from operation so that at the end of the 10th year
after production, the foreign shareholders shall own not more than 49% shares in the
mining companies.

The divestment stages are as follows:

– in the 6th year, 20% of all shares;
– in the 7th year, 30% all shares;
– in the 8th year, 37% all shares;
– in the 9th year, 44% all shares; and
– in the 10th year, 51% of all shares.

Under GR 23 it was unclear whether the divestment requirements would apply to
existing operating mining companies that have operated for more than five years at
the time GR 23 was issued. GR 24 is silent about this as well.

7. No Dilution of Indonesian Shareholding

Based on the new divestment requirements listed above, GR 24 requires that the
Indonesian shareholding levels noted in point 6 above must be maintained at all times
and the Indonesian shareholdings shall not be diluted.

8. Areas Not Covered in IUP Extensions for COW and CCOW 

GR 24 provides that any mining area that is not covered by an IUP which is an
extension of an existing COW or CCOW, shall be determined a state reserve area.

9. Requirements for IUP Extensions for COWs and CCOWs

GR 24 details the requirements for the extension of a COW or CCOW. The IUP
Extension shall be issued by the Minister.

A holder of COW or CCOW must apply for the extension by at least six months
before it expires, together with all the administrative, technical, environmental, and
financial requirements set out in GR 24. The Minister will then evaluate the
application and may approve or reject the application. If the Minister rejects the
application, such rejection must be made before the expiry of the relevant COW or
CCOW.

This change provides legal certainty for any COW/CCOW companies which are PMA
or PMDN (domestic capital investment companies) wanting to obtain an extension on
the validity period of their COWs/CCOWs in the form of an IUP. The COW/CCOW
company must file an application directly with the Minister—not the local
government with jurisdiction over the mining area. The Minister will then evaluate
the company’s compliance with the administrative, financial, and technical
requirements, and shall take into account the potential of the minerals or coal reserves
to deliver benefits to Indonesian people.