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2 The pitfalls of Indonesian
coal By Bill Guerin
JAKARTA - Indonesia's Bumi Resources and
India's Tata Power are closing in on a US$1.3
billion deal that promises to give the Indian
energy concern a 30% stake in two big Indonesian
coal mines, Kaltim Prima Coal (KPC) and Arutmin.
If completed, the blockbuster sale would represent
the second-largest corporate deal ever in
Indonesia.
It would also on the surface
appear to breathe new life into the
country's moribund mining
industry, which is badly underperforming because
of unresolved regulatory uncertainty. The proposed
deal significantly comes while investor attention
focuses on an ongoing parliamentary debate
concerning amendments to Indonesia's 40-year-old
mining law and its controversial contract of work
(CoW) investment framework.
Tata has three
months to complete the transaction, and any deal
will likely require it to share the cost of future
expansion at both mines. Bumi stands to net a tidy
$685 million from the minority-stake sale of
assets it only recently acquired from big Western
energy concerns. In 2003, Bumi paid British oil
giant BP and Australian mining company Rio Tinto
$500 million for a 100% stake in KPC.
Bumi
bought its 100% stake in Arutmin from Australian
mining giant BHP Billiton for $185 million in two
tranches, entailing an 80% stake in 2001 and the
rest in 2004. The two mines produced an aggregate
of 53.5 million tons of coal in 2006, 95% of which
was exported. Bumi is currently Indonesia's
largest and Asia's third-largest coal producer.
It's also one of Indonesia's most
politically connected companies, controlled by the
family members of Aburizal Bakrie, coordinating
minister for people's welfare and poverty
alleviation. PT Bakrie & Brothers, which
previously invested in hotels and tourism, was one
of Indonesia's biggest corporate debtors in the
wake of the 1997-98 Asian financial crisis. With a
helping hand from the government, it has recently
diversified out of the hospitality business and
now has strategic assets in the oil, gas and
mining sectors.
Bumi is now one of
Indonesia's most profitable and expansionary
corporations. Its net profits last year hit $222
million on sales of $1.85 billion, up
substantially from its 2005 profit level of $123.3
million. Bumi's shares are up almost 50% so far
this year, in line with booming global coal
prices, which have risen more than 30% this year.
Indonesian coal fetches about $55 per ton in
global markets.
India's Tata requires a
steady supply of coal to fire two plants that will
soon come online as part of its Mundra mega-power
project, which is under construction. Tata company
executives have justified the risky venture by
saying that burning high-quality Indonesian coal
will generate cost savings, improve efficiency and
give it protection from fluctuating global coal
prices. They said 4 million tons of Indonesian
coal is capable of producing the same amount of
power it would take 6 million tons of Indian coal
to generate.
The proposed $1.3 billion
transaction also includes a 29.98% shareholding in
three other Bumi-owned coal concerns, namely PT
Indocoal Kalsel Resources, PT Indocoal Kaltim
Resources and 300 shares in Indocoal Resources
(Cayman) Ltd.
Bumi's mining assets have
been highly sought after. Last year it offered to
sell full ownership in both its mines for $3.2
billion to Borneo Lumbung Energi, a shell company
owned by Indonesian investment bank Renaissance
Capital. That sale was eventually scrapped, a move
related to Renaissance's reported concerns about
declining production at the mines - though it had
failed to raise the $2 billion in capital it
needed to complete the agreed transaction.
Stark reminder That botched
deal was a stark reminder of the regulatory
uncertainty that still looms over Indonesia's
entire mining industry - a risk that presumably
could still scupper the Tata sale. Indonesia is
one of the world's biggest producers of minerals
and metals, with major gold, copper, nickel and
tin mines operated by both foreign and local
enterprises. The country is the world's biggest
coal producer, with 2007 production forecast at
183 million tons, of which 134 million tons is
forecast to be exported. Production for 2008 is
projected to increase to 198 million tons, about
145 million of which will be exported.
Although Indonesia's House of
Representatives recently passed a new Investment
Law aimed at leveling the playing field for local
and foreign investors, the fate of the mining
sector rests on a long-awaited new mining bill
aimed at replacing the 1967 Mining Law and its
current CoW framework. Regulatory uncertainty
intensified with the implementation of a regional
autonomy law in 2001, which transferred authority
over issuing licenses for mining concessions from
the central government to local administrations.
(Oil and natural-gas concessions were exempted
under the autonomy law.)
From a business
perspective, the new mining law could represent
the most important piece of legislation since the
end of the Suharto era in 1998. Legislators
apparently favor a new "agreement" arrangement to
replace the CoWs, where local governments would
have the power to issue mining licenses and
investors would have no resort to independent
arbitration in the event of a contractual dispute
- as they may under the current system.
There are concurrent rumors that
nationalistic legislators aim to ban exports of
unprocessed ores, which would represent a death
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