Control of Indonesia’s KPC mine in dispute

Jakarta, Indonesia — PT Kaltim Prima Coal (KPC), a massive open-pit mine in East Kalimantan, Indonesia, is embroiled in a power struggle with local authorities. The struggle has occurred because KPC is a foreign-owned company, with shares split evenly between BP (BP-N) and Rio Tinto (RTP-N), and is therefore legally required to sell 51% of its shares to Indonesian parties.

The divestment issue intensified when the East Kalimantan provincial government and legislature’s political and legal fight to obtain the first option on the controlling stake was apparently trumped by a central government decision virtually compelling state-owned coal company PT Batubara Bukit Asam to acquire up to 20% of KPC.

Provincial authorities claimed the decision would only benefit Rio Tinto and BP, and questioned the central government’s commitment to acquiring a US$419-million share of the mine, particularly as it rejected the first stake, offered four years before.

The final equity position has yet to be publicly resolved. The acrimonious dispute was not a problem caused by Indonesian authorities. The divesture program was contained within KPC’s coal Contract of Work (CoW). During 2002 four other Kalimantan-based coal miners with similar coal CoWs — PT Arutmin Indonesia, PT Adaro Indonesia, PT BHP Kendilo Coal Indonesia and PT Kideco Jaya Agung — divested without fuss.

Ironically, it was the stability and enforceability of the CoW system that attracted major mining companies such as Rio Tinto and BP to Indonesia and saw the rapid development of more than a dozen major mines in less than 25 years.

The intensity of exploration in Indonesia confirmed the country’s remarkable prospectiveness for minerals and energy fuels and the mining sector’s favourable image of the country for long-term investment.

Despite weak metal and fluctuating coal prices, Indonesia’s major mines still prosper.

The archipelago nation’s immediate problem is attracting high-risk investment to fund consistent and large-scale exploration. Only then will it be able to maintain its inventory of mineral resources and replace mines that have come to the end of their productive life.

What’s required are legal, fiscal and security measures that can compete with those of other nations.

Exploration spending on exploration in Indonesia dropped from US$160 million in 1996 (it peaked during the Canadian Bre-X scam) to $67 million in 2000 and to about $22 million in 2001. Early estimates are that as little as $4 million was spent on Indonesian exploration in 2002.

The situation is likely to continue until there is clarification of the regulatory environment and stabilization of the political and economic situation.

These factors include the following:

n the terms and conditions of the proposed new mining law;

n the impact of a forestry law, No. 41/1999, which banned open-pit mining in overlapping protected forest areas;

n royalty increases;

n levies on dead rental areas and water services;

n changes to taxation, specifically the value-added-tax law and the increase in personal rates;

n Ministry of Manpower decrees regarding service and severance payments to employees who leave their employer;

n excessive illegal mining.

In the laid-back town of Padangsidimpuan, some 230 km south of the North Sumatran provincial capital, Medan, the Bupati of Tapanuli Selatan regency told of a different side of the Indonesian mining story as he explained his relationship with William Howell, managing director of Normandy South East Asia (now Newmont SEA), an exploration arm of Normandy Mining (now Newmont Australia).

The occasion was just a few days before Newmont successfully closed its takeover of Robert Champion de Crespigny’s substantial Australian-based gold mining group.

After an early-morning flight from Jakarta to Medan, a 2-hour helicopter ride across picturesque but geologically active ground culminated near the principal outcrop of Normandy’s Martabe project.

The project is a large zone of disseminated gold mineralization similar in style to the Pierina or Yanacocha gold deposits in Peru, said Champion de Crespigny. Newmont, the key player in those fabled South American fields, would have been delighted with the comparison.

With several identified prospects, including Purnama and, 3.5 km to the north, Gerhana, the project covers an area of 7 by 2 km. Other discrete zones of mineralization have been identified, and long intersections of 100-200 metres grading 2 grams gold per tonne are common in the deposit.

Given the topography and apparent grade continuity, Newmont anticipates low stripping ratios and the potential to develop a heap-leach operation.

According to Peter Bird, at the time Normandy’s executive general manager of investor relations, the prefeasibility study of the Purnama deposit demonstrates that high returns can be achieved from a heap operation for a low entry capital of about US$30 million and operating costs of rougly US$105 per oz., with an indicative average annual production of 150,000 oz.

Australian Internet writer Barry FitzGerald puts the upper limit of the deposit at about 5 million oz. gold.

Says Howell: “The review of the prefeasibility resulted in a recommendation to proceed to feasibility studies. This will have been the only project at the feasibility stage in Indonesia in 2002. It is a breakthrough for the gold sector in Indonesia.”

A year ago, Indonesia introduced sweeping decentralization laws that had the effect of moving local governments, such as Tapanuli Selatan, into the forefront of minerals management. If a mining project is within one local government, that administration negotiates the mining licence or contract, conditions and supervision. If it covers two or more local government areas, responsibility passes to the province. If two or more provinces are involved, the Ministry of Energy and Minerals Resources takes over.

Complicating matters is the need for a new mining law, to replace that of 1969. Also, national standards and other central-government-initiated regulations have yet to be completed.

Nonetheless, the Martabe project’s title is secure and bankable; its sixth-generation CoW, issued in April 1997, is held by PT Horas Nauli (previously PT Danau Toba Mining), which is owned 90% by Newmont and 10% by PT Austindo Nusantara Jaya. All of the proposed mining area is within one district, Tapanuli Selatan.

“The project is entirely new, a result of modern reconnaissance exploration,” says Howell. “There’s no historical mining in the area — not by the Chinese, the Dutch nor the Japanese.”

He describes the exploration period as one of building strong relationships with the local people and their government, even before “regional autonomy” became a political reality.

— The author is the principal of Gold Group Consulting (www.goldglobal.com) and editor of the Asian Journal of Mining.