Indonesia Introduces Significant Changes to Mining Law

By Fitriana Mahiddin, Fransiscus Rodyanto and Ahmad Charlie Rivai Malessy

Indonesia’s House of Representatives has passed a long-awaited amendment to the Mining Law, which promises to introduce significant changes to the sector and how mining companies operate in the country.

After years of deliberation, the House passed the bill (the “Mining Bill”) on May 12, 2020, to amend Law No. 4 of 2009 regarding Mineral and Coal Mining (the “Mining Law”).

As of this writing, the Mining Bill is on the desk of President Joko Widodo awaiting his signature to become law. This article is based on the most recent version of the Mining Bill that is publicly available, dated May 11, 2020. It is unclear when the official version of the Mining Bill approved by the House will be officially published and enacted.

The Mining Bill introduces numerous changes. This article will focus on the most significant changes to the Mining Law and their effect on companies in the sector.

New Mining Licenses

The Mining Bill requires that every mining business activity be carried out based on business licensing by the central government in the form of (i) business identification numbers, (ii) standard certificates, and/or (iii) licenses.

The Mining Law provides three types of license for mining activities:

  1. Mining Business License (Izin Usaha Pertambangan or “IUP”);
  2. Community Mining License (Izin Pertambangan Rakyat or “IPR”); and
  3. Special Mining Business License (Izin Usaha Pertambangan Khusus or “IUPK”).

An implementing regulation of the Mining Law, namely Minister of Energy and Mineral Resources (“MEMR”) Regulation No. 7 of 2020 regarding Procedures for the Granting of Areas, Licensing and Reporting of Mineral and Coal Mining Business Activities (“MEMR Reg. 7/2020”), further stipulates the types of business licences for mineral and coal mining, which are:

  1. IUP Exploration;
  2. IUPK Exploration;
  3. IUP Production Operation (“IUPOP”);
  4. IUPK Production Operation (“IUPKOP”);
  5. IUPOP specifically for processing and/or refining;
  6. IUPOP specifically for transportation and sales; and
  7. Mining Service Business License (Izin Usaha Jasa Pertambangan “IUJP”).

In addition to the three types of licenses under the Mining Law and the IUJP, the Mining Bill introduces the following licenses:

  1. IUPK for the Continuation of Operation of Contract of Work (Kontrak Karya or “COW”))/Coal Contract of Work (Perjanjian Karya Pengusahaan Pertambangan Batubara or “CCOW”);
  2. Authorization Letter for Rock Mining (Surat Izin Penambangan Batuan or “SIPB”);
  3. Assignment License (Izin Penugasan) for radioactive minerals mining activities;
  4. Transportation and Sales License (Izin Pengangkutan dan Penjualan); and
  5. IUP for Sales (Izin Usaha Pertambangan untuk Penjualan).

The above licenses, as well as business identification numbers and standard certificates, will be granted by the central government, which may delegate this authority to provincial governments for some licenses. The Mining Bill provides that the delegation of authority from the central government to provincial governments is related to the authority to grant, among others, IPR and SIPB.

Term of IUPs

The Mining Bill takes the same approach as the Mining Law where the IUP covers two stages of mining activity, i.e. (i) exploration and (ii) production operation. The term of the IUP depends on the type of mining commodity the IUP covers.

Under the Mining Law, IUP Exploration holders cumulatively calculated the term of their IUP Exploration according to each exploration activity (i.e. general investigation, exploration, and feasibility study).

The following table details the term of IUPs under the Mining Bill:

Mining License

Validity Period

(in years)        

Extension

IUP for Exploration for Metal Minerals

8

1 year per extension

IUP for Exploration for Non-Metal Minerals

3

N/A

IUP for Exploration for Certain Types of Non-Metal Minerals

7

N/A

IUP for Exploration for Rocks

3

N/A

IUP for Exploration for Coal

7

1 year per extension

IUP for Operation Production for Metal Minerals

20

Extendable twice, up to 10 years period per extension

IUP for Operation Production for Non-Metal Minerals

10

Extendable twice, 5 years per extension

IUP for Operation Production for  Certain Types of Non-Metal Minerals

20

Extendable twice, 10 years per extension

IUP for Operation Production for Rocks

5

Extendable twice, 5 years per extension

IUP for Operation Production for Coal

20

Extendable twice, 10 years per extension

IUP for Operation Production for Metal integrated with processing and refining facilities

30

10 years per extension

IUP for Operation Production for Coal integrated with development and utilization activities

30

10 years per extension

Transfer of Licenses and Shares

IUP or IUPK holders are now allowed under the Mining Bill to transfer their IUP or IUPK to other parties, with the approval of the MEMR. This right extends only to IUP or IUPK holders that have:

  1. completed their exploration activities, evidenced by the availability of data on the relevant resources and reserves; and
  1. fulfilled all administrative, technical and financial requirements.

This represents a major change as the Mining Law explicitly prohibited the transfer of licenses to other parties, with the exception of the transfer of an IUP or IUPK to an affiliate in which the IUP or IUPK holder owned at least 51% of the shares. That exception was stipulated in Government Regulation No. 23 of 2010 regarding Implementation of Mineral and Coal Mining Business Activities, as amended several times, lastly by Government Regulation No. 8 of 2018.

Under the Mining Bill, a transfer of shares in holders of an IUP or IUPK is also subject to MEMR approval, which would be granted upon the completion of the exploration stage and the satisfaction of administrative, technical, environment and financial requirements.

In addition, the Mining Bill no longer requires the discovery of two prospective mining areas as a prerequisite for the transfer of shares on the Indonesian stock exchange, as was required in under the Mining Law.

Prohibition on Encumbering Mining Commodities

The Mining Bill reiterates the prohibition provided under MEMR Reg. 7/2020 on IUP or IUPK holders encumbering their IUP or IUPK or their mining commodities to other parties. Violation of this prohibition is subject to administrative sanctions by the MEMR in the form of (i) written warning, (ii) fine, (iii) temporary suspension of part or all of exploration or operation production activities, and/or (iv) revocation of the IUP or IUPK.

Based on the above, since all IUP and IUPK must be adjusted with the requirements under the Mining Bill within two years as of the enactment of the Mining Bill, mining companies would be advised to seek counsel to evaluate their options and negotiate with financiers to remove any encumbrances on their mining commodities.

Reserve Fund

For the purpose of mineral and coal conservation, the Mining Bill obliges IUP and IUPK holders at the production operation stage to annually carry out and allocate a budget for continued exploration activities. To guarantee continued exploration activities, the Mining Bill now requires all IUP and IUPK holders at the production operation stage to provide a reserve fund, the details of which are to be further regulated by a Government Regulation.

In a press release dated May 1, 2020, the Director General of Mineral and Coal Mining said this reserve fund would be used to conduct detailed exploration activities to gather actual data on Indonesian reserves and to find unexplored areas for development.

Extension of COW and CCOW

One of the most important changes under the Mining Bill is the guarantee for the continuation of COW and CCOW operations, which now can be extended into an IUPK for the Continuation of Operation of COW/CCOW, as follows:

  1. COW/CCOW that has not yet received an extension shall be guaranteed two extensions in the form of an IUPK for the Continuation of Operation of COW/CCOW for a maximum 10 years per extension after the COW or CCOW has expired; or
  1. COW/CCOW that has received its first extension shall be guaranteed a second extension in the form of an IUPK for Continuation of Operation of COW/CCOW for a maximum 10 years after the expiry of its first extension.

The above conditions shall take into account efforts to increase the state’s revenue, namely (i) adjustment of the imposition of tax and non-tax state revenue and/or (ii) the area of the IUPK for the Continuation of Operation of COW/CCOW is in accordance with the development plan of the entire COW or CCOW area as approved by the MEMR.

COW or CCOW holders must submit an application to the MEMR for an IUPK for the Continuation of Operation of COW/CCOW at the earliest five years and at the latest one year before the COW or CCOW expires.

IUP Operation Production for Processing and Refining

The Mining Bill requires all existing IUPOP specifically for processing and refining issued before the enactment of the Mining Bill to be changed to an industrial business license no later than one year as of the enactment of the Mining Bill.

This requirement may address the concerns of smelter companies that previously had to obtain both an IUP Operation Production specifically for processing and refining and an industrial business license to conduct processing and/or refining business activities.

Conclusion

The Mining Bill seems to be trying to strike a balance between the interests of business and the government. It imposes additional obligations on miners, but the government provides greater assurances that miners will be able to continue their ongoing operations. It also seeks to foster Indonesia’s mining industry by simplifying and centralizing the licensing process and creating a more flexible approach for conducting mining business activities. This new flexibility includes the ability of mining companies to self-determine the time period of each of their exploration activities and the ability to transfer mining licenses.

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