Taking A Mine From Permit to Production Rick Beckmann, Senior Foreign Legal Counsel, Susandarini & Partners Kresna Panggabean, Senior Associate, Susandarini & Partners 2 September 2013 Kalimantan Coal

Introduction

§  domiciled in Kutai Panas §  owners of a coal concession in Kutai Panas §  capitalised at IDR 100,000,000 §  Mr Bintang, an Indonesian national, holds 80% of the shares §  Mr Bulan, an Indonesian national, holds 20% of the shares §  Mr Bintang is sole director §  Mr Bulan is sole commissioner §  We are on the lookout for further mining investments in

Indonesia, both in coal and other minerals!

Welcome to PT Magnificent Mines!

Overview q  Current regulatory framework

q  Recent controversial changes

q  National Interest and Divestment

q  Walking through the IUP

q  Requirements to upgrade

q  Land

q  Forestry

q  Due Diligence

q  Investment Agreements

q  Coal Sales Agreements

q  Macro permits

q  Micro permits

q  Divestment

Indonesia has traditionally recognised three forms of mining right:

q  Contracts of Work (“COWs”)

q  Coal Contracts of Work (“CCOWs”)

q  Mining Rights (Kuasa Pertambangan) (“KPs”)

Pre-2009 System:

COWs and CCOWs

Legally binding agreements with the Government of Indonesia – issued at the central level and time-consuming – in the form of “conditional” contracts – frozen in time

Pre-2009 System:

KPs – quick and easy – issued mostly at Regency level over 5 stages: q  General Survey KP

q  Exploration KP

q  Exploitation KP

q  Processing and Refining KP

q  Transportation and Sales KP

…after starting with a SKIP…

Pre-2009 System:

Regional Autonomy – and confusion over authority with respect to issuing mining rights – among other reasons However, there are some moves by the Courts to return some level of regional autonomy in the mining sense.

Pre-2009 System:

What was wrong with the old system?

Pre-2009 System:

Foreign investors said pre-2009 system was unfair – local investors said pre-2009 system was unfair

Pre-2009 System:

“Work Arounds” the pre-2009 system – Nominee Arrangements, Contractual Rights, etc. There have been recent moves to “Crack Down” on the “Work Arounds” More about these later…

Pre-2009 System:

The New System from 2009 – the Mining Business Permit (Ijin Usaha Pertambangan) (“IUP”) There are only two IUPs (instead of five): - Exploration

- Production An IUP is similar to a KP, being a “licence” – it is not a contract

New System:

All KPs were required to convert to IUPs by May 2010 – not automatic conversion, applications were to be submitted. Some old KPs are still lingering out there…

New System:

Foreigners are able to hold shares in companies which hold IUPs – provided that the company first converts into the status of a Foreign Investment Company (Penanaman Modal Asing) (“PMA”) – applauded by foreign investors as “one step forward” COWs and CCOW are to remain valid for their stated term – although subject to “adjustment” to comply with the New Mining Law How can a unilateral “adjustment” to a contract be forced?

New System:

Current “negotiation” process for COWs; and the “Presidential Task Force”

New System:

All new IUPs to be subject to tender and auction provisions – however, implementing regulations still pending – resulting in a practical “moratorium” on direct issues of new concessions (although some direct issues of new concessions continue…) This has now been going for years. There are some exemptions.

New System:

q  divestment obligation to Indonesia interests was increased from 20% to 51% in March 2012 (more on this later). However, there is now some pushback on this.

q  IUPs for PMA Companies to be issued at central level

q  IUPs may be transferred to subsidiaries, despite what the New Mining Law says

q  multiple IUPs may be held in certain circumstances despite what the New Mining Law says

q  ban on raw ore export as of February 2012 (more on this later). Again, there appears to have been some recent pushback on this.

q  requirement for export licence for raw ore export as of May 2012 (more on this later). Again, there appears to have been some recent pushback on this.

q  impose of new export tax rate on raw ore export as of May 2012 (more on this later)

q  proposed ban on low calorific coal exports, as of 2014 (more on this later)

Significant regulatory developments

New System – Recent Regulatory Developments: New System:

Pending implementing regulations

q  Procedures for auctions of WIUPs and WIUPKs

q  Procedures for issuance of Production Operation IUPs for sales and transport and processing and refinery

q  Procedures for issuance of new IUPs and IUPKs

q  Procedures for determining borders of WIUPs and WIUPKs

q  Procedures for temporary suspension of mining activities

q  Procedures for shares divestment and mechanism for determination of shares price

PT Magnificent Mines is looking for additional concessions. How can it obtain rights to a production mine in Indonesia? 1. Acquire the shares in a company which holds an Exploitation KP

2. Take an assignment of a Production IUP

3. Acquire the shares in a company which holds an Exploration IUP, then upgrade the Exploration IUP to Production IUP

4. Apply to the Regent for a new Production IUP

5. Apply for a COW

6. All of the above

7. None of the above

Question:

Issues which must be resolved with respect to the IUP before moving into production

IUP Issues:

“Clean-and-Clear List” The Ministry of Energy and Mineral Resources issued the results of a survey of more than 8,000 IUPs in May 2011 – of those surveyed, about 50% were found to have “issues”

By July 2013, the Ministry of Energy and Mineral Resources has issued nine versions of the “Clean-and-Clear List”

IUP Issues:

First issue Overlap (more on this shortly)

The President in his Energy and Security Policy in October 2011 said the number of IUPs affected by overlap is as high as 6,000

IUP Issues:

Second issue

Failure to comply with IUP obligations

IUP Issues:

Third issue

Regent for whatever reason did not include your IUP on his/her list of “cleared” IUPs sent to MEMR

IUP Issues:

How to get your IUP onto the Clean-and-Clear List:

q  Resolve “issue”, if an issue actually exists;

q  Send request to the Regent to be included on the Clean-and-Clear List;

q  The Regent then sends updated list to MEMR; and

q  MEMR will then issue an updated Clean-and-Clear List

Nine versions of Clean-and-Clear List have now been issued

IUP Issues:

Overlapping Concessions Preliminary point – an IUP does not constitute an “interest” in land

IUP Issues:

Overlapping Mining Concessions – in theory: q  The first in time should prevail

q  Overlapping concessions with respect to different minerals should be able to co-exist

However, this is often resolved by “negotiation” – or ultimately court proceedings

IUP Issues:

How can overlap arise between mining concessions?

q  Regional boundaries are redrawn

q  Somebody (deliberately or not deliberately) did not do their homework!

IUP Issues:

Ultimate goal is to have IUP boundaries redrawn, although an issue arises with respect to the “auction” system

IUP Issues:

Overlapping plantations, in the form of: q  Location Permits (Ijin Lokasi); and

q  Rights of Cultivation (Hak Guna Usaha)(“HGU”)

HGU are considered capital intensive – although under law, a plantation should not be granted in an areas which is designated for mining activities

So – how could a plantation overlap with a mining concession?

IUP Issues:

Resolving overlap between mining concession areas and plantations:

q  Commercial negotiation

q  Mediation before the Land Office (“BPN”), although this has some limitations

q  Lobbying the Regent; and

q  Action in Court

Commercial resolution is often reached, despite the merits of the case –calculating compensation?

IUP issues:

Overlap with timber concessions – areas cannot be mined, Pinjam Pakai cannot be granted (new Ministry of Forestry regulation)

IUP issues:

Overlap with competing government rights, for example:

q  PLN rights to install electricity infrastructure

q  MIGAS rights to lay gas pipelines

Requirement for MOU – very time-consuming

Regency-level issues – transmigration zones, areas earmarked for village development, etc

IUP issues:

PT Magnificent Mines has identified a target company, which holds a production IUP. However, the Production IUP does not appear on the Clean-and-Clear List. Is this the end of the story?

Question:

PT Magnificent Mines has just received the results of legal due diligence into the Production IUP by its lawyers.

The Due Diligence Report indicates that:

1.  About 50% of the concession area is located in a production forest;

2.  The northeast corner of the concession area overlaps with a timber concession of PT Kayu Makmur;

3.  The west of the concession area overlaps with an IUP for coal held by PT Batubara Untung;

Question:

4. The south of the concession area overlaps with an IUP for gold held by PT Emas Harapan;

5. The southwest of the concession area overlaps with a Location Permit held by PT Sawit Abadi;

6. PLN has the right to install transmission cables in the southeast of the concession area; and

7. A small portion of the concession directly south has been designated as a transmigration area.

What needs to be done to clean this up?

Question (continued):

PT Magnificent Mines was issued an SKIP, General Survey KP and, in 2007, an Exploration KP.

Then along came the New Mining Law, and MM obtained a conversion of its Exploration KP into an Exploration IUP.

MM now wants to move into production – and has approached the Regent for an upgrade to Production IUP.

Is there anything wrong with this?

MM Exploration IUP:

Walking through the obligations under the MM Exploration IUP for upgrade to a Production IUP

It allows for:

q  General Survey for one year

q  Exploration for two years

q  Feasibility Studies for two years

MM Exploration IUP – Phases:

Use it or lose it – the rule under the New Mining Law – and the need to meet deadlines

MM Exploration IUP - Progress:

Required reports: q  Quarterly Report

q  Annual Work Plan and Budget

q  Reports at the end of General Survey Phase, Exploration Phase and Feasibility Studies Phase

q  Detailed Feasibility Studies Report

MM Exploration IUP - Reporting:

Environmental Impact Analysis (Analisa Mengenai Dampak Lingkungan) (“AMDAL”) – required for open-pit mining in areas of more than 50 ha – otherwise Environmental Management Plans (Rencana Pengelolaan Lingkungan)(“RKL”) and Environmental Monitoring Plan (Rencana Pemantaan Lingkungan)(“RPL”) are required

A requirement to obtain Environmental Permit (Izin Lingkungan)

MM Exploration IUP – AMDAL:

Process starts with a baseline study involving the collection and analysis of data on all physical aspects and issues, including climate, flora, fauna, soils, river flows, tides, waves, topography (land and sea), social studies on population, health, education, employment and religion.

Community consultation is required.

MM Exploration IUP – AMDAL:

AMDAL Process:

q  AMDAL Committee is formed q  Terms of Reference (“TOR”) are submitted to AMDAL

Committee for approval, to be approved or rejected within 30 days

q  AMDAL is submitted to AMDAL Committee for approval, to be approved or rejected within 75 days

Deeming provisions do not work well in practice

MM Exploration IUP - AMDAL:

AMDAL must be rejected if: q  Adverse major/significant impact resulting from the

particular business or activity cannot be overcome by available technology; or

q  Cost of overcoming major/significant impact outweighs the benefits of favourable major/significant impact which results from the particular business activity

MM Exploration IUP - AMDAL:

“Seriousness deposit” in the amount of US$100,000 – although beware of the bank account details

MM Exploration IUP - Deposit:

Reclamation bond – although you need to know how much to pay!

MM Exploration IUP - Bond:

This can be in many forms:

q Employing the local community

q Developing specific infrastructure for the local community – schools, mosques, etc.

MM Exploration IUP – Community:

“Fostering” the local community – development of local infrastructure

Prioritize use of local and/or national mining services companies – meaning?

MM Exploration IUP – Prioritization:

A 30 September 2009 regulation:

§  100% Indonesian-owned mining services companies located within the Regency; if none available

§  100% Indonesian-owned mining services companies which operate nationally; and only if none available and after making a newspaper announcement

§  PMA mining services companies; and

MM Exploration IUP – Prioritization:

q  requires a concession holder to give priority to:

q  requires a concession holder to conduct its own “mining activities” which, if read literally, suggests mining services companies can only be engaged for stripping of overburden and transportation

The 30 September 2009 regulation also prohibits a mining services provider from paying a royalty, production share, etc., to a concession holder.

“Working around” the restrictions?

MM Exploration IUP – Prioritization:

A mining services company cannot retain an affiliate company for the provision of mining services without Ministerial consent

MM Exploration IUP – Prioritization:

Other minerals – a priority right?

MM Exploration IUP – Other Minerals:

Submit domestic processing and refinery plans

– but MM is a coal miner?

Wait for the Production IUP…

MM Exploration IUP - Domestic Processing:

Rules have changed for ore – although not yet clear on coal – more about this later.

MM Exploration IUP - Domestic Processing:

Limits on concession areas: Ø  Coal

q Exploration – 50,000 ha

q Production – 15,000 ha

Ø  Metals

q Exploration – 100,000 ha

q Production – 25,000 ha

MM Exploration IUP – Relinquishment:

Ø Non-Metals

q Exploration – 25,000 ha

q Production – 5,000 ha

Ø Rock

q Exploration – 5,000 ha

q Production – 1,000 ha

Compensation to local land owners

Often subject to litigation

MM Exploration IUP – Local Land Owners:

Indonesian law distinguishes between:

q  unregistered land, including native title (Adat) land; and

q  Registered land, of which there are numerous forms of title

Land Issues:

An IUP is not an “interest” in land – the IUP holder must either obtain registered title to land, or rights to access the land and conduct mining activities

Usually:

q  registered title for land with key infrastructure; and

q  unregistered title for land for mining activities

Land Issues:

q  Unregistered title may be individually or communally held – how to work out who the owner is?

q  Companies cannot hold unregistered title to land – rights are usually through land release

Land Issues:

q  Right of Ownership (Hak Milik) – similar to freehold, but can only be held by Indonesian nationals

q  Right to Build (Hak Guna Bangunan) (“HGB”) – the most popular form for mining company infrastructure

q  Right to Use (Hak Pakai) – shorter term than HGB

q  Right of Cultivation (Hak Guna Usaha)(“HGU”) – usually for plantations

Land Issues:

Numerous forms of registered title, including:

Converting unregistered land into registered land:

q  Location Permit (Ijin Lokasi)

q  Land Declaration and Local Confirmation

q  Land Release (to State, but in favour of named party)

q  Application to Land Office (“BPN”)

q  BPN conducts land remeasurement

q  Land is converted and certificate is issued

Land Issues:

within the concession area, and also secure rights to conduct mining activities within the concession area.

MM is approached by a Mr Herbert Nugroho. Mr Nugroho says nobody in the local community is literate and, therefore, nobody in the local community can sign land transfer documents. Mr Nugroho says he has a PhD from Oxford University, and is able to represent the local community.

What should PT Maginificent Mines do?

Question: The concession area subject to the IUP is, as PT Magnificent Mines understands it, entirely held by individuals. MM intends to build:

1.  a camp; 2.  a high-technology coal-drying facility; and 3.  a haulage road

1.  Part of the land is held in the form of Right of Ownership, which is registered in the name of Mr Herbert Nugroho’s sister-in-law’s cousin’s husband, who passed away two years ago;

2.  Part of the land is in the form of HGB, registered in the name of PT Batubara Untung;

3.  Part of the land is in the form of Right to Build, which is held in the name of PT Emas Harapan; and

4.  The remainder of the land is held by a company which is owned by the Regent.

Question: PT Magnificent Mines also wishes to construct a port 2 kilometres outside of the concession area. PT Magnificent Mines also needs to construct a haulage road outside the concession area to the port. PT Magnificent Mines understands that:

All of the land title certificates have, apparently, been lost. What should PT Magnificent Mines do?

PT Magnificent Mines has heard there are a lot of forestry issues in Indonesia. It approaches the Ministry of Forestry, and is told that the entire concession area is located within a production forest. PT Magnificent Mines does not hold any licences to conduct exploration, or production, activities in a production forest area.

How could this have happened?

Forestry Issues:

Forestry Law of 1999 – banned open pit mining in protected forests

Forestry Issues:

Distinguish:

q  Protected Forests

q  National Parks

q  Production Forests

q  Other Usage Areas

Forestry Issues:

Open pit mining may be conducted in production forests, but requires a Borrow Licence Permit (Ijin Pinjam Pakai). In theory, obtained in separate phases:

q  exploration stage permits

q  production transition permits

q  final production stage permits

Notoriously time-consuming, and complaints about bottlenecks are common – numerous applications on “hold”

Forestry Issues:

Exploration Stage – traditionally: Secretary-General of Ministry of Forestry, Head of Forestry Planology Board, Director-General of Forest Production Development, Director-General of Forest Protection and Nature Conservation, Director-General of Land Rehabilitation and Social Forestry, Head of Stabilization of Forestry Area PLUS • Recommendation from Governor, • Recommendation from Regent, • Recommendation from Directorate-General of Minerals and Coal within Ministry of Energy and Mineral Resources

Forestry Issues:

Production Transition Stage – repeat process for Exploration Stage, but this time add the AMDAL approval (and Environmental Permit (Izin Lingkungan) – In-Principle Approval (Ijin Prinsip) will be issued

Forestry Issues:

Final Production Stage – this time add Technical Considerations from the Director-General of Forestry Production Development

Ministry issues Decree of Pinjam Pakai

Forestry Issues:

Letter of Intent between the Government of Indonesia and the Government of Norway:

– Norway to advance US$1 billion to assist Indonesia reach its voluntary target of reducing greenhouse gas emissions by 26% by 2020

– two year ban on granting concessions in peatland and primary forests to come into effect by January 2011

Forestry Issues:

Presidential Instruction in May 2011 – suspension of issue of forestry licences by reference to attached map – fell short of expectations

Extended in 2013 for a further two years – still falling short of expectations

Forestry Issues:

…… the following day, the President issued a regulation permitting underground mining activities in protected forest areas ……

May not be achieving purpose.

Forestry Issues:

Recent regulations aims to streamline process with Borrow Forest Permits to be issued faster

Forestry Issues:

So what should PT Magnificent Mines now do?

Forestry Issues:

Having obtained AMDAL approval (and Environmental Permit), a Decree of Borrow Forest Permit and otherwise having complied with all obligations under the Exploration IUP, PT Magnificent Mines applies for an upgrade to IUP Production.

Forestry Issues:

Walking through the MM Production IUP

It allows for:

q  Construction for one year; and

q  Production for five years, although there is an error in the parenthesis reference

What should PT Magnificent Mines do?

MM Production IUP:

Requires products to be processed domestically – meaning? PT Magnificent Mines is a coal miner …….

MM Production IUP - Domestic Processing:

The Ministry of Energy and Mineral Resources issued a regulation in February 2012 prohibiting export of raw commodities (coal not included)

While some confusion, the ban appeared to come into effect from May 2012, with a requirement that processing be conducted onshore by 2014 (which leaves a slight gap!) – and you have to do it yourself

MM Production IUP - Domestic Processing:

MM Production IUP - Domestic Processing In the last couple of weeks, relaxation of rules on raw ore exports have been relaxed Rules on processing yourself have also been relaxed, reducing fears of build-up of monopolies in mining industry

Exception for holders of IUP Production Operation to export raw materials or ores à Recommendation from MEMR Requirement to obtain recommendation from MEMR: (1)  the status of IUPs must be “clean and clear”; (2) no outstanding monetary obligations to the State; (3) has submitted working plan and/or cooperation plan for

processing and/or smelting in Indonesia; and (4) sign a form of integrity pact.

MM Production IUP – Domestic Processing:

Challenges to the regulation – the Supreme Court overturned the export ban in November 2012

Recently MEMR issued an amendment to the regulation on export ban of raw ores which now allow mining companies which do not have resources to process and purify minerals, to carry out joint operation with parties that hold Production Operation IUP or Production Operation IUP specifically for processing and/or purifying.

MM Production IUP - Domestic Processing:

Requirement for Export Licence for Export of Raw Ores (1) issued by Ministry of Trade (2) recommendation from Ministry of Energy and

Mineral Resources

MM – Export Licences:

MEMR circulated a draft regulation two years ago banning exports of low calorific value coal from January 2014 – the threshold has oscillated between 5100 kcal/kg and 5700 kcal/kg on an air dried basis.

Query whether proposed ban is viable – and whether adequate coal upgrade technology is possible

MM Production IUP – Low KV Coal Export Ban:

China’s proposed ban on import of low calorific value coal

Indonesian coal industry reacts with horror

Indonesian Government rather blasé

MM Production IUP – Low KV Coal Export Ban

MEMR regulation in December 2009 allows the Minister to annually forecast domestic demand – and to determine the Domestic Market Obligation (“DMO”) based on projected coal production and projected coal demand.

MM Production IUP – DMO:

Specific companies are named under ministerial decree as being required to comply.

Originally, mostly CCOWs were targeted. The current DMO regulation, issued in 30 July 2013, is also starting to focus on IUP holders:

•  50 CCOW companies

•  34 IUP holding companies

•  1 State-Owned enterprises

MM Production IUP – DMO:

MM Production IUP – DMO:

The projection of coal production in 2014 is 368,899,464 tonnes Companies which are subject to DMO requirement are required to meet 25.90% of the projected coal production. The projection for domestic coal requirement in 2014 is 95,550,000 tonnes

MEMR issued a regulation in September 2010 which allows the Minister to set a monthly Coal Reference Price (“CRP”). Coal must be sold at, or above, the CRP.

Applies to primary, although apparently not secondary, sales.

MM Production IUP – CRP:

Unresolved issue – is this about the evils of transfer pricing?

Or can the government royalty be set at the CRP, but the actual transaction does not need to take place at the CRP?

We are (still!) waiting for a directive

MM Production IUP – CRP:

MM Production IUP - CRP

Mine Mouth projects – how do they sit? MEMR is currently discussing a potential regulation on Mine Mouth Projects, although it is getting “stuck” on pricing.

Due Diligence:

What is due diligence?

Extent of due diligence depends on nature of investment.

Consider: •  Investment due diligence •  Offtake due diligence

Due Diligence:

Investment Due Diligence:

Requirement for Investment due diligence – two levels: 1. “Red Flags” 2. Advanced

Investment Due Diligence:

“Red Flags” •  Clean and Clear List? •  MEMR search •  MOF search

Investment Due Diligence:

If “Red Flags” passes muster, move to advanced: •  Corporate •  Licensing •  Land •  Environment (basic) •  Material Contracts •  Employees •  Financing and Securities •  Disputes

Investment Due Diligence:

Searches: •  Regency Mines Office •  Regency Land Office •  Regency Spatial Layout Office •  Regency Plantation Office •  Regency Forestry Office •  District Court with domicile under AOA •  District Court in Regency •  Industrial Relations Tribunal •  State Administrative Court •  Tax Court •  Indonesian National Arbitration Board

Investment Due Diligence:

Searches can be done only with consent of the target company – and must be done in person

Investment Due Diligence:

“Specialist” due diligence, for example: •  taxation/financial •  environmental •  “connections” •  operational

Investment Due Diligence:

What do you do with the results of due diligence? A matter of “apportioning” risk •  Who bears the liability for particular events? Warranties

and indemnities? •  Should there be a withholding on the purchase price?

Contracting:

Quirky aspects of Indonesian law

Contracting:

Indonesian language (or bilingual) – failure to comply District Court of West Jakarta very recently held that an English-only contract was void under Indonesian law

Contracting:

No ostensible authority – so know who is signing!

Contracting:

Governing law – how do you choose?

Contracting:

When things go wrong (hopefully not) – how to resolve disputes? • Foreign courts? • Indonesian courts? • Foreign arbitration? • Indonesian arbitration? • Mediation? • Stay silent and work it out at the time?

Alternative Investment Structures:

Nominee structures are now, strictly speaking, prohibited – although some still exist.

Investment Structures:

Cooperation Agreement structures – you own the KP, we will do the mining and sell the coal and pay you a royalty/production share/other

Investment Structures:

Cooperation Agreements, or agreements where a mining services provider pays a concession holder a fee, have been prohibited since 30 September 2009 - with a three-year window for existing Cooperation Agreements to “adjust” Which has now ended Position of power in “adjustment”

Investment Structures:

Share Purchase Agreements – the preferred approach, as it allows direct investment (and is not a convoluted attempt to circumvent restrictions)

Share Purchase Agreement:

Key terms of Share Purchase Agreement

Share Purchase Agreement:

Conditions precedent: Consents of Government – usually, Letter of Recommendation from Regent and approval of BKPM, although recently an additional approval of Ministry of Energy and Mineral Resources is required

Share Purchase Agreement:

Conditions precedent: Change in control requirement: •  newspaper announcement, then 30 days •  rights of employees upon change in control

Share Purchase Agreement:

Conditions precedent: Due Diligence (and apportionment of risk)

Share Purchase Agreement:

Conduct prior to Completion

Share Purchase Agreement:

Events to take place at Completion – share subscription or share purchase

Joint Venture Agreement:

Key terms of Joint Venture Agreements

Joint Venture Agreement:

Immediate or phased buy-in? Note the requirements for ongoing government consent

Joint Venture Agreement:

Timeframes: •  Initial Exploration Program •  Resource Drilling Program •  Reserve Estimation and Feasibility Study •  Decision to Mine •  Commercial Production

Joint Venture Agreement:

Budgets, and who will be responsible – free carry?

Joint Venture Agreement:

Rights to appoint managers: •  Board of Directors •  Board of Commissioners •  Management Committees

Joint Venture Agreement:

Voting rights of shareholders – and “Reserved Matters”

Joint Venture Agreement:

Preemptive rights, tag-along rights, drag-along rights, consequences of upstream changes of control of corporate shareholders

Alternative Structures:

Offtake Agreements

Alternative Structures:

Due Diligence for Offtake Agreements More limited than for investment, unless being used as an Alternative Structure, usually: •  “Red flags” •  Corporate •  Licensing/IUP verification •  Forestry •  Disputes

Offtake Agreements: Vanilla Alternative Investment Structure •  Prepayment •  Offtake •  Security •  Management Committee •  Technical Services Fee (although under increasing

scrutiny from the Tax Office)

Offtake Agreements:

Key terms of Offtake Agreements

Offtake Agreements:

Note restrictions on onshore trading by PMA Companies, which dictates some provisions

Offtake Agreements:

Exclusivity – and quantity

Offtake Agreements:

Price – needs to adjust to CRP – fixed, or may also have variable components to allow flexibility

Offtake Agreements:

Quality specifications, minimum/maximum and rejection levels, and price adjustments

Offtake Agreements:

Quantity determination

Offtake Agreements:

Sampling/Analysis

Offtake Agreements:

Short-form Coal Sales Agreement usually entered into

Financing:

Prepayment and Offtake Agreement – the vanilla version

Common forms of security:

•  pledges of shares •  fiduciary securities – although now clear that coal-in-stockpile is not “owned” until royalty is paid, so relevant only in relation to other assets •  personal guarantees •  corporate guarantees •  bank guarantees •  mortgages

Construction of infrastructure – preferably on registered land

Infrastructure:

Key licences for construction of all infrastructure:

q  AMDAL (and Environmental Permit)

q  Building Construction Permit (Ijin Mendirikan Bangunan)(“IMB”)

q  Nuisance Act Permits

Infrastructure:

Public ports – subject to a 49% foreign shareholder restriction – sometimes inconsistently applied

Infrastructure - Ports:

Terminals for Own Use (Terminal Untuk Kepentingan Sendiri) (“TUKS”) – located within the working area of a port operator

Special Terminals (Terminal Khusus) (“TKS”) – located outside of the working area of a port operator

In theory, can only be used by the relevant company to support its own mining activities. In practice, companies sometimes obtain exemptions to operate TUKS/TKS for other companies within the same group or third parties. However, this is not specifically permitted under any law/regulation.

Infrastructure - Ports:

Foreign share ownership restrictions for Terminals for Own Use/Special Terminals follows the foreign ownership restrictions for the company’s main business activities. In the case of mining companies, 100% foreign ownership is permitted until after five years of commencement of commercial production, when phased divestment of up to 51% in Year 10 applies.

Impact on PMA “infrastructure” companies

Infrastructure - Ports:

Two-stage licensing process:

q  port construction license

q  port operations licence

The law does not provide that port operations licences are transferable – although acquisitions of port infrastructure are possible

Infrastructure - Ports:

Land acquisitions for haulage roads can be challenging

Infrastructure – Haulage Roads:

Construction licence obtained from:

q  Regent, if haulage road located in Regency

q  Governor, if haulage road crosses two Regencies

q  MEMR, if haulage road crosses two provinces

Infrastructure – Haulage Roads:

Special permits required if:

q  haulage road on private land crosses a public road

q  haulage road is constructed in a production forest

Infrastructure – Haulage Roads:

“Bureaucracy gone beserk”

– although multiple permits often required for mining projects internationally

Micro Permits:

Timber felling permit (Ijin Pemanfaatan Kayu)(“IPK”)

Requires: • Regent’s In-Principle Recommendation,

• Forestry Agency’s Technical Recommendation, and

• Governor’s Recommendation

Micro Permits – Forestry Clearance:

q Temporary Explosive Magazine Permit from MEMR

q Permanent Explosive Magazine Permit from MEMR

q Permit to Purchase and Use Explosives (“SIP2”) issued by National Police

q Permit to Possess and Store Explosives (“SIP3”) issued by National Police

Micro Permits – Explosives:

Issued by Regency after obtaining a letter of commitment from a supplier, usually Pertamina

Micro Permits – Fuel Storage:

Operation Permit (Ijin Operasi) issued at Regency level

Micro Permits – Power Generation:

Radio Licences for Special Purposes (Ijin Penyelenggaraan Telekomunikasi untuk Kepentingan Khusus) required for individual communications systems, issued by the Director-General of Post and Telecommunications

Micro Permits – Radio Licences:

Foreigners may only be employed by Indonesian companies in positions which cannot currently be filled by Indonesians.

The law requires foreigners to transfer technology to Indonesians.

In theory, foreigners must have Indonesian language capability and can work in Indonesia for five years only.

The Ministry of Manpower has issued an updated list of positions which foreigners cannot occupy – has always included human resources, but now includes “Chief Executive Officer” – meaning?

Manpower:

Types of employment relationships:

q  fixed-term contract employees

q  permanent employees

Manpower:

Manpower Report Submit standard-form annual report in relation to workforce to the local Manpower Office

Regional Minimum Wages Pay employees minimum wage as required by relevant government authorities

JAMSOSTEK Register employees for Workers’ Social Security Program and make monthly contributions If the foreign employee has insurance of equal or better protection they do not need to register with JAMSOSTEK

Company Regulations Companies with more than 10 employees must have Company Regulations legalised by the Manpower Office, unless a Collective Labour Agreement is in place

Fixed-Term Employment Contracts

Fixed-term employment contracts must be registered with the Manpower Office

Manpower permits:

General Mining Manpower Certification

Certain employees of mining companies to be registered with Department of Mining

Expatriate Usage Plan (Rencana Penggunaan Tenaga Kerja)(RPKTA)

Obtain approval of RPTKA for expatriate employees from Department of Manpower, which confirms number of permitted expatriate employees and relevant positions

Expatriate Work Permit (IMTA)

Obtain separate IMTA for each specific expatriate employee

Limited stay Permit (KITAS) KITAS and other permits/visas obtained by foreign employee

Manpower permits:

Indonesian Training Report Submit (standard form) report on proposed education/training program for Indonesian employees to replace expatriate employees

Implementation of Education and Training Program For Indonesian employees on Basis of RPTKA Report

Submit (standard-form) report on implementation of education/training program for Indonesian employees to replace expatriate employees to (i) Director of Control Over Usage Expatriates within the Department of Manpower and Transmigration; (ii) the Department of Mining; and (iii) regional office of the Department of Manpower and Transmigration

Employment of Expatriates Report

Submit (standard-form) six-month report on employment of expatriates to Director of Control Over Usage Expatriates, Department of Manpower regional office and Department of Mining

Payment of Vocational Skill Development Fund (Dana Pengembangan Keahlian dan Keterampilan)(“DPPK”)

Pay US$100 per month for each expatriate

Manpower permits:

Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal)(“BKPM”) has jurisdiction with respect to Foreign Investment Companies (Penanaman Modal Asing)(“PMA”)

PMA Companies:

The New Mining Law of 2009 finally provided that PMA Companies could hold IUPs – after delay in issue of the implementing Regulations, PMA Companies started to acquire shares in 100% Indonesian-owned companies, provided that:

Ø  Regent which issued the IUP provides a Letter of Recommendation; and

Ø  Consent of BKPM is obtained.

Foreign investors hailed this as “one-step forward”.

BKPM previously required an increase in capital of the IUP-holding company to US$600,000-US$1,000,000. A recent regulation (BKPM Regulation No.5 of 2013) has indicated that it will require IDR 10 billiono – not yet clear whether may be mix of debt-to-equity on an assumed debt:equity ratio of 3:1.

PMA Companies:

q  20% in the sixth year of commencement of commercial production

q  30% in the seventh year of commencement of commercial production

q  37% in the eighth year of commencement of commercial production

PMA Companies:

An MEMR regulation was released in May which changes the existing divestment to Indonesian interests in PMA IUP-holding companies from 20% to 51%, phased as:

q  44% in the ninth year of commencement of commercial production

q  51% in the tenth year of commencement of commercial production

Foreign investors say this is “two steps back”.

PMA Companies:

Is there now a hidden policy:

•  20% local shareholding for conversion to PMA status, for exploration no matter what year

•  51% local shareholding for conversion to PMA status for production no matter what year

PMA Companies:

No requirement at this point for commercial consideration

Issues when dealing with offers to government

PMA Companies:

PMA Companies:

Draft regulation appeared, then disappeared: •  Listed companies •  Formula for commercial value •  Process for offers – strictly government controlled

PMA Companies:

Recent BKPM regulation indicates that listed companies should not be exempt from divestment requirements – in mining and elsewhere – although unclear how this work in practice

PT Magnificent Mines has identified a port currently owned by PT Dapper Diamonds, which it is interested in acquiring. PT Dapper Diamonds is a PMA Company which holds an IUP, although the end of life-of-mine is approaching. PT Magnificent Mines wishes to use the port for its own purpose, and also earn extra cash by renting the port to the third parties. PT Magnificent Mines has been negotiating the port acquisition with the CEO of PT Dapper Diamonds, Mr John Smith, although has been facing communication difficulties.

How should PT Magnificent Mines proceed?

Question:

Crafty Concessions Limited of Tanzania has agreed to fund PT Magnificent Mines operations, on the condition that PT Magnificent Mines agrees to a 10-year fixed-term offtake arrangement at fixed price. The actual mining activities will be conducted by Crafty Concession’s Indonesian PMA mining services company. At the end of the contract, Crafty Concessions Limited has a right to acquire a majority interest in PT Magnificent Mines.

Any issues?

Question:

Disclaimer – Susandarini & Partners is an Indonesian legal practice which operates in association with Norton Rose Fulbright Australia. Norton Rose Fulbright Australia is part of

Norton Rose Fulbright, a global legal practice offering a full business law service to many of the world's pre-eminent financial institutions and corporations from offices in Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

– References to “Norton Rose Fulbright” are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together “Norton Rose Fulbright entity/entities”). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to Susandarini & Partners or any Norton Rose Fulbright entity (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of Susandarini & Partners or the relevant Norton Rose Fulbright entity.

– The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Susandarini & Partners or any Norton Rose Fulbright entity on the points of law discussed.

– You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Susandarini & Partners or Norton Rose Fulbright.