Learning from the 2018 trial tenement issuance program.

Learning from the 2018 trial tenement issuance program.  (Vol 101)


The Indonesian Mines Department’s 2018 program to issue new mineral and coal tenements did not receive strong industry support. There is little scope for Government bodies to undertake green-fields exploration, as there is reluctance to fund significant exploration throughout Indonesia. Both Industry and Government realize that new exploration tenements need to be taken up by the private sector in order to grow the mining industry, and so provide new jobs and new wealth for Indonesia.

It is apparent that much of the present tenement issuance program is reasonable and shall remain. It is widely accepted that a successful new tenement issuance program shall need revisions to the present program, and to improve several key longer-term business factors that influence investment decisions in the Indonesian mining sector (divestment, smelters, business stability etc).

For the purpose of this article, green-fields exploration is all work up to the point of starting mine construction, and brownfields is all exploration after construction commences. This article is prepared from long experience in the Indonesian exploration sector, and in discussions with others. This article looks at what conditions may support a successful program to issue new exploration tenements.

Credible regulation.

The 2018 trial tenement issuance program uncovered issues with the existing regulations. The recent Ombudsman report found that the Mines Department (ESDM) did not follow the regulations in the issuance of two nickel tenements to PT. Aneka Tambang (Antam). This claim before the Ombudsman raised several legal issues that may take some regulatory effort to rectify. For example; –

  • The stipulation of WIUPK (PP Number 22 of 2010), the mining area must first change to a State Reserve Area (WPN) that requires the approval of the House of Representatives (DPR). Then it can be determined as WIUPK by considering the aspirations of the local government.
  • The WIUPK Production Operation should not be able to change its status to WIUPK exploration. (Law Number 4 of 2009).

Should the Ombudsman’s issues, as above, need to be rectified, then the path to a sound legal basis for issuing some new tenements may take considerable effort.

The exploration industry would be encouraged if the process to issue the new tenements is formally agreed upon by the different levels of government, and by the ministries competing for influence in the ensuing mining industry (forestry, spatial planning, manpower etc). The “One Map” provides the science background for coordination. What is needed is a formal intergovernmental “sign off” by all involved government agencies prior to the bidding process to confirm that the area is available (no foreseeable objections) for exploration and mining.

No competing Interests.

The 2018 tenement issuance program largely focussed on the ESDM’s areas of responsibility, and essentially said that the tenement winners would need to then go and deal separately with the forestry, local government and other agencies. This presents an unfavourable “cat-in-a-bag” business scenario, where, after bidding and winning a tenement, there is no guarantee for the issuance of supportive permits from other areas of government.

The industry would be encouraged if all supportive permits were prepared in advance of the bidding process, and available for contenders to inspect and consider in preparing their bid. It is not enough to simply say this or that area is subject to forestry restrictions. The forestry permits to operate need to be prior approved for the term of the project, though subject to monitoring in the usual manner. In the example of forestry, the Mines Department could provide a wide-ranging optional work program to coordinate with forestry. For example, stream sediment & shallow soil sampling, outcrop mapping, surveying, geophysics, limited trenching, drilling with limited size of disturbed drill pad, limited temporary vehicle access etc. Other such regulations concerning expatriate manpower slots, local office permits etc could be prepared during the tenement bidding process, and be issued simultaneously with the tenement awarding process. The period of validity for supporting permits, such as forestry, should be issued for the same period as the exploration permit.

The Churchill coal case shows us that apparently expired overlapping tenements can come to life through the courts, and compromise the newer tenement.  Further assurances may be needed to ensure older claims are “expunged”, and that the bidding / awarding process includes a warrant of exclusive legal certainty by the provincial / central Mines Department for the given area and commodity.

There are some historic cases in Sulawesi where the issued tenement owner had to yield to a local gold mining operation that was later turned into an overlapping KP / IUP with the help of local influences. Traditional or illegal mining may take place on an irregular basis in some areas. It is up to the Provincial and Central Mines Departments to provide warranties of complete exclusivity for the commodity and tenement area to the tenement bidders and winners.  If local mining areas are to be included within the tenement, then their presence and operating conditions should be very clearly defined in the bidding process.

Stable regulation environment.

A number of would be investors expressed concern on Indonesia’s recent history of adjusting, or bringing in new, regulations that provide an uncertain basis for long term and high-risk projects such as exploration in minerals and coal. It is unreasonable to expect all the various government agencies to give up their right to adjust or develop new regulations in todays fast moving business and social environment.

A compromise may be worked out where by the exploration industry could more readily accept a changing regulatory environment. This compromise may take the form of a deeper engagement between regulators and the community. There is already a tacit understanding that if a factory is to be built in an area, then it needs environmental approvals, wherein this process included public engagement and approval. It is proposed that a comparable government engagement with the mining community is to be developed for any, and all, agencies that may wish to introduce regulatory changes that impact upon the exploration and mining industry business environment.  Perhaps the answer could include a Presidential Regulation stating that any new regulation that impinges on the exploration & mining tenement holder must first seek a round table approval with those wishing to change the regulations, and with those for whom the new rule will impact (as may be represented through the local chamber of commerce and recognized mining industry association).

Full Bid Price

A number of would be investors expressed concern that they would find the business risk more measurable if the regulatory compliance cost of entering the bidding process and the exploration industry was clearly laid out.

The Mines Department needs to work with other government agencies to determine and declare the full bid cost obligation, along with ongoing government fees and taxes to be applied. Besides the “Data Compensation Fund” the Mines Department should list the “revenue streams” required by the Mines Department and other agencies. This list may include the rates and amounts for, local taxes & levies, work performance guarantees, reclamation guarantee fund, post exploration fund, forestry borrow & use fees, and all other fees as might reasonably be expected for establishing a business entity, engaging manpower, and undertaking an exploration program.

There is surely sufficient experience within the Mines Department and various coordinating ministries to provide such a list of rates and actual costs.

Data Fee.

The present “Data Compensation Funds (KDI)” is widely acknowledged in industry as being vastly excessive (US$ 10-20 million) per tenement. Note also that the data compensation funds have the potential to expose the Mines Department to legal liability cases of misrepresentation where the data is of poor quality or misleading.

Antam was prepared to pay data compensation funds of Rp 184.4 billion and 185.05 billion (about US$ 13 million each) for the two IUPK blocks it received from the 2018 tenement issuance program. In this case the IUPK is considered to be a more “secure” tenement title than the regular IUP that is issued to most private investors. These blocks are suspected to contain previously drilled resources of lateritic nickel whereupon Antam could readily mine and export some raw ore along with supplying ore to their existing nickel smelters. However, most of the other blocks open to the public through the bidding process are unlikely to contain low project risk and ready-to-mine resources.

The investing public acknowledge some “signing fee” is to be applied. The present data compensation fund is not actually linked to data, but to the prospectivity of the block. A more reasonable fee is needed to attract real investors.

Predictable Fees.

The uncertainty over the various government agencies to change the business environment is of concern to potential tenement bidders. The recent example of a local government suddenly changing the water use fees for Freeport, and subsequently immediately demanding $400 million sends a message to would be investors that the cost structure of the venture could suddenly change at any time, and jeopardize the expenditure already committed.

One option may be for all government fees to be limited to changes related to external factors, such as National GDP, inflation or other. Again, the Mines Department would need to work with the coordinating ministries to secure adequate legal assurances for such a system of fee increments or new fees, as part of the package presented to would-be tenement bidders.

Getting Local Government to cooperate.

Financial, regulatory and other “controls” sought from all levels of government agencies could be managed through the Mines Department insisting on suitable local supportive legislation being passed. If any of the local government agencies do not agree and pass such legislature, then the Mines Department can decline to activate the bidding process for new tenements in such districts / provinces – until they fall into line.


Most serious investors did not want begin the tenement bidding process if the divestment obligations are unfavourable for a viable business, or for domestic companies to obtain agreeable finance terms or future joint venture partners. One option for local companies to raise development capital is to secure loans as secured with the mining company shares. However, if a foreign bank or finance agency does not have the option to take over the shares, due to foreign ownership restrictions (divestment etc), then it becomes harder for mining companies to secure finance.

The present regulations stipulate a schedule of a somewhat complicated staged divestment over 5-10 years. This style of divestment may be suited for some projects with short cheap exploration programs, small capital investment and fast returns of profits, such as heap leach gold, lateritic nickel or bauxite raw ore, some alluvial projects and some open cut coal mines. Many projects do not fit this model, wherein the divestment obligations dissuade serious companies from even starting with the tenement bidding process. The Freeport negotiations show that the Government is willing to set a different schedule of 51% divestment after 10 years of actual production (not production starting from issuance of construction permit).

The Mines Department has the opportunity to develop a new divestment program in conjunction with the issuance of new tenements. The Mines Department has built up a library of feasibility studies, and operating costs along with profit margins for many different projects. Discussions between the Mines Department and  industry may allow a new divestment scheme to be developed that can still attract local and foreign investors that need to manage guarantees for project finance.


Most serious investors will not begin the tenement bidding process if the smelter obligations are unfavourable for a viable business case.

The smelter obligation has been with us for 10 years, and was more strongly imposed over the past 5 years. There have been mixed reactions to this smelter program, some smelters have been built, some are operating, others quickly closed, and a number will never be built as the fundamental economics are not adequate. The Mines Department’s “one size fits all” is stopping some projects from becoming mines, and so denying the people of the benefits that come from mining that is enshrined in the Constitution.

Some minerals (tin and gold) typically can readily comply with this smelter policy, while others (including many polymetallic deposits) can not be viable due to complexity, limited size of deposit and the domestic cost structure. The smelter policy has already had a major overhaul wherein some raw ore can be exported while smelter construction is underway. Indeed, the use of raw ore exports can significantly reduce the need for foreign borrowings, and thus reduce Indonesian’s gross national debt, and increase the proportion of Indonesian ownership of the smelters The Mines Department has many files of smelter proposals, and can call upon industry and experts to review this smelter policy.

The issuance of tenements can be undertaken more readily for commodities that do not have burdensome smelter requirements.  Thereafter, the other mineral commodities can be issued in conjunction with clear new workable/ viable smelter requirements. Note that significant delays in developing new smelter policies will reflect on the delay in allowing many Indonesians to draw benefit from its mineral wealth.

Term of Licence.

The “one-one-size-fits-all” regulation on the period of exploration, and for production, may be suitable for many small to medium sized projects. There is growing technical confidence to explore and mine some much larger deposits, particularly porphyry style. Freeport shows the way for industry to consider some mines to have significantly longer tenement periods, say up to 100 years.

Such huge projects can bring significant long-term wealth and development to remote parts of Indonesia, and underpin the nations long term credit profile. The World Bank financial rescue of Indonesia from the 1998 global financial crisis was largely underwritten by the knowledge that Indonesian oil reserves could provide an export lead economy to rebuild Indonesia and repay the World Bank loans. Today there are many impoverished countries that can not attract such international loans to come to the aid of their country in times of crisis. The future underlying assets of Indonesia are now more diversified. By replacing the diminishing oil reserves with new huge mineral reserves, with long life project certainty, adds another dimension to national security.

The apparent short term of some licences may be a disincentive to explore and exploit the much larger or more challenging ore deposits. There may be a tendency to “high grade” a deposit and then terminate, leaving the next generation of miners with a less viable large low-grade deposit.

Investors may be encouraged if term of new tenements can be more variable, and include provisions for longer extensions, based upon exploration targets and ongoing discoveries.

Land ownership.

In a number of expired IUP’s or IUPK’s, the previous tenement holder may have purchased land, own roads and buildings that may influence the new tenement owners’ operations in some way. Perhaps the old owner wants a fee for their road, or to impose worse conditions.

It is understood some regulations indicate that mining companies are single purpose companies, wherein once the old tenement is returned to the government or terminated, then the company should be wound up. Any assets, such as site land and buildings would need to be sold, wherein it may be more difficult for the Mines Department or the new tenement holders to identify potential key asset holders in the tenement area.

The Mines Department’s preparation for a tenement auction may be more attractive to investors, if the bidding process includes a legal/ title audit of the Mines Department & other government records for any such land or building permits. The presence or absence of any known impediments or right of way, should be declared in the bidding documents, along with a warrant (and disclaimers) that such a title search has been undertaken.

Private initiative.

The above-mentioned auction system is designed to issue ground that has previously been partially explored and is considered by the ESDM Geological Division to hold some potential for a particular commodity. The Mining Law and regulations also allow for private initiative to nominate unexplored ground, or for new minerals, to be applied for by private parties. The recent Sumatra Miner seminar indicated some explorers have interests to apply for such new potential ground, but the regulatory process is off-putting. This writer does not know of any new ground being awarded under this private initiative scheme. This apparent disinterest in taking up new initiative ground / minerals is a clear signal that the process for such initiative requires review.


There are many cases in the regulations where companies submitting data to the Mines Department must warrant their data is true and correct. Herein the ESDM may consider acting in a similar responsible manner to provide bidders with warrantees for various aspects of the tenement issuing program.

The Coordinating ministry needs to be more involved with other ministries and with the various levels of government. Working together for the overall benefit of the mining industry and the well being of Indonesia will bring broader benefits to Indonesia.

The 2018 trial issuance of new tenements did not result in the issuance of many new tenements to the private sector, but was a success in identifying issues to be further resolved to make the next round of tenement issuances more successful. The next trial tenement issuance program is encouraged to cover many more provinces, and so expand the “learning process” and provide incentive for more Provinces to participate.

If the issuance of new tenements is continually delayed, then there is greater incentive for illegal mining. Resolving the many negative factors associated with the illegal mining industry may become a greater burden on the Mines Department and other Ministries than rectifying the process for new tenement issuance.

Will the dance music change?

Early in Ignasius Jonan’s period as Minister for Mines and Energy, held a talk at the Jakarta Foreign Correspondence Club (12 October 2017) where the Minister expounded his policy towards private parties’ participation in the mining and oil & gas industries. “The Ministers analogy is that the music is changing, and he is looking for his dancing partner to follow the new music, or he will find another dancing partner”. The subsequent history of the Ministers management appears to have followed this line. Those already in the mining industry have been obliged to dance to his tune, while some have left the dance floor. The very poor performance of the first issuance of new tenements would suggest the existing miners are not interested in following this Ministers rap music, and it seems new investors are more interested in the reliable old-fashioned waltz. Will this minister be able to soften his music to attract new players onto the exploration dance floor?


Leave a comment

Your email address will not be published.