Lobby to implement new regulations to promote the exploration industry. Vol 115

Introduction.

In May 2020, the Indonesian parliament (DPR) amended the Mining Law 4/2009, with 83 articles amended, 52 new articles and removed 18 articles. (recent EMD webinar). Overall, the amended mining law takes into consideration many of the present operational regulations, along with other points that have earlier been “discussed” with industry, wherein there is little of a surprising nature in these amendments. Some industry commentators feel many of these amendments help to provide a more settled regulatory bases for the mining industry. There are some articles that should have a clear positive impact on the industry.

Prior to the amendment there were a number of public discussions on this matter, though by the end of May, there were not many opportunities for the Mines Department to hold meaningful socialization meetings on these amendments. Therein some of the matters outlined in this article are of a personal speculative nature. The focus of this article is to look at selected amendments, and to see where the ensuing implementing regulations can be supportive of a vibrant exploration industry. This article is based on one of several draft English versions of the new amendment merged with the Mining Law. (Note; reference to Article 1.1 is herein abbreviated to (A1.1).

Research.

The defining term “Mining” does not carry forward the term “research”(A1.1). The defining term “General Survey” (A1.14a. investigations and research) includes research to determine general geological condition, indicative data, potential resources and / or mineral and/ or coal reserves. This author recently published in Coal Asia Vol. 112 the article “Alert on the overlapping research law 11/2019” wherein it would seem these amendments may clarify some possible overlap with the research law. This amendment clears the way for standard geological exploration (mapping, geochemistry, geophysics, petrology, remote sensing etc) to be within the Mining Law rather than overlapping with the research law. However, research in the mining sector, such as researching to define new blasting patterns, machine learning, geotechnical research, geochemical research to find new vector or maturity indicators may now come under the research law. There are several mining & smelting companies supporting research initiatives, wherein further clarification is to be sought on this front. There are several international research projects applying to Indonesian geology and mining cases, wherein they could have been further encouraged by including the term “research” within the broader definition of Mining. Research and innovation are key elements to the long life of the Indonesian mining industry. Perhaps the elucidation on the final issued law may clarify this aspect of research in mining.

The Central Government, in the management of mineral and coal mining, is authorized (A6.1.e) to conduct mining investigations and research in all mining designated areas. This article may support the authority of the Geological Agency to evaluate regions for the preparation of new mining tenement areas, or (hopefully) for the State’s Geological Agency to embark on the long sought after 1:50,000 scale national geological mapping programs etc.

The Minister may (A17B.1) nominate assignments to state research institutes, state owned enterprises, regionally-owned business entities, or business entities to conduct investigations and research in the context of preparing metal mineral WIUP’s and Coal WIUP’s. This is followed by (A17B.3) BUMN, regionally owned business entity, or Business Entity that gets the assignment as referred to in paragraph (1) and the assignment area is determined as WIUP, has the right to equal the bid in the WIUP auction. Also, the Government can (A104A.1&2) assign parties to conduct coal research, wherein such parties have equal right to bid. These amendments are very similar to the original Mining Law of 4/2009 and its implementing regulations.  It is apparent that this approach has not been effective in stimulating exploration, as there has been no noticeable SOE’s or private companies perusing this option towards generating a new exploration tenement. Similarly, the various state geoscience research agencies do not seem to be well funded, nor have a great depth in government support to undertake substantial research programs. Indonesian researchers are readily attracted to the many offshore universities.

Producers to undertake exploration: –

In the context of Mineral and Coal conservation, (A36A) holders of IUP or IUPK in the stages of Operation Production are required to budget for, and carry out, continued annual exploration activities. It would seem the mining industry is keen to discuss the pending implementing regulations for this article.

• A number of coal and metal miners have undertaken extensive exploration throughout their tenement to derive a “life of mine” production program, which has been approved by the Mines Department. Perhaps these companies can be exempt from the requirement for ongoing exploration.
• Some company’s strategy is to undertake sufficient exploration to achieve productions status, and then to incorporate further exploration expenditure based on income from production. PT. Timah is a prime example, and would fit the requirements of this article.
• There are some COW & CCOW that are not yet in production due to long outstanding unresolved land use / forestry disputes that are out of the hands of the COW / CCOW holders’ control. Similarly, many of the ex BHP coal tenements now owned by Indonesian parties are awaiting good market prices, or reliance on completion of parallel projects to provide infrastructure. A number of South Sumatra coal companies invested seriously to develop potential coal mines to bid for government nominated mine mouth power plants, wherein the Government later cancelled / delayed its commitment towards such power plants. There is little commercial sense in undertaking further exploration on these valid tenements, wherein a delay of the new article on exploration commitment would be appreciated.
• The budget for an ongoing exploration program may run into complications, as companies profit / loss margins can change quite unexpectedly. Also, the negative results of an exploration program can require significant changes to planned exploration programs. Therein any annual government monitoring of ongoing exploration within the tenement may best include some reasonable flexibility.
• We might assume one purpose of the Mines Department in requiring such ongoing exploration is for the tenement holder to relinquish un- prospective ground. Such relinquished ground could (in theory) then be reissued by the Government to potential new explorers with different exploration goals or strategy. The relinquished ground would reduce the dead rent and may have complications for the restoration fund etc. If the relinquished ground is not taken up by another party, there may be a nett effect of reduced income for the local district and communities.
• Some environmental impact statements require a “buffer zone’ around the mine site. This buffer zone may have no resource potential, but is necessary to be included under the mining companies influence in order to ensure environmental compliance. Perhaps these non-resource zones can be excluded from the new articles’ exploration requirements.

Reserve resilience funds: –

Article 112A (1) introduces the new concept for holders of IUP & IUPK on Operation Production to be required to provide Mineral & Coal reserve resilience funs, that are to be (2) used for new reserve discovery activities, with (3) further provisions to be developed. Perhaps this concept has been devised in recognition that the Mines Department has the desire to replace the draw down of existing reserves.

Last year at the MGEI annual conference, the CEO of Inalum (now MIND-ID) introduced this groups concept to promote exploration with the development of an exploration budget derived from 2-3% of gross income. This budget could be spent on internal projects as well as forming JV’s with Juniors and other parties on various exploration projects that meet Inalum’s criteria. We might suspect this new Mines Department reserve resilience fund concept has been stimulated by Inalum’s proposal. It is not known to this writer, if Inalum’s proposal (including the 2-3% gross income budget) has been turned into practice. 

Several international and Indonesian leading mining companies have been looking for possible JV’s or acquisition opportunities in Indonesia for several years, wherein we may assume most realistic opportunities amongst the current tenement holders have been exhausted. The recent Mines Department public auctions of new tenements appears to hold little interest to investors in exploration. The concept of a reserve reliance fund directed at new discoveries, needs suitable targets and an agreeable commercial bases for investment. Note comments from the Indonesia Miner recent webinar on “COVID 19 impact on building new smelters”, wherein the unviable business case for the construction of new copper smelters is a strong disincentive for continuing the various highly potential porphyry copper exploration programs in Eastern Indonesia.

The recent S&P presentation at the EMD webinar indicates an anticipated drop in global exploration by around 29%, due largely to the global slow down introduced by the global pandemic. Exploration in Indonesia is expected to follow this trend. Therein it is reasonable for the Mines Department to acknowledge no one/ very few are rushing to undertake new exploration programs in Indonesia. The Governments past approach to local and international companies to develop various industries (insurance, shipping, Power plants etc)  is to devise a way to “oblige” the existing players to fill such gaps (hunting in the zoo).

Note that all implementing regulations (A174) are to be established within 1 (one) year after the law becomes effective. The exploration and mining industry may be keen to discuss this concept of a reserve replacement fund with the government, and have input into the future implementing regulations. It may be expected most Indonesian producers will find difficulty in 2020 to produce a profit, and a number may even make a loss. Therein the timing to introduce the reserve resilience fund would seem to be some point in the future.

Front, Operation & Back End loading.

Front: – Exploration Permits (IUP) and special exploration permits (IUPK) are assigned to the private industry through a bidding system (A51 & A60), wherein the bidder shall provide various information about the company, its capabilities and plans, along with up front “commitment deposits”. This amended law mentions such commitments shall be prepared under separate regulations. The present commitment regulations appear to be unchanged by these amendments. Industry has mentioned to the Mines Department that many of these front-end-loading commitments are excessive, and a barrier to investors interested to bid for new tenements. The new opportunity (A93) to transfer the IUP (with the Ministers permission) at the completion of the exploration stage is generally seen as a positive amendment to support Juniors to come into the exploration business.

There may an opportunity to update the implementing regulations from the present vague multi stage divestment to something more certain.

Operation: – The rational for many potential explorers is – why get started if the operational-loading is not predicable nor acceptable? The operation aspect seems to be loading-up further, as IUP and IUPK holders (A108 (1)) must allocate funds for the implementation of the Community Development and Empowerment program, the minimum amount of which is not yet set out, but to be determined by the Minister. Holders of IUP or IUPK must fulfil the stipulations on the determination of the amount of national production and sales (A101A), wherein mine life production & sales plans are determined by the Government rather than solely business to business.

The imposition of “environment carrying capacity” would seem to be in greater need of definition. The Freeport mine’s tailings dump was subject to such pressures prior to divestment. However, the plan to build more mine mouth power plants near Bukit Asam’s coal mine seems to down play earlier environmental reports that the power plants heated water discharge would be detrimental to the aquatic life in the M. Enim river. The not yet defined “reserve resilience fund”, is an unknown factor at this point.

A major concern to foreign and local investors seeking financial support with international linkages, is the 51% divestiture requirement (A112.1). The new opportunity to divest via the Indonesian Stock Exchange (A112.1.2) is welcome, but may not be a good option for some cases. There may be difficulty in arranging suitable underwriters, and the IPO costs are substantial. Smelter construction commitments (A103) remain in place, though the term of accompanying mining tenement may be increased.

Back End Mining: – There are several new penal provisions with hefty fines and jail terms, (A162B.1) for any person whose IUP or IUPK is revoked or terminated and does not implement the termination. Also (161B.2) that ex holders of IUP or IUPK may be subject to additional (undetermined) penalties to pay for the obligations of reclamation and or post mining obligations. This amendment seems to effectively cut out any legal challengers an IUP / IUPK holder may claim for wrongful revocation or termination, and replace them with a very big stick.

Small scale & rock.

The Minister is now responsible for the Mines Inspectors work and budgets (A139), reclamation (A99.3), along with responsibility for small scale mines (A66 & 70, 73.2) and rock mines (A86A). This responsibility includes bringing such mines into the formal sector and involves formal registration, good mining practices, environment, reclamation and community engagement and regular reports to the Central Government. There may be tens of thousand such small family and village mining sites all over Indonesia, including many gold mines, alluvial tin mines, facing stone, plus sand & gravel mines for construction. The opportunities for small scale mining are improved with these amendments, with small scale mining districts increased from 25 to 100 Ha(A22d.), and increased depth from 25 m to 100m (A22b.). At this point it is not clear if the numerous limestone pits for cement plants, or clay pits for local bricks will be included in the Ministers new field of responsibility.

The transfer of responsibility of small-scale mines and rock mines from the Regional Government to the Minister(A173c) is to be undertaken within 6 (six) months of the date of this law comes into force, or until the issuance of implementing regulations for this law. The National and Mineral Coal management plan (173A) must be determined by the Minister within 2 (two) years after this amended law takes effect. It would seem the Ministers responsibilities for managing the small-scale mines and rock mines would need to be developed within this two-year time frame.

This may be a significant opportunity for the provincial mining technical schools to focus their courses to accommodate the vast increase in number of inspectors and trainers required to undertake this ambitious and good project. The huge manpower training required to lift the performance of the small-scale mines and rock mines may also take advantage of the ESDM training facility (Pengembangan Sumber Daya Manusia Geologi, Mineral dan atubara) at Bandung. The geological records so recorded by this amendment may help with the generation of more detailed geological maps, and so stimulate broader exploration.

Let’s not miss out on the COVID 19 opportunity.

The Free Aceh movement was in armed conflict with first the Dutch, and then the Indonesian government, for more than 100 years. Then the great tsunami event in 2004 was taken as an opportunity for both sides of that conflict to drop their entrenched positions and come together for the greater good of the people. The 2020 COVID 19 pandemic is another national crisis that has the opportunity for the government to change its entrenched position that is stifling the development of the oil & gas, plus mineral & coal industries. The mining industry has demonstrated its key economic role in sustaining Indonesia’s economy during this pandemic. The exploration industry has the capacity to be a significant driver in the post pandemic recovery. However, the new mining law amendments seem to just tinker around the edges of the well-recognized obstacles to invigorating exploration, rather than delivering a breakthrough agenda. There is sufficient opportunity remaining to adjust several implementing regulations to “breakthrough” the past entrenched positions, and to open up the exploration industry.