The Professional Perspective of Indonesian Mineral Valuations. [Coal Asia magazine Vol.68 ]
The Professional Perspective of Indonesian Mineral Valuations.
Introduction.
The Jakarta post (27 April 2016) article “Indonesia says Freeport stake worth $630m” relates to a statement by ministry spokesman Sudjatminko referring to the governments replacement value for 10.64% of shares in the local unit of Freeport McMoRan Inc. The article goes on to refer to Freeport’s valuation of the same shares is at $1.7 billion dollars. Various media reports on this matter state that the Government used a “replacement cost “ method as directed in ESDM regulation 27/2013, whereas Freeport have used “fair value” methodology. This Jakarta Post article was corrected on the same day by several digital news reports, stating that the Ministry’s director general of mineral and coal, Bambang Gatot denied the government had set the price at $630 million, and explained that the government is still calculating and discussing the price, with an outcome expected later this year or next.
This Coal Asia article is not concerned with the dollar values claimed by each party, acknowledges that such valuations are highly confidential, and that many mineral valuations often go through a latter negotiation phase before an agreement is reached. This article looks at the Freeport case as an example to reflect on the current development of the Indonesian valuers professional associations and code of ethics.
Share Divestment.
The Regulation of the Minister of Energy and Mineral Resources (ESDM) No. 27/2013, sets out the procedure and pricing of share divestment along with other matters. Share Divestment refers to the amount of foreign shares which should be offered for sale to Indonesian participants. Such shares are to be offered in successive order to the central government, provincial government, regency government, BUMN or national business entity. There are various restrictions imposed on the divested shares, and the procedure for divestiture is set out. If the government does not want to purchase the shares, then the BUMN or private enterprise can undertake a sealed bid, with the miner selecting the highest bid, along with other requirements. Article 13 sets out the procedure of pricing of share divestment. The share price is based on “replacement cost of the cumulative amount of investment cost expended since the exploration stage up to the year of obligation of share divestment”, with deductions for depreciation and amortization plus financial obligations until the time the share divestment is due. This becomes the highest price offered for the government to purchase, or the lowest price for BUMN or national private business entity by way of auction.
There is no indication how the replacement cost valuation team shall be derived (assume ESDM, ministry of finance and others), and if independent parties are to be involved. There is no reference for the valuers to belong to an appropriate professional association, and work within a code of ethics for the determination of the replacement price. Note also there is no reference as to who holds the government divests shares, but it may be similar to SOE shares that are held by the Minister of Finance. Note that ESDM 27/2013 definition makes reference to the Independent Surveyor registered with the Indonesian Surveyors Council, however this association does not relate to asset survey, but to mapping, geodetic engineering, remote sensing etc.
Registration of Appraisers.
Appraisal is undertaken by an Indonesian professional who has obtained permission from the Minister of Finance to provide public appraisal services or external assessor as stipulated in the Minister of Finance regulation 125/PMK.01/2008 on the assessment of public services. Assessment services are of two kinds, that of property valuation (including mining), and business valuation (including intangible assets) along with additional services that includes feasibility studies. The regulation sets out the qualifications for appraisers along with the manner in which their business is to be undertaken. Article 32 states clearly that appraisers shall obey “Indonesian Appraisal Standard (SPI) and the Code of Conduct Appraisal Indonesia (KEPI) set by the Professional Association, that does not contradict Regulation of the Minister of Finance or Legislation related to the field of assessment services rendered.” Appraisers are prohibited from holding a number of concurrent positions, including being a state official (with certain exceptions). Appraiser shall be a member of MAPPI and is responsible for the valuation report.
MoF Intangible Assets.
The Ministry of Finance regulation about the Assessment Guidelines and Presentation of Assessment Report Intangible Assets in Capital Market (KEP 620/BL/2011) was Google translated for this review, wherein I apologize for any inaccuracies or misconceptions related to such translation. The KEP 620 guidelines are designed to encourage professionalism, independence and objectivity of business appraisers by providing rules for determining and reporting on intangible assets. Intangible assets are defined as non-monetry assets without physical form and Goodwill. Article 3.d lists intangible assets related to a company’s contract including License, and Use rights such as minerals etc. The definition of Purchase Price Allocation includes the important concept of fair value of assets, while the definition of Goodwill is an asset representing the future economic benefits etc.
This KEP regulation states that business valuers must comply with codes of conduct and standards set by the association. The regulation goes further to specify that the business valuer shall use the Fair Market Value for intangible asset valuation. The methodology follows many international norms. For example; 1)The use of quantative analysis to compute the remaining useful life of the intangible asset (herein I assume mineral reserves/ resources), wherein the economical life can be obtained through future earnings etc. 2) Business appraisers must use at least two approaches for the assessment and show that other approaches are not applicable. 3) Technical criteria are set out for conducting the assessment methods [Market Based, Income Based & Cost Based]. The business appraisers are prohibited from using the cost based approach where the asset does not make a positive contribution to the company’s revenue (herein I assume reserves for an operating mine may exclude the cost base method). Furthermore it appears that the cost based method includes the concept of new replacement cost, 4) Report format that includes statements of independence by the business appraisers and professional team and office of the Public Appraisal Service (Kantor Jasa Penilai Publik – KJPP), along with transparency of Experts and their works (herein I assume an independent reserve report by suitably qualified geologists and miners etc). The business appraisers are required to sign the report of intangible assets with name, place, date, and STTD number. 5) Enforcement of the reporting code is through sanctions from the capital market, Bapepam and LK, or possible criminal code.
MAPPI.
According to personal communications with a major accounting firm, MAPPI is the only professional body for valuers in Indonesia. They are individuals that only value assets (buildings, machinery etc) and businesses. If the subject business is a miner then the valuer would be required to rely on an expert report, and a valid JORC style report qualifies for this. The Indonesian Society of Appraisers (ISA / Masyarakat Assosiasi Profesi Penilai – MAPPI) vision is to increase the role and quality of Indonesian professional appraisers in the era of globalization. The association has a code of conduct for appraisers (KEPI), and an Indonesian appraisal standard (SPI). MAPPI is active with business and government on a national and international level. They have several classes of membership, including Participate, Accredited and Certified members.
VALMIN
“The VALMIN Code (2015) provides a set of fundamental principles (Competence, Materiality and Transparency), mandatory requirements and supporting recommendations accepted as representing good professional practice to assist in the preparation of relevant Public Reports on any Technical Assessment or Valuation of Mineral Assets in Australia. It is a companion to the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC Code). The concept of a Mineral Asset is similar to that used in Indonesia, wherein the minerals within the ground belong to the State but the rights for exploitation and sale are included in the definition of a Mineral Asset. The Valmin code valuation is limited to the Mineral Asset and does not include the valuation of the company. There are two main methods of valuation, the technical value and the market value, with three widely accepted valuation approaches – market based, income based and cost base. The valmin code specifically rejects the cost method for producing mines. This may be a potential source of conflict should an ASX listed company be subject to Indonesian divestment using the cost based approach. All Ore Reserves and Mineral Resources must be considered in a Technical Assessment or Valuation. “A range of values (high/most likely/low) must be determined and stated in a Public Report to reflect any uncertainties in the data and the interaction of the various assumptions made; however, the range should not be so wide as to render the conclusion of the Public Report meaningless.” The concept requires a sign off by a specialist with appropriate AusIMM or AIG membership to follow industry guidelines and a code of ethics.
IVS
The current status for standards and regulations for appraisal of the value of US mineral properties is a little complicated. The 9th edition of the International Valuation Standards (IVS) was commented upon by KPMG in 2011, and effective on January 2011. The US based Society for Mining, Metallurgy, and Exploration (SME) issued their first edition 2016 of Valuation Standards that are binding on its registered members.
Valuation work on US properties must comply with the USA’s Uniform Standards for Professional Appraisal Practice (USPAP), though this makes no mention of mineral properties or any directly related terms in its 200 pages. Minerals industry technical assessment reports for stock markets must abide by the Security and Exchange Commission’s (SEC’s) Industry Guide 7. Valuation of mineral resources can only be reported and applied to the asset ledger for mergers and acquisitions, in which case, accounting firms do the valuations using business valuation methods.
The International Institute of Minerals Appraisers (IIMA), requires that USA valuers apply either USPAP or the International Valuation Standards (IVSs), subject to jurisdictional requirements. The IVS Indonesian affiliated body is the Society of Indonesian Appraisers ( MAPPI).
International Risk.
The Crystallex International Corp Vs the Bolivian Republic of Venezuela ICSID case No. ARB(AF)/11/12 was resolved in April 2016. The Canadian Crystallex secured an arbitral award of US$ 1.2 billion for unfair and inequitable treatment and the unlawful expropriation of its investment in the Las Chistinas mining project. There are some significant differences, and some similarities, between that case and Indonesia’s application of the ESDM share divestment regulation.
When Hugo Chavez came to power in Venezuela he commenced a wide spread nationalization program, including the oil and gold mining. However Venezuela signature to various bilateral trade agreements allowed for international arbitration. Crystallex complained it had been unfairly denied an environmental permit to operate, and suffered inequitable treatment and unlawful expropriation contrary to articles in the Canadian- Venezuela bilateral trade agreement. [This would seem similar to some aspects of the ongoing Churchill Vs Indonesia case ]. Notably, the Tribunal considered that the public statements of President Chávez that he intended to oust Crystallex and take Las Cristinas back into governmental hands, even prior to the rescission of the Mine Operation Contract, constituted “an incremental encroachment of the Claimant’s contractual rights and resulted in a gradual yet significant decrease of the value of the Claimant’s investment.” [We have seen similar statements by various Indonesian politicians and others regarding the taking back of Freeport]. Further, although the contract was purportedly terminated on contractual grounds, the Tribunal found that “the true nature of the act . . . was one of exercise of sovereign authority” and amounted to unlawful expropriation without compensation. [It may be argued that the ESDM regulation 27/2013 on divestiture post dates the issuance of the COW/PKP2B for Freeport and others, wherein the specified cost replacement method could be considered closer to unlawful expropriation as compared to Fair Market Valuation between a willing seller and willing buyer.]
Venezuela valuers claimed the compensation based on book accounting for Cost Approach was $245 million. Crystallex had put forward a reasonable basis on which its loss of profits could be assessed, including the stock market approach, P/NAV method, market multiples method and indirect sales comparison method, winning the arbitration award of US$ 1.2 billion.
Transparency
Freeport has transparent data (reserves, production and financial statements) in compliance with various stock exchanges, which is readily reviewed by many independent analysts.
Indonesian government has many NGO activists and the government watch dog KPK scrutinizing all financial transactions. Thus each party must proceed with due caution over public concern.
Indonesia has adopted the International Financial Accounting Reporting Standards (IFRS) that are designed as a common global language for business affairs. Assets are defined as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.”
Potential Solution.
It would seem from the above information, that the ESDM should engage valuers who have been authorized by the state mechanism through registration with the Minister of Finance, and hold suitable membership of their professional society (MAPPI), wherein they are bound by such rules that direct the valuers to use fair market valuations for mining companies, such as Freeport.
MAPPI is affiliated with the international valuers society (IVS), and furthermore, the Ministry of Finance (as the buyer of the mineral companies shares) has an outlook to apply international financial accounting methods to Indonesia, wherein such international codes may oblige the registered Indonesian valuers to use fair market valuation methods for such mineral companies. The application of the domestic ESDM regulation to use a replacement cost method may need to be further considered with regards to the various international treaties when applied to PMA companies.
The apparent conflict for the ESDM valuers between applying a replacement cost (ESDM No. 27/2013) and MAPPI professional compliance (fair market) may be resolved by applying both sets of valuations. One valuation on the replacement cost for tangible assets, plus a fair market value for intangible assets.