Current Status of Freeport Indonesia and its Compliance to The Government’s Mining Regulation

By: AMO Lawyers

Contributors:

1. Drafted by Azizah Mutia Karim, S.H.

2. Reviewed by Noverizky Tri Putra Pasaribu, S.H., LL.M. (Adv).

PT. Freeport Indonesia (“Freeport”) is considered one of the biggest mining company in the Indonesia, conducting its business in mining, processing, and exploration for ore copper, gold, and silver minerals.[1] Freeport-McMoRan, a United States – based company currently act as the holding and the biggest shareholders of the Freeport. Previously, Freeport had signed its very first Contract of Work or Kontrak Karya (“CoW”), a licensing framework set forth by the Law No.11/1967 on the Basic Provisions of Mining, with the Government of Indonesia in 1967. Freeport has become Indonesia’s biggest oldest foreign investor in Papua Province since then.[2] In 1991, the Company signed the second CoW that currently still prevails and will be expired in 2021.

For the past few years, some issues currently arose concerning Freeport’s status in Indonesia and its compliance to the new Indonesian Mining Regulation in 2009 including its subsequent regulations, which replaced the Law No.11/1967. This new mining regulation introduced at least 2 (two) new concepts that must be adapted: i) a new licensing framework, and ii) an obligation to divest shares.

Licensing Framework on Mining

In 2009, the Government of Indonesia enforced a new licensing framework under the new mining regulation, the Law No. 4/2009 on Mineral and Coal Mining (“Mining Law No. 4/2009”). The Mining Law introduced new licensing frameworks, namely the Mining Business License (“IUP”), Special Mining Business License (“IUPK”), and People’s Mining License (“IPR”) as a substitute of the previous framework, the CoW. The main differences between the two types of licenses between the new and old licensing framework are:

[1] http://ptfi.co.id/en/about/overview

[2] https://www.pressreader.com/indonesia/kompas/20170221/282518658265420

– The predecessor Licensing Framework (Contract of Work/CoW)

Principally, a CoW is a contract between the Government of Indonesia and an Indonesian incorporated company. A Foreign Direct Investment (“FDI”) Company act as a contractor to the government for the exploration and exploitation of certain minerals in the specified CoW area. CoW valid for 30 years since its commencement for commercial production and its term is extendable. As a contract, CoW holds horizontal relationship between the government and company as provided under the Indonesian Civil Code 1320, thus the terms set under the CoW is negotiable and can be changed accordingly mutually between the parties.[1]

– The latter Licensing Framework (IUP, IUPK and IPR)

The new licensing framework is a concept of permit given by the Government of Indonesia to an Indonesian legal entity/cooperative/individual.[2] As a permit, these licenses hold a vertical relationship between the government and the license holder, whereas the government may suspend or revoke the permit unilaterally. The difference between IUP, IUPK, and IPR lies solely on the type of mining areas (Commercial Mining Business areas, State Reserve areas, or People’s Mining areas).

Under Mining Law No. 4/2009, the government has no longer acknowledge CoW, instead all the licenses are governed under the IUP, IUPK, and IPR. Therefore, all existing CoW must be converted to IUP/IUPK/IPR in accordance to Mining Law No. 4/2009. The Mining Law, however, also grants a legal certainty that all existing CoW remain valid until the stipulated expiry date. Article 169 (a) of Mining Law No. 4/2009 stated that:

“Coal mining exploitation work contracts and work agreements that already existed prior to this Law coming into force remain valid until the contract / agreement expires.”

However, subsequent to its expiry date, CoW can only be extended by converting the license into the IUP and/or IUPK.

In this particular matter, Freeport previously has refused to comply with the government to convert CoW to IUP/IUPK. Consequently, the government banned Freeport from selling copper concentrates overseas. In respect to this export ban, Freeport has violated the provisions set forth under the Government Regulation No. 1/2017 On Fourth Amendment of The Government Regulation No. 23/2010 on The Operation of Mineral and Coal (“GR No. 1/2017”), which stipulates that an IUP holder must conduct mineral processing domestically, and only the said IUP holders may conduct exportation of mineral and coal.

[1] http://www.iflr.com/Article/2025438/Indonesia-Mining-regulations.html

[2] “Mining in Indonesia: Investment and Taxation Guide”, Pricewaterhouse Coopers, May 2011.

Article 112C (2) and (4) of GR No. 1/2017 stipulated:

(2) “Holders of IUP Production Operation, which mentioned in Article 112 number 4 letter A of Government Regulation, is obligated to conduct mineral processing and purifying domestically.”

(4) “Holders of IUP Production Operation, which mentioned in number 2, that conduct mineral and coal mining and have conducted mineral processing, can export its product in certain numbers.”

Owing to the fact that Freeport is not an IUP holder nor processing its mineral domestically, the government banned Freeport from selling minerals overseas.

This export ban leads to a large pile up of mineral concentrates that put a brake on Freeport’s mining operations.[1] On early April of 2017, Freeport agreed to convert its CoW into an IUPK, but only under some terms and conditions,[2] resulted in the government action to grant Freeport a short-term or temporary IUPK for 6 (six) months until October 2017. One of the crucial terms and condition asked by Freeport to agree with the Government to grant its IUPK was to ensure that the IUPK able to provide the same legal certainty as provided by the CoW.

Meanwhile, to the date, Freeport and the government are still in negotiation process. Provided that the negotiation is succeeded, it will be converted to the official IUPK, contrarily, when it failed, Freeport will continue its CoW with the government until the end of contract (2021).

The Obligation to Divest Shares

As a Foreign Direct Investment Company, Freeport is also obliged to divest its shares to Indonesian party, whether to the central government, regional government, or state-owned companies. Currently, the proportion of shareholders in Freeport Indonesia are as follow:

– 81,28% held by Freeport McMoRan,(Freeport holding company);

– 9,36% held by PT Indocopper Investama; and

– 9.36% held by the Indonesian government.

According to GR No. 1/2017, the obligation to divest shares to Indonesian party is within 5 years period. Article 97 (1) stated:

[1] http://www.thejakartapost.com/news/2017/03/31/freeport-accepts-govt-terms.html

[2] ibid.

“Holders of IUP and IUPK from foreign investment, after 5 years of initial production, must divest its share gradually, so that in the tenth year, Indonesian party has 51% (fifty one percent) share for the least.”

Pursuant to the Article 4 of Ministerial Decree of Energy and Mineral Resources No. 09/2017 (“MD 9/2017”), the divestment should be offered to Indonesian parties within 90 calendar days since 5 years of its production at the latest, with a hierarchy as follows:

a. the Central Government through the Ministry;

b. the Regional Government;

c. State-owned and regional government-owned company; and

d. Indonesian private entity.

Those Divestment of Shares are deemed to have successfully done when the IUP/IUPK holders have conducted procedures set forth by the MD 9/2017:

– Deed of Sale and Purchase of shares, signed by the Parties (Article 11 point 1);

– Payment and transfer of shares have been done (Article 11 point 2);

– Minutes of meeting concerning the payment and transfer of shares, signed by the Parties (Article 11 point 2);

– Submit reports on Divest of Shares to the Ministry through the General Director, forwarding to Governor and Mayor (Article 12);

– IUP/IUPK holders, which have successfully divest its share, is obliged to submit its Composition of Shares to Ministry through the General Director, forwarding to Governor and Mayor (Article 13).

In compliance to the divestment of shares regulation, on late March 2017, Freeport Indonesia has stated that they finally agreed to divest 51% shares to Indonesian government.[1] However, this statement is not yet proved by the abovementioned documentation and/or procedures set forth under MD 9/2017. Hence, Freeport is could not yet be deemed as to have complied the Mining Regulations until they proved to have finally divest 51% of its shares and convert its CoW into an official IUP/IUPK.

[1] https://www.theinsiderstories.com/jonan-freeport-agrees-to-divest-51-shares-to-indonesia-govt/