Project Financing On Mining Sector

Drafted By: Nasfiahtul Istani Daely, S.H.

Reviewed By: Noverizky Tri Putra, S.H., L.LM. (Adv.)

The project financing on mining sector is a financing technique on mining projects with a high level of risk and income, where the scope of mining activities is the exploitation of mineral and coal processing which consists of stages such as exploration, feasibility studies, construction, mining, processing to mining with the use of mining products or maintenance of mining products (Vide: Article 1 point 6 of the UU No. 3/2020).

In practice, there are several project financing platforms in the mining sector, as follows:

a. Company Capital (Equity)

Own capital or equity capital may come from the issuance of shares or derived from the company’s retained earnings (retained earnings).

b. National Strategic Project (PSN Project)

Executive officers are now empowered to prioritize and accelerate certain infrastructure projects identified as PSN Projects. One of them is a mining project that can be initiated by the government, state-owned or private companies. Example: The government established a coal gasification plant in Tanjung Enim, South Sumatra that was initiated by PT Bukit Asam Tbk, that became the PSN Project. PSN project status has administrative and licensing facilities, such as Exploration Mining Business License (IUP), Special Mining Business License (IUPK), Production Operation IUP, Production Operation IUP specifically for processing and/or refining, Production Operation IUP specifically for transportation and sales as stipulated in Perpres No. 109/2020 and PP No. 42/2021.

c. Initial Public Offering (IPO)

IPO is a process of distributing a certain portion of shares by selling its value to the public market. Therefore, from such sale of shares, it shall provide an additional financing for the company with the following process:

• Implementation of the General Meeting of Shareholders (GMS) to obtain IPO approval from the shareholders;
• Appointment of supporting professions (underwriter, public accountant, capital market notary, legal consultant, appraiser, other professions);
• Appointment of supporting institutions;
• Registration statement with the Financial Services Authority (Otoritas Jasa Keuangan/OJK);
• Statement of registration of the public offering has been effective from OJK;
• Stage of offering securities on the primary market;
• The stage of listing securities on the Indonesia Stock Exchange and trading on the secondary market.

d. Banking Credit

Banking credit can be in the form of syndicated and non-syndicated loans. Syndicated loans are loans that are given jointly by several banks to certain debtors in the form of investment loans or working capital loans for mining companies. In practice, a syndicated credit agreement between creditors and debtors must regulate the detail of rights, obligations and its responsibility between the parties. For example, when a default occurs, sufficiently a default occur for one creditor means a default to another creditor. One of the intrict that might occured during the transaction is to identify the law and jurisdiction if one syndicated participants is a foreign entity that is subject to foreign law. Meanwhile, non-syndicated loans are bilateral loans, which are loans that are only financed by one bank with a smaller loan scale because they only work with one bank.

In principle, lending uses the 5C prudential principle, namely Character, Capacity, Capital, Collateral, and Condition of Economy provided that the OJK stipulates the regulation of the Maximum Lending Limit/legal lending limit through POJK No. 38/POJK.03/2019 to avoid non-performing loans.

e. Foreign Loans and Domestic Loans

Foreign Loans and Domestic Loans must comply with the principles of being transparent, accountable, efficient and effective, prudent, not accompanied by political ties, and not having a content that can disrupt the stability of State security (Vide: Article 2 of PP No. 10/2011).

f. Grant

An action in where a donor delivers an item free of charge to other party, where the grantor being able to withdraw the grant’s object for the benefit of a person that receiving the delivery of goods based on his/her decision as regulated in Article 1666 – Article 1693 of the Civil Code. Each mining project can receive any transfer of mechanism of grant related to anything such as land, shares or other tangible and intangible assets carried out by the grant mechanism and become the company’s assets or capital.

g. State Revenue and Expenditure Budget (APBN)/Regional Expenditure Revenue Budget (APBD)

The provision of APBN/APBD to a mining project is the right of the central and regional governments that is recognized as an addition to the value of the net worth (Vide: Article 3 paragraphs 4 and 5 in conjunction with Article 13 of UU No.1/2004).

h. Private Public Partnership (PPP)

PPP as an alternative financing mechanism in the provision of public services through long-term cooperation contracts, between:

1. Government or local government as regulator;
2. Banks/consortiums as funders; and
3. Private parties/BUMN/BUMD as Special Purpose Company.

From the project financing that mentioned above, it should be noted that the mining project financing always pays attention to:

1. How can mining companies receiving financing be able to manage mining projects well;
2. How big is mineral content is in the mining project;
3. How long is the Mining Operation Permit valid for the company.

In addition, it is necessary to note that the specific factors that being a concern or threat that are quite high for Banks/Lenders related to the approval of financing transactions are as follows:

1. There is government approval for mining companies to continue their activities to obtain bank financing.
2. Before the Bank can proceed with financing approval, the Bank usually proceeds to investigate the Legal Due Diligence and Finance Due Diligence from the corporate sector, licenses, government approvals, current capital conditions, debt and other loans, third party agreements, financial recapitulation, financial statements and other elements that must be examined very carefully.
3. The holders of IUP and IUPK are required to submit all the data obtained from exploration and production operations to the Minister of Energy and Mineral Resources, governors, or regents/mayors in accordance with their respective authorities (Vide: Article 111 of the Permen ESDM No. 16/2021).
4. The holders of IUP, IUPK, or Mining Services Business License (IUJP) are required to submit plans for the purchase of capital goods, equipment, raw materials, and other supporting materials as well as imported products sold domestically and goods to be imported by themselves to the Minister of Energy and Mineral Resources for the Work Plan and Annual Budget (Vide: Article 162 paragraph 5 PP No. 96/2021).
5. The holders of Production Operation IUP and Production Operation IUPK in the context of foreign company, after 5 (five) years from production, are required to divest their shares in stages, therefore in the tenth year their shares are at least 51% (fifty one percent) owned by Indonesian Participants (Vide: Article 2 of Permen ESDM No. 43/2018).
6. The holders of Production Operation IUP and Production Operation IUPK are required to offer divestment shares to Indonesian Participants within a period of no later than 90 (ninety) calendar days from 5 (five) years of production in stages to the Government through the Minister of Energy and Mineral Resources, Provincial Government and local Regency/City Government; BUMN and BUMD, and National Private Enterprises (Vide: Article 4 of Permen ESDM No. 43/2018).
7. The holders of Production Operation IUP and Production Operation IUPK who have completed the Share Divestment are required to submit a share change composition to the Minister of Energy and Mineral Resources through the Director General with a copy to the governor and regent/mayor (Vide: Article 13 of Permen ESDM No. 43/2018).
8. In practice, bank financing will require mining companies to provide guarantees, therefore Bank has legal immunity to continue its approval of financing transactions.

As the project financing mechanism described above, there is a financing structure in mining financing projects, which are as follows:

a. Revolving Loan

• Includes flexible financing tools and has a loan interest rate that can fluctuate.
• The purpose is to fund the mining company for working capital needs and to continue the company operations.
• Debtors are given a limit on the maximum amount (ceiling) of loan funds that can be withdrawn.
• Funding requirements depend on cash flow and withdrawals and repayments can be made in stages.

b. Standby Loan

This loan is standby to deal with a development in financial condition or an insurance fund that will be available when the project is completed.

c. Fiduciary

Fiduciary guarantees can be tangible consisting of movable objects such as mining machines, mining heavy equipment, motor vehicles and other valuables used in mining facilities, as well as immovable objects such as land, buildings, merchandise (inventory) and so on. The coal as an object of inventory can be guarantee in a coal project financing in accordance with the provisions of Article 6 letter c of UU No. 42/1999, the fiduciary guarantee deed includes a description of the type and quality of the coal. The process of the occurrence of fiduciary guarantees through the stages of imposition of fiduciary guarantees, stages of registration of fiduciary guarantees (Vide: Article 4 jo. Article 5 jis. Article 6 of UU No. 42/1999).

d. Hedging

Hedging transactions is a method to anticipate losses arising from exchange rate fluctuations, aiming to reduce the risk that is expected to arise from transactions or investments made by investors or companies to minimize unexpected business risks. Hedging is regulated in the Minister of Finance Regulation No. 36/PMK.08/2017 concerning Hedging Transactions in Government Debt Management.

To facilitate the project financing mechanism, the following is a simple explanation of the project financing structure:

From the above scheme, the explanation are as follows:

1. The project finance funding can come from investments or loans to Project Company that carry out mining projects.
2. Investment can come from shares or loans financing in debt form.
3. In the case of project financing using an investment or loan scheme, the Project Company will bind an agreement with the Contractor (the holder of the Construction Services Business License) as the party carrying out the construction of mining project facilities through a Construction Contract or an agreement with the Operator that has IUP to carry out mining work.
4. When the project begins, the Project Company will bind itself with an Input Supply Contract (a long-term fuel or material supply agreement), an offtake contract (a legally binding contract related to transactions between buyers and sellers of mining products) with related parties.
5. In addition, the Project Company will bind itself with a Concession Agreement or License with the government through a Borrow-to-Use Forest Area Permit (Izin Pinjam Pakai Kawasan Hutan) or an engagement with the community in case mining land is owned by community, the Project Company will go through a Land Borrowing-Use Agreement (Perjanjian Pinjam Pakai Atas Tanah).

Furthermore, it should be noted that in project financing, guarantees are one of the considerations whether or not a project financing could be accepted. Collateral can be in the form of a fiduciary guarantee as described above, or a guarantee for shares. Based on M. Yahya Harahap’s book, in his book Limited Liability Company Law (pages 274-275), shares can be pledged according to their form as movable property with the following conditions:

1. Shares can be used with a pledge or fiduciary guarantee;
2. Pledge of shares or fiduciary guarantees on shares are recorded in the Register of Shareholders or a special register; and
3. The voting rights of the shares used remain with the shareholders.

Apart from shares, collateral can be in the form of land rights that can be encumbered with mortgage rights, namely property rights, cultivation rights, and building rights (Vide: Article 4 of UU No. 4/1996). If the debtor is in default, then the right of the first mortgage holder to sell the object of the mortgage through a public auction and to take repayment of his receivables from the proceeds of the sale (Vide: Article 6 of UU No. 5/1960).

Furthermore, there are also Banking Guarantees with the following types of guarantees, as follows:

a. Performance Bond

Bank guarantee issued for the purposes of the work or project undertaken by the Bank guarantee applicant.

b. Advance Payment Bond

Bank guarantee issued to guarantee the down payment that has been received by the Bank guarantee applicant for the work being carried out.

c. Maintenance/Warranty Bond

Bank Guarantee issued for the needs of the applicant for the work that has been completed.

d. Retention Bond

Bank Guarantee issued for the purpose of guaranteeing an amount of value/money which has an amount of around 10% to 30% of the project value.

e. Standby Letter of Credit (Standby L/C)

A form of guarantee from the Bank issuing the Standby L/C to the Beneficiary against the possibility of default on the Applicant (the guaranteed party/standby L/C applicant), in this case the Bank’s Debtor/Customer.

In principle, the world depends on the coal sector even though developed countries are pushing policies related to renewable energy, but coal-fired power plants cannot just be stopped. Indonesia, with its large potential of natural mineral resources, is expected to have regulations that facilitate the successful financing of coal projects for the success of long-term economic development, but still prioritize environmental factors and their consequences in every coal landing platform offered.

Legal Basis:

• Law of the Republic of Indonesia Number 5 of 1960 concerning Basic Regulations on Agrarian Principles (“UU No. 5/1960”).
• Law of the Republic of Indonesia Number 8 of 1995 concerning the Capital Market (“UU No. 8/1995”).
• Law of the Republic of Indonesia Number 4 of 1996 concerning Mortgage Rights on Land and Objects Related to Land (“UU No. 4/1996“).
• Law of the Republic of Indonesia Number 10 of 1998 concerning Amendments to Law Number 7 of 1992 concerning Banking (“UU No. 10/1998”).
• Law of the Republic of Indonesia Number 42 of 1999 concerning Fiduciary Guarantees (“UU No. 42/1999“).
• Law of the Republic of Indonesia Number 1 of 2004 concerning State Treasury (“UU No. 1/2004”)
• Law of the Republic of Indonesia Number 40 of 2007 concerning Limited Liability Companies (“UU No. 40/2007”).
• Law of the Republic of Indonesia Number 3 of 2020 concerning Amendments to Law Number 4 of 2009 concerning Mineral and Coal Mining (“UU No. 3/2020“).
• Law of the Republic of Indonesia Number 9 of 2020 concerning the State Revenue and Expenditure Budget (“UU No. 9/2020“).
• Government Regulation of the Republic of Indonesia Number 10 of 2011 concerning Procedures for Procurement of Foreign Loans and Receipt of Grants (“PP No. 10/2011”).
• Government Regulation of the Republic of Indonesia Number 96 of 2021 concerning Implementation of Mineral and Coal Mining Business Activities (“PP No. 96/2021”).
• Regulation of the Minister of Energy and Mineral Resources of the Republic of Indonesia Number 43 of 2018 concerning Amendments to the Regulation of the Minister of Energy and Mineral Resources Number 09 of 2017 concerning Procedures for Divestment of Shares and Mechanism of Determining the Price of Divestment Shares in Mineral and Coal Mining Business Activities (“Permen ESDM No. 43/2018“).
• Regulation of the Minister of Energy and Mineral Resources of the Republic of Indonesia Number 16 of 2021 concerning Amendments to Regulation of the Minister of Energy and Mineral Resources of the Republic of Indonesia Number 7 of 2020 concerning Procedures for Regional Granting, Licensing, and Reporting on Mineral and Coal Mining Business Activities (“Permen ESDM No. 16/2021”).
• Financial Services Authority Regulation Number 58/POJK.04/2017 Regarding Submission of Registration Statements or Submission of Corporate Actions Electronically (“POJK No. 58/POJK.04/2017”).
• Financial Services Authority Regulation Number 22/POJK.04/2019 concerning Securities Transactions (“POJK No. 22/POJK.04/2019”).
• Financial Services Authority Regulation Number 38/POJK.03/2019 of 2019 concerning Amendments to Financial Services Authority Regulation Number 32/POJK.03/2018 concerning the Maximum Limit for Loans and Provision of Large Funds for Commercial Banks (“POJK No. 38/POJK. 03/2019”).