Finance & Projects
Jakarta | Singapore
Client Alert
April 2014
Licensing of coal/mineral trading and
processing/refining activities - more devil in more
detail
On 19 November 2013, with little fanfare or publicity, the Minister of Energy
and Mineral Resources issued Regulation No 32 of 2013 ("Regulation 32")
which primarily regulates the granting of special mining permits for companies
who do not own a mine, but who wish to carry out coal/mineral trading or
processing/refining activities.
Regulation 32 provides a set of detailed requirements not only for those
wishing to apply for trading or processing/refining licences, but more
importantly imposes a number of new restrictions on the carrying out of those
activities. The activities of trading and processing/refining had, for companies
who themselves did not own a mine, been left largely unregulated in the past,
so the new requirements imposed by the Government demonstrate the
Government's continued desire to ensure its presence is felt at all levels of the
mining value-chain.
Coal/Mineral Trading Licences
Background
The 2009 Mining Law foreshadowed that the Government was going to take a
more hands-on approach to regulating the activities of coal/mineral traders that is, companies which bought and sold coal and minerals, but which were
not themselves companies that owned a mine. That law made reference to
such traders being required to hold a Production Operation Mining Business
Licence (IUP-OP) specifically for transportation and sale.
Despite the fact that a number of traders have been granted IUP-OP
specifically for transportation and sale over the last few years, this has
happened in the absence of a full regulatory foundation. Regulation 32 now
provides that missing foundation: laying out in detail the requirements for
companies wishing to apply to obtain an IUP-OP specifically for transportation
and sale, but more surprisingly, imposing some strict limitations on the scope
of the business activities of these licence holders.
Application requirements
Those trading companies that in the past have applied for IUP-OP specifically
for transportation and sale will know the extensive list of administrative and
technical requirements that the Government, as an interim measure pending
the issuance of the regulatory framework for trading companies, required to
be fulfilled. Regulation 32 now formalizes a lot of these requirements, and
adds additional requirements that need to be fulfilled in submitting an
application. Some of the important (and in some cases, potentially
problematic) requirements to note are as follows:
Finance & Projects

The trader must submit a cooperation agreement with the relevant
proposed supplier of the coal/miners, which may be a mine owner, a
holder of processing/refining licence or another trading company,
provided that the Minister/Governor/Regent who has authority over that
supplier provides a recommendation letter. The cooperation agreements
must provide the key commercial details, including quantity and pricing,
quality characteristics and must refer to the relevant Government
benchmark pricing. It is important to note that the list of potential suppliers
does not include Contract of Work/Coal Contract of Work companies
("CoW/CCoW Holders") (and we have commented on these features
separately below).

Where the proposed supplier is a mine owner, a copy of the relevant
mining licence must be submitted and that mine owner must hold a Clean
and Clear certificate for its mining licence (although strictly as drafted, this
Clean and Clear certificate requirement also applies to proposed suppliers
which holders of IUP-OP specifically for transportation and sale or IUPOP specifically for processing/refining, which is nonsensical as these
companies are not subject to the Clean and Clear verification process);

In addition to demonstrating that the supply side of the trade has been
confirmed with a cooperation agreement with a legitimate supplier, the
trader must also submit a cooperation agreement between itself and the
domestic or foreign buyer of the coal/minerals. The same key commercial
terms as are required for the supply-side cooperation agreement are
similarly required for the sell-side cooperation arrangements.

The trader must submit its work program and budget, and listing of
equipment required to carry out the proposed trading activities.

Where the trader has, for the purposes of the application, put forward a
mining company holding an IUP-OP as the proposed supplier, the
application must include data on the reserves, an annual production plan
of the mine owner, the last 2 years of work program and budgets of the
mine owner that have received the requisite approval, copies of the
approved feasibility study and environmental permits which have been
"legalized by the competent agency" and proof of payment by the mine
owner of its deadrents and royalties for the past five years.

The trader must also fulfil certain financial requirements, including
provision of its latest audited financial statements (or for new companies,
provision of the unaudited financial statements) and a reference from a
Government bank and/or a national private bank.
Issuing Authority
The issuing authority for the licence follows the usual division of authority
(depending on whether the hauling and sale activities are cross-Regency,
cross-Province or export), provided further that irrespective of the
geographical reach of the trading and hauling activities, where the holder of
the special IUP is a foreign investment (PMA) company, the licence will be
issued by the Minister.
Term of trading licence
The licence will be granted for a period of between 3 to 5 years, and is
extendable on an evergreen basis (provided that the each extension period
cannot exceed 3 years).
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Limitations on sourcing of coal/minerals by trading companies
When issued, the trading licence will specifically state the relevant source
mines/named traders from which the trader can purchase coal/minerals. If a
trader wants to source coal/minerals from another supply source not
mentioned on its licence, the trader will need to apply for an amendment to its
licence.
There are similar mechanisms provided for any plan by the trader to increase
the hauling and sale capacity. This indicates that the licences granted under
Regulation 32 may prescribe a certain volume of sales, and if the trader
wishes to exceed that volume, a further amendment is required.
The trader can only source coal from mine owners that have been issued with
a Clean and Clear certificate for their relevant mine. This will therefore act as
another very strong incentive for all mine owners to have themselves included
on the Clean and Clear list and fulfil all administrative requirements necessary
to obtain their clean and clear certificate.
Whilst the new regulations allow a trading company to source coal from
another licensed trading company, interestingly Regulation 32 provides that
the supplying trader must be one whose licence was issued by an issuing
authority which is different to the issuing authority which has issued the
purchasing trader's licence. For example, a trading company who has a
licence issued by the Minister cannot source coal/minerals from another
trading company who similarly has its licence issued by the Minister, but can
source from trading companies who have their licences issued the
Regent/Mayor or the Governor. It is not entirely clear what these limitations
are intended to protect against.
Rights and obligations of trading companies
Traders are entitled to build and/or use hauling and sale facilities, among
other things, stockpile, terminal or special jetty.
Trading companies are required to submit annual work program and budgets,
and monthly, quarterly and annual activity reports.
Trading companies must comply with any onshore value adding requirements
imposed the Government, and must sell the coal/minerals with reference to
the Government benchmark prices.
Changes of shareholding in trading companies and other
corporate actions
Prior to Regulation 32, MEMR issued Regulation No. 27 of 2013 regarding
Procedure for Divestments and Change of Investment Particulars in Mineral
and Coal Mining ("Regulation 27"). Based on Regulation 27, certain
corporate actions of holders of IUP-OP specifically for transportation and sale
would require prior approvals from the relevant IUP issuing authority and
these corporate actions include share transfer, amendment of articles of
association, change of director/commissioners, etc. Regulation 32 appears to
strengthen the concept introduced by Regulation 27 and requires prior
approval of the relevant issuing authority before any share transfer in holders
of IUP-OP specifically for transportation and sale occurs.
Temporary licences for mined coal and minerals
Regulation 32 recognises 2 types of temporary licences to deal with situations
where coal and minerals are mined ancillary to some other main activity:
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1. Temporary hauling and sale licence
A temporary hauling and sale licence is a licence granted to a mining
company during its exploration or feasibility stages to sell coal/minerals
extracted as part of those activities (e.g. bulk sampling/test pit activities or
trial production).
The licence can only be issued one time, is not extendable, and is granted
for a specified quantity of coal/minerals. The licence is granted by the
Regent/Mayor (where the coal/minerals are excavated within one
Regency), the Governor (where the coal/minerals are excavated crossRegency but within one Province) or Minister (where the coal/minerals are
excavated cross-Province, contiguous to another country or in the
territorial sea area).
The holder of the licence must pay production royalties on the
coal/minerals sold, and perhaps most controversially, the coal/minerals
must be sold domestically.
2. Mining Business Licence (IUP) for sale
An IUP for sale is a licence granted to a company which is not in the
mining business (e.g. a road construction company, a seaport developer
etc) which excavates coal/minerals as part of its activities (e.g. as part of
construction activities). The licence is required whether or not the nonmining entity wishes to ultimately sell the coal/minerals excavated, or
whether they want to use the coal/minerals excavated for their own
construction activities.
The relevant authority to grant the licence follows the same division of
authority as applies for the temporary hauling and sale licence.
The other requirements for this licence are very similar to the licence for
temporary hauling and sale: namely the licence is issued one time only, is
not extendable, is granted for a specified quantity of coal/minerals,
production royalties are paid if the coal/minerals are sold or used, and the
coal/minerals must be sold domestically.
Coal/Mineral Processing and Refining Licences
Regulation 32 also lays down the requirements for companies wanting to
establish stand-alone companies (i.e. companies which do not themselves
own a mine) to carry out coal/mineral processing or refining.
Issuing Authority
The determination of which level of Government issues the processing and
refining licence depends on a range of factors starting from the geographic
location of the raw commodities being processed or refined, through to the
foreign investment status of the processing company or its source supplying
mine.
The Minister will issue the licence where:
4

the raw commodities being processed/refined are imported;

the mining licence for the source mine supplying the raw commodities
was itself issued by the Minister;
Licensing of coal/mineral trading and processing/refining activities - more devil in more detail April 2014
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
the location of the source mine is in a Province different to that where the
processing/refining facilities are located;

where the processing/refining facilities are located in an area that
straddles two Provinces; or

where the processing/refining company is a foreign investment (PMA)
company.
The Governor will issue the licence where:

the mining licence for the source mine supplying the raw commodities
was itself issued by the Governor;

the location of the source mine is in a Regency different to that where the
processing/refining facilities are located (but both fall within the same
Province);

where the processing/refining facilities are located in an area that
straddles two Regencies (but both fall within the same Province).
The Regent/Mayor will issue the licence where:

the mining licence for the source mine supplying the raw commodities
was itself issued by the Regent/Mayor;

the location of the source mine is within the same Regency as the
processing/refining facilities.
Sourcing of raw commodities
The processing/refining company can source raw commodities from mine
owners holding IUP-OPs, as well as from holders of other processing/refining
licences.
A processing/refining company will also be entitled to source raw commodities
from trading companies who have had their trading licence issued by the
same issuing authority. For example, the holder of a processing/refining
licence issued by the Minister can purchase raw commodities from a trading
company who has had its trading licence issued by the Minister.
As with traders, it is important to note that the list of potential suppliers does
not include CoW/CCoW Holders (and we have commented on these features
separately below).
Licensing process
Processing and refining activities involve a two stage licensing process: firstly
a Principle Licence, followed by the final IUP-OP specifically for processing
and refining.
For the Principle Licence, an extensive list of administrative, technical,
environmental and financial requirements must be met. These follow much the
same philosophy as with the trading companies - namely providing
documentation showing a source of supply of raw commodities from properly
licenced suppliers.
It should be noted that obtaining the final IUP-OP specifically for processing
and refining does not mean that a processing/refining company can
commercially carry out its activities. Regulation 32 provides that the activities
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Licensing of coal/mineral trading and processing/refining activities - more devil in more detail April 2014
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can commercially be commenced after fulfilling feasible operation
requirements based on commissioning evaluation and obtaining an approval
from the issuing authority of processing/refining licence. So, another approval
from the issuing authority must be secured by processing/refining companies,
although it is not clear in what form the approval will be issued.
Term of licence
The Principle Licence is granted for a period not greater than 3 years, and is
extendable one time only for a one year period. Extensions are only allowed
where there remain outstanding land acquisition or licensing issues.
Accordingly, there is a clear desire from Government to ensure that once a
Principle Licence is issued, the holder gets on and starts the development of
the project.
For the permanent licence, the term is a maximum of 20 years, which can be
extended twice for 10 years each time.
Rights and obligations of processing/refining companies
The obligations imposed on processing/refining companies follow the same
structure as explained above for traders: namely any changes in source of
supply or capacity requires an adjustment to the licence, and there are
requirements for regular work program and budget approvals and submission
of reports on activities.
Changes of shareholding in processing/refining companies and
other corporate actions
Similar to IUP-OP specifically for transportation and sale, Regulation 32
further emphasizes the need for securing a prior approval of the relevant
issuing authority before any share transfer occurs in a company holding a
IUP-OP specifically for processing and refining (which has been previously
regulated under Regulation 27). Interestingly, however, it appears that no
such approval is required for a share transfer when the company is holding
only a Principle Licence.
Sanctions for non-compliance
Regulation 32 sets out the usual set of administrative sanctions for noncompliance: namely written warning, a suspension of activities and ultimately
the revocation of the trading licence or processing/refining licence.
Status of Contract of Work/Coal Contract of Work
holders
The most striking of the requirements governing the IUP-OP holders
specifically for trading and processing/refining is that the list of suppliers from
whom these IUP-OP licence holders can source coal/minerals does not
include CoW/CCoW Holders. This would appear therefore to restrict these
IUP-OP holders from procuring coal/minerals from CoW/CCoW Holders.
However, the transitional provisions of Regulation 32 provide that if a
CoW/CCoW Holder wishes to enter into cooperation with the holder of an IUPOP specifically for transportation and sale or an IUP-OP specifically for
processing/refining, then the CoW/CCoW Holder must follow the provisions of
Regulation 32. There would seem therefore to be an inherent contradiction,
as this transitional provision suggests that CoW/CCoW Holders can in fact
supply to the holders of IUP-OP specifically for transportation and sale or the
holder of an IUP-OP specifically for processing/refining.
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Licensing of coal/mineral trading and processing/refining activities - more devil in more detail April 2014
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www.bakermckenzie.com
We have discussed the contradiction with senior officials from the Ministry of
Energy and Mineral Resources who have indicated that these special IUP-OP
holders are in fact permitted to source coal/minerals from CoW/CCoW.
For further information please contact
Luke Devine
Foreign Legal Consultant
+62 21 2960 8600
[email protected]
Norman Bissett
Foreign Legal Consultant
+62 21 2960 8678
[email protected]
Muhammad Karnova
Partner
+62 21 2960 8699
[email protected]
Andika Sefatia Mendrofa
Associate
+62 21 2960 8508
[email protected]
Transitional Provisions
As mentioned above, a number of licences for trading and processing/refining
activities were issued prior to the introduction of Regulation 32. This new
regulation now provides that those licences must, by 19 November 2015, be
adjusted in accordance with this regulation.
Regulation 32 does recognize that CoW/CCoW Holders may already have
entered into trading or processing/refining arrangements with stand-alone
entities. The regulation provides that those existing contractual arrangements
remain valid until their expiry, but must be adjusted to be in accordance with
the provisions of Regulation 32 by 19 November 2015. However because
Regulation 32 appears not to allow cooperation between these CoW/CCoW
Holders and the trading or processing/refining companies, it is not entirely
clear what sort of "adjustment" needs to be made.
Conclusion
Hadiputranto, Hadinoto & Partners*
The Indonesia Stock Exchange
Building, Tower II, 21st Floor
Sudirman Central Business District
Jl. Jendral Sudirman Kav. 52-53
Jakarta 12190
Indonesia
www.hhp.co.id
Regulation 32 does add significant bureaucracy to activities that were
previously very much the subject of light touch regulation. Whilst some may
argue that the Indonesian Constitution requirements for the State to manage
its natural resources for the best interests of the people gives the Parliament
and the Government the necessary legal foundation by which to over-regulate
upstream mining activities, it is hard to see how this principle can justify
Regulation 32's apparent over-regulation of downstream activities such as
trading or processing and refining.
Chew Chin
Principal
+65 6434 2638
[email protected]
.
Milan Radman
Local Principal
+65 6434 2641
[email protected]
Frans Sihasale
+65 6434 2617
[email protected]
Baker & McKenzie.Wong & Leow*
8 Marina Boulevard
#05-01 Marina Bay Financial Centre
Tower 1
Singapore 018981
www.bakermckenzie.com/Singapore
*Hadiputranto, Hadinoto & Partners and
Baker & McKenzie.Wong & Leow are
member firms of Baker & McKenzie
International.
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This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.
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Licensing of coal/mineral trading and processing/refining activities - more devil in more detail April 2014