Bill Guerin, Jakarta – The forced sale of one of the world's biggest coal mines appears set once again to damage Indonesia's reputation severely as a destination for mining investment and is likely to leave investors with the knowledge that vested interests, manipulation and harsh government disputes leave them devoid of legal certainty when it comes to doing business.
The British-owned energy giant BP and Rio Tinto, through its Sangatta Holdings Ltd (Australia), announced this week that they have agreed to sell off their stakes in the country's most profitable coal-mining company, PT Kaltim Prima Coal (KPC), to Indonesian-owned PT Bumi Resources, controlled by the Bakrie Group.
The purchase price of US$500 million is a whopping $322 million less than the two were offered a year ago and only slightly more than the $450 million a year that the mining company contributes to Indonesia's export revenues. BP and Rio Tinto will get $250 million in cash and Bumi Resources will also take on KPC's debt. The sale appears to leave East Kalimantan's regional government, which had staged a bitter legal fight for the mine, out in the cold and still considering further strategy.
While the sale appears to bring to an end an astonishing and protracted saga of conflict of interest among KPC, the East Kalimantan regional administration and the central government in Jakarta, it is certain to discourage international investors who thought the fall of Suharto as Indonesia's dictator in 1999 after 23 years in power would create a more rational investment climate. It has not done so, nor has it helped the Indonesian Mining Association, which has been warning for months that the country's mining industry is bleeding to death.
The long-running dispute began 21 years ago when Rio Tinto, in partnership with BP, secured a contract to exploit coal in Sangatta, the capital of East Kutai regency and a jungle village with some 600 inhabitants on the island of Borneo. It cost $1 billion to build the mine and associated infrastructure and pay for the 7,900-square-kilometer concession. Ultimately KPC would become Indonesia's second-biggest coal producer, exporting some 17 million tonnes of coking coal from 10 open-cast mines last year. The mine, employing 4,000 people, ships its high-quality black gold to steel mills and power utilities in Japan, South Korea, Malaysia, Taiwan and Hong Kong.
KPC makes an estimated $8 per ton, producing net profits of some Rp2.5 trillion (US$297 million) a year and pays the government 13.5 percent in royalties. Remaining reserves are estimated at 500 million tons, good enough for at least another 20 years of continuous extraction – a veritable money machine.
Under the terms of the original contract, signed with what is now the state-owned mining company PT Tambang Butkit Asam, the mine was required to eventually revert to Indonesian control although the original contract did not specify details of the parties entitled to buy the shares other than a stipulation that part of the shares would be transferred to the "government".
As late as 1999, KPC had offered 30 percent of its shares to the government for $175 million. In December of that year, out of the blue, the East Kalimantan provincial administration offered to buy the 30 percent at the same price but nothing further was heard until July 2000 when the then-minister of finance, Rizal Ramli, announced that the government would not buy the KPC shares and KPC should sell to the East Kalimantan administration.
In December 2000 KPC offered 37 percent of its shares at $216 million. The government insisted on divestment in full and eventually, in March 2002, both parties settled on $822 million for 51 percent ownership.
Eventually, however, regional autonomy was hastily introduced in January 2001 and the East Kalimantan provincial administration suddenly gained clout, claiming the right to represent the government and demanded to be first in line to buy the shares. Led by Brigadier-General (retired) Suwarna Abdul Fatah, the governor of East Kalimantan, Kalimantan immediately sued the central government, BP Indonesia and Rio Tinto at the South Jakarta District Court. His administration is believed to have the financial backing of David Salim of the Salim Group of companies, owned by one of Indonesia's powerful political and business families.
The court duly issued an interim ruling freezing divestment and threatened to exercise garnishment over the 51 percent of shares due for divestment, confiscate KPC's movable goods and, astonishingly, ownership of the Rio Tinto and BP shares at KPC. Among assets put under the court's control were the working interests in the Tangguh liquefied natural gas project in Papua province owned by BP and the assets of BP's Tangguh partner, state-owned oil and gas firm Pertamina, in a tower block in South Jakarta.
Jakarta, in a move to attempt to end the dispute, allocated 31 percent to the administration of East Kalimantan and the remaining 20 percent to the state-owned Tambang Bukit Asam. However, neither of the parties could pay and they demanded that the price be renegotiated. The government quickly announced that it was extending the divestment date up to June 30, 2002, and the court revoked its interim rulings.
Last August, KPC offered 51 percent for $419.22 million and on October 31, two local companies, Perusda Melati Bhakti Satya and Perusda Pertambangan dan Energi Kutai Timur, were officially assigned by Jakarta to acquire 31 percent of the divested shares. However, PT Tambang Bukit Asam, which produces only 10 million tonnes per year from four open-cast mines, yet again could not raise the cash for the 20 percent share it had bid.
Last month Energy and Mineral Resources Minister Purnomo Yusgiantoro warned that KPC would be declared in default if proved to be in breach of the original contract calling for divestment.
The Ministry of State-Owned Enterprises (SOEs), run by Laksamana Sukardi, took over the KPC case from Yusgiantoro's ministry on April 21. Sukardi warned of "strict measures" against KPC if the company did not comply with Article 26 of the contract. This states that KPC must divest a total of 51 percent of the company to Indonesian entities by the end of 2002.
Bumi Resources, part of a conglomerate owned by the Indonesian Chamber of Commerce chairman, Aburizal Bakrie, started life as Bumi Modern in 1973 and became a major player in the hotel and tourism sector. In 1998, however, the company, citing adverse economic conditions, shifted its core business to oil, natural gas and mining and changed its name.
When BHP-Billiton became the first to meet its divestment obligation under Indonesian law by selling down its 80 percent interest in PT Arutmin, the fourth-largest coal-mining company in the world, Bumi Resources snapped it up in 2001. It was alleged that Bumi Resources had used funds from state-run workers' insurance firm Jamsostek on deposit in Bank Mandiri to pay for the $148 million deal. As PT Bakrie and Brothers Tbk already owned the remaining 20 percent equity in PT Arutmin, Indonesia's biggest coal mine was back in Indonesian hands.
The two Arutmin mines in South Kalimantan, Satui and Senakin produce about 11 million tons of coal a year, which is shipped to its Asia-Pacific markets. The coal goes straight out to barges in a deepwater port facility, North Pulau Laut Coal Terminal, owned by Arutmin, unlike the KPC operation, where coal is carried 24 kilometers on a wide open conveyor belt to the port.
In the meantime, the squabble went on for KPC. Only this week the provincial government (PEMDA) in East Kalimantan threatened to shut down the KPC operational site, alleging the company used state-owned coal deposits in East Kalimantan as collateral for a loan worth $73 million.
Clearly the two multinational resources companies were wearying of the continued squabble. Insiders say Bumi Resources approached BP with an offer that persuaded the British energy giant to get out of mining altogether. Rio Tinto, clearly averse to being left as the underdog in Indonesian hands, was quick to follow suit and agree to the deal.
Djoko Darmono, secretary general of the Ministry of Energy and Mineral Resources, on the same day announced that the divestment of 51 percent of KPC shares would proceed as planned despite the change in shareholders.
Sukardi claimed on Tuesday that the government was surprised by the announcement of the sale. "We will summon Rio Tinto and BP to explain why they suddenly decided to sell their stakes in KPC," he told the press.