Indonesia is to take more of the profits from its vast mineral resources by limiting foreign ownership of mines in a move likely to scare off new investment in the world's top exporter of thermal coal and tin. Under new rules announced on the energy ministry's website, Indonesia will force foreign firms to sell down stakes in mines by the 10th year of production and increase domestic ownership to at least 51 percent.
Southeast Asia's largest economy contains some of the world's richest mineral deposits and its fast-growing mining sector accounts for more than a tenth of GDP. Grasberg on eastern Papua island is the world's largest gold mine. It was not immediately clear if the regulation, effective from February 21, will apply only to new investors or also to existing mining investors such as Freeport McMoRan Copper & Gold Inc and Newmont Corp.
"Holders of mining business permits and special mining business permits, in terms of foreign investment, are required to divest the shares gradually 5 years after production, so in the 10th year the shares are at least 51 percent owned by Indonesian entities," the regulation stated. After steep rises in commodity prices over the last decade, Indonesian politicians have become increasingly vocal in demanding better deals with mining companies, many of which were struck in the era of former autocratic leader Suharto.
The requirement comes as the government is renegotiating contracts with Freeport and Newmont, the leading foreign metals miners in the country. "Miners such as Bumi Plc and Freeport who operate under the previous 'contracts of work' licensing system will be required to shift to the new 'mining business licenses' when the contracts expire," said Liberum Capital.
The 2009 mining law was aimed at boosting investment in mining and metals processing, but its supporting regulations have not gone down well with the industry, and new investors still face risks such as policy reversals, local community demands, a tortuous permit process and poor infrastructure. "The government regulation ... is impossible for foreign mining investors. It's impossible if in only 10 years after production they have to divest 51 percent of their stake in the mines," said Syahrir Abubakar, executive director of the Indonesian Mining Association.