JAKARTA - Indonesia's Bumi Resources and India's Tata Power are closing in on a US$1.3 billion deal that promises to give the Indian energy concern a 30% stake in two big Indonesian coal mines, Kaltim Prima Coal (KPC) and Arutmin. If completed, the blockbuster sale would represent the second-largest corporate deal ever in Indonesia.
It would also on the surface appear to breathe new life into the country's moribund mining industry, which is badly underperforming because of unresolved regulatory uncertainty. The proposed deal significantly comes while investor attention focuses on an ongoing parliamentary debate concerning amendments to Indonesia's 40-year-old mining law and its controversial contract of work (CoW) investment framework.
Tata has three months to complete the transaction, and any deal will likely require it to share the cost of future expansion at both mines. Bumi stands to net a tidy $685 million from the minority-stake sale of assets it only recently acquired from big Western energy concerns. In 2003, Bumi paid British oil giant BP and Australian mining company Rio Tinto $500 million for a 100% stake in KPC.
Bumi bought its 100% stake in Arutmin from Australian mining giant BHP Billiton for $185 million in two tranches, entailing an 80% stake in 2001 and the rest in 2004. The two mines produced an aggregate of 53.5 million tons of coal in 2006, 95% of which was exported. Bumi is currently Indonesia's largest and Asia's third-largest coal producer.
It's also one of Indonesia's most politically connected companies, controlled by the family members of Aburizal Bakrie, coordinating minister for people's welfare and poverty alleviation. PT Bakrie & Brothers, which previously invested in hotels and tourism, was one of Indonesia's biggest corporate debtors in the wake of the 1997-98 Asian financial crisis. With a helping hand from the government, it has recently diversified out of the hospitality business and now has strategic assets in the oil, gas and mining sectors.
Bumi is now one of Indonesia's most profitable and expansionary corporations. Its net profits last year hit $222 million on sales of $1.85 billion, up substantially from its 2005 profit level of $123.3 million. Bumi's shares are up almost 50% so far this year, in line with booming global coal prices, which have risen more than 30% this year. Indonesian coal fetches about $55 per ton in global markets.
India's Tata requires a steady supply of coal to fire two plants that will soon come online as part of its Mundra mega-power project, which is under construction. Tata company executives have justified the risky venture by saying that burning high-quality Indonesian coal will generate cost savings, improve efficiency and give it protection from fluctuating global coal prices. They said 4 million tons of Indonesian coal is capable of producing the same amount of power it would take 6 million tons of Indian coal to generate.
The proposed $1.3 billion transaction also includes a 29.98% shareholding in three other Bumi-owned coal concerns, namely PT Indocoal Kalsel Resources, PT Indocoal Kaltim Resources and 300 shares in Indocoal Resources (Cayman) Ltd.
Bumi's mining assets have been highly sought after. Last year it offered to sell full ownership in both its mines for $3.2 billion to Borneo Lumbung Energi, a shell company owned by Indonesian investment bank Renaissance Capital. That sale was eventually scrapped, a move related to Renaissance's reported concerns about declining production at the mines - though it had failed to raise the $2 billion in capital it needed to complete the agreed transaction.
That botched deal was a stark reminder of the regulatory uncertainty that still looms over Indonesia's entire mining industry - a risk that presumably could still scupper the Tata sale. Indonesia is one of the world's biggest producers of minerals and metals, with major gold, copper, nickel and tin mines operated by both foreign and local enterprises. The country is the world's biggest coal producer, with 2007 production forecast at 183 million tons, of which 134 million tons is forecast to be exported. Production for 2008 is projected to increase to 198 million tons, about 145 million of which will be exported.
Although Indonesia's House of Representatives recently passed a new Investment Law aimed at leveling the playing field for local and foreign investors, the fate of the mining sector rests on a long-awaited new mining bill aimed at replacing the 1967 Mining Law and its current CoW framework. Regulatory uncertainty intensified with the implementation of a regional autonomy law in 2001, which transferred authority over issuing licenses for mining concessions from the central government to local administrations. (Oil and natural-gas concessions were exempted under the autonomy law.)
From a business perspective, the new mining law could represent the most important piece of legislation since the end of the Suharto era in 1998. Legislators apparently favor a new "agreement" arrangement to replace the CoWs, where local governments would have the power to issue mining licenses and investors would have no resort to independent arbitration in the event of a contractual dispute - as they may under the current system.
There are concurrent rumors that nationalistic legislators aim to ban exports of unprocessed ores, which would represent a death blow to hopes that the new law will attract more foreign investment. A group of major mining companies has already issued a statement urging the government to retain the existing CoW system to avoid creating any "obstacles" to new investments.
Successive Indonesian administrations have failed to attract enough foreign investment, technical expertise and managerial resources to extract more of the country's mineral wealth, crucially when global commodity prices are soaring. Vested interest groups have long manipulated loopholes in mining regulations for their own particular interests.
Indonesia's mining sector was one of the country's biggest revenue earners under former strongman Suharto's 32-year tenure. Then, massive amounts of foreign investment were pumped into the sector, primarily because of government flexibility that allowed production contracts to be signed before any major exploration had been carried out.
The risks and investments were previously shouldered largely by foreigners, rather than by wealthy local investors, who have developed a habit in recent years of swooping in only after big mineral deposits have been discovered. Several first-generation CoWs that in recent years have come up for renewal have forced big multinational mining companies to sell their majority stakes in invested operations at fire-sale prices to local companies. Bumi in particular has profited hugely from the controversial practice.
Both BP and Rio Tinto were required to divest their 51% holding in the KPC mine to Indonesian interests by the end of 2002, because of a stipulation in their original CoW that the mine must eventually revert to local control. The agreement did not specify details concerning who would be entitled to buy the shares other than the stipulation that a partial holding must be transferred to the government.
Invoking the new autonomy laws, the East Kalimantan provincial administration assumed the right to represent the government and demanded that the two foreign investors sell their stake in KPC to it. After a protracted and bitter dispute over pricing and other issues with local authorities, Rio Tinto and BP eventually lost and sold their stakes on slightly more favorable terms to Bumi. Bumi's purchase of BHP Billiton's Arutmin mine represented another government-enforced divestment, where Bumi secured funding from the state-run workers' pension fund and state-owned Mandiri Bank to finance the $150 million purchase.
That local-over-foreign precedent has recently steered multinational mining concerns clear of new Indonesian ventures, even at a time when surging global demand, sparked largely by China's and India's growing appetites for commodities, is outstripping available supplies. Australian mining giants BHP Billiton and Rio Tinto both currently cannot deliver enough copper and nickel to meet their growing global orders, and both companies have indicated plans to spend more on exploration activities than they jointly spent last year.
Nonetheless, Rio Tinto said this week that a possible $1.3 billion investment in an Indonesian nickel mine was contingent on winning what it vaguely referred to as a new government "accord". Meanwhile, BHP Billiton reportedly has interest in investing in two major coal mines in Kalimantan, but has put the plans on hold because of the continued regulatory uncertainty looming over the entire mining sector.
That they maintain any interest at all in Indonesia is indicative of surging global demand. Both companies have endured particularly tough times in Indonesia. Rio Tinto spent an estimated $8 million on exploration activities in Central Sulawesi, but was forced to sell its gold-mining interests in 2005 for a mere $800,000. Across the bay in North Sulawesi, BHP Billiton sold its copper mine for $2 million after spending an estimated $27 million on exploration. The bargain-basement buyer in both cases: Bumi.
Bumi now plans to pay off its total outstanding debt of about $1 billion and plans to spend another $1 billion to bring on stream by 2010 two new copper and gold mines it owns on Sulawesi with the $1.3 billion proceeds of the proposed Tata Power transaction. And Bumi also has its eye on other forced divestment deals, including Newmont Nusa Tenggara (NNT), the US mining giant's gold and copper venture in far-flung West Nusa Tenggara.
NNT is obliged through a provision in its CoW to divest the first 7% of its 31% stake in the Batu Hijau gold mine by next March. Politically connected Bumi is in a joint venture with the provincial government and Sumbawa Regency to bid for the shares. According to news reports, big US hedge fund Farallon Capital, which owns a controlling stake in Indonesia's biggest bank, BCA, is likewise sniffing around a potential deal.
With those forced foreign divestments in the cards, and indications that Indonesia's new mining law could be more prohibitive than the current investment framework, it seems clear that India's Tata Power is taking on an enormous risk. In a statement, Tata recently described the two Bumi-owned mines it hopes to take minority stakes in as "world-class assets". But the fact that those same assets were only recently stripped from foreign investors that owned majority stakes, it would seem, should temper Tata's hopeful expectations.Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at