Rio Tinto defends KPC sale, not pulling out of RI

The planned acquisition of coal mining firm PT Kaltim Prima Coal (KPC) from Rio Tinto and BP Plc. by Bumi Resources has surprised and infuriated many parties, including top officials of the Central and East Kalimantan governments. Lex Graefe, president of Rio Tinto Indonesia, defended the sale on Monday in an interview with The Jakarta Post reporter Fitri Wulandari.

Question: What is the reasoning behind the decision to sell all the shares to Bumi Resources?

Answer: We had a situation where BP Plc. wanted to sell its 50 percent share, because BP is not a mining company. Bumi Resources approached the company with an offer to buy 100 percent of the shares. We got to a process of negotiation to a price that was satisfactory for Rio Tinto to sell (its) 50 percent. The three parties have shared a common commercial interest.

Q: Coal mining is one of Rio Tinto's core businesses. Why did Rio Tinto make the decision and lose a potential 20 years of profit?

A: We have coal operations in other countries. In all our business, we make a decision either to operate an asset, buy an asset or sell an asset. In this case, the price was sufficient for us to think that we would make as much money for selling the asset as we would if we continued operating.

Q: But the price is lower than the agreed value of US$822 billion for 100 percent shares in KPC last year.

A: Yes, but no one had said they were going to pay that price. Even the East Kalimantan government said they wanted to conduct due diligence, because the price was too high. The price was set two years ago in different circumstances and processes. What we had here (was) an offer for 100 percent of the business in a relatively quick time, and the overall commercial package was satisfactory for us.

Q: Were they the only ones who made the offer?

A: There were some others who made offers, but I can't name them. We chose to have a discussion with Bumi, because they have had experience with PT Arutmin (coal mining firm).

Q: Some people suspect that Rio Tinto is backing Bumi Resources in buying the shares. What is your comment on this?

A: That is absolutely not true. There is absolutely no evidence that we are backing up Bumi Resources. We are selling the business and that's it. Why would we provide financial sources for Bumi Resources? If we wanted to control the business, we would stay and operate it ourselves.

Q: Last year, it was agreed that the KPC shares would be split 31-20 percent between the East Kalimantan government and state coal mining firm PT Tambang Bukit Bara. What happened to the agreement?

A: It is not true to say that we agreed to the 31-20 percent split. We signed a framework agreement with the central government, which allowed the central government to nominate two groups of buyers in early August 2002. One group was to receive 31 percent and the other group, 20 percent, but they had to nominate the buyers by Oct. 28, 2002.

After the deadline expired, the government announced their nominations, but they no longer had the right to do so. We continued negotiations and talked of giving them an extension so they could nominate the buyers, and we offered them a draft agreement for the extension. But we never got that plan finalized and it had already been going on for many months -- right up to May (2003).

We had agreed that the central government would have some right to nominate parties, but they didn't exercise their rights according to the agreement. So their rights are finished.

As part of the framework agreement ... it's now KPC's right to nominate who the shares will be sold to. We have to discuss that with the central government, but we have the right to nominate the parties.

We were talking to them about extending their rights and we got to a situation where another legal suit was instituted by the East Kalimantan government. So under the terms of the agreement, we can suspend the agreement. But the central government, the East Kalimantan government and PT BA (Bukit Asam) no longer have the legal right to buy the shares.

Q: East Kalimantan is planning to sue Rio Tinto, KPC, Bumi Resources and BP Plc. What is your comment?

A: It's too early to comment on this issue at the moment, as we haven't heard anything about it.

Q: It's rumored that Rio Tinto was upset with the developments on the divestment issue, and that this prompted Rio Tinto to sell the shares...

A: We weren't happy with the slow (divestment) progress, and we weren't happy with a number of disputes. Nobody likes to spend a lot of time and money in dealing with issues like that.

But that wasn't the primary reason for selling the shares because if you look at KPC around that time, despite the problems, KPC still operated as a successful company. It still supplied coal and we were still generating profit from the business.

We would much rather that the divestment process was more straightforward, that there weren't a lot of legal issues.

Q: What is going to happen with Rio Tinto's activities in Indonesia?

A: If the sales go ahead and are completed, we still have a gold mine, Kelian (Kelian Equatorial Mining, East Kalimantan), that is in the process of closing. We are continuing to support that process. We have two yayasan (foundations) that we continue to support, and we are continuing our exploration work. So we are continuing our activities in Indonesia.

But (the process from) exploration to production takes several years. From the time explorations start and the mine operates, it takes about 10 years. And at the moment, while we are still doing exploration, we don't have any projects that are ready to move into the feasibility study, constructional or production (phases).

It is unlikely that we are going to make a significant investment in Indonesia, but we are continuing our exploration work mainly for investment in the future ... I can't say when this will be, because it depends on how successful we are in exploration.

Q: So, Rio Tinto is not pulling out of the country?

A: No, a decision to leave Indonesia is not a cause of selling (shares) in KPC, and shouldn't be interpreted as part of a larger move.

Q: What is your view of the mining industry in Indonesia?

A: There has been very little investment in the mining industry, and it is continuing to decline. But it is not hopeless. Indonesia has significant mineral resources and capable people. You have many of the things required for a healthy mining industry.

The problem at the moment is that there is a lack of sufficient regulation. Everyone was told years ago that the mining law was going to be changed, but it has not yet changed. There were a number of regulations around the basic law that were going to be changed -- like the closure regulation, water quality regulation, that sort of thing -- that haven't been resolved.

So, you've got good resources, you've got the people. But you don't have regulation. I have to say that there aren't many foreign investors that have confidence in the Indonesian legal system.

Normally, when we have a regulatory problem, we go to the legal system to sort it out. If investors feel that the legal system does not provide rights for a fair hearing, they have nowhere to go. Thus, regulations and the legal system need to be addressed -- this will take some time.

But my concern is that, while those things are being fixed, at the same time, there will be a loss of jobs, expertise and careers. Because when we close the mine, people find it difficult to find work, as there are no new mines around.

There is a risk that before new investments come, much of the industry capability will be destroyed and it will be difficult to restart.