Rio Tinto defends KPC sale, not pulling out of RI

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.