The Indonesia Stock Exchange is proposing to allow, for the first time, public offerings by and listings of mineral and coal exploration companies even though they have no revenue history.
Given Indonesian exploration activity has almost ceased entirely, any initiative that may make it easier for exploration companies to obtain capital is to be welcomed.
It should be recognized, however, that the impediments to new exploration activity in Indonesia are actually less about access to capital and more about fundamental policy and regulatory issues facing the local mining industry; particularly, when it comes to foreign investor participation in exploration activity. Accordingly, it must be questioned whether or not allowing the listing of exploration companies will, by itself and without other reforms, lead to any material increase in local exploration activity.
In this article, the writer will review the proposal to allow public offerings by and listings of exploration companies before turning to the bigger issue of why implementation of this proposal will not, by itself, necessarily lead to any material increase in local exploration activity.
The listing requirements of the Indonesia Stock Exchange (“IDX”) are set out in IDX Regulation No. I-A re Listing of Shares and Equity-Type Securities Other than Shares Issued by a Listed Company (“IDX Regulation I-A”).
IDX Regulation I-A imposes various general requirements on all applicants for IDX listing which must be met unless applicants fall within certain specialized categories that are the subject of different requirements.
Special IDX listing requirements currently apply to certain mining companies only. These special IDX listing requirements are set out in IDX Regulation No. I-A.1 re Listing of Shares and Equity-Type Securities Other than Shares Issued by a Listed Company in the Field of Minerals & Coal Mining (“IDX Regulation I-A.1”).
1 Bill Sullivan, Senior Foreign Counsel with Christian Teo & Partners and Senior Adviser to Stephenson Harwood LLP.
2 Bill Sullivan is the author of “Mining Law & Regulatory Practice in Indonesia – A Primary Reference Source” (Wiley, New York & Singapore 2013), the first internationally published, comprehensive book on Indonesia’s 2009 Mining Law and its implementing regulations.
3 Copyright in this article belongs to Bill Sullivan and Petromindo.
4 This article may not be reproduced for commercial purposes without the prior written consent of both Bill Sullivan and Petromindo.
5 This article appeared in the December 2018 – January 2019 edition of Coal Asia Magazine.
IDX Regulation I-A.1, however, only applies to the following companies:
(a) companies carrying on mineral or coal mining business activities; or
(b) holding companies which have so-called “Controlled Companies” (i.e., subsidiaries) carrying on mineral or coal mining activities and:
(i) where the relevant holding company has, on a consolidated basis, an earned revenue contribution of more than 50% from its Controlled Companies carrying on mineral or coal mining activities, including processing and refining activities (if any) (“Primary Mining Revenue Contribution”); or
(ii) where the relevant holding company does not presently have a Primary Mining Revenue Contribution but, based on financial projections, will have a Primary Mining Revenue Contribution in not more than four years (together, “Prospective Listed Mining Companies”).
Prospective Listed Mining Companies do not include companies which only carry on mineral or coal processing and refining activities or sales and transportation activities.
A Prospective Listed Mining Company may only proceed to submit an IDX-listing application if the Proposed Listed Mining Company itself or its Controlled Company holds a Special Operation Production Mining Business License (“IUPKOP”) or an Operation Production Mining Business License (“IUPOP”) and has:
(a) carried out sales activities;
(b) carried out operation production activities but has not commenced sales activities; or
(c) not commenced operation production activities.
IDX Regulation I-A.1 also requires that a Prospective Listed Mining Company must have:
(a) minimum combined net tangible assets and deferred exploration costs, based on an audited financial report, of not less than:
(i) Rp100 billion for the purposes of listing on the IDX Main Board; or
(ii) Rp5 billion for the purposes of listing on the IDX Development Board;
(b) complied with all regulations applicable to its mineral or coal mining business activities;
(c) all required licenses for its mineral or coal mining business activities;
(d) proven or probable mineral or coal reserves based on a report issued by a competent party;
(e) Clean & Clear Certificate status for its IUPKOP or IUPOP; and
(f) a completed Feasibility Study that meets the requirements of IDX Regulation I-A.1.
IDX Regulation I-A.1 effectively confines Prospective Listed Mining Companies to (i) operation production mining companies only rather than to both exploration companies and operation production mining companies, (ii) with substantial assets and (iii) existing revenue or medium-term prospects (i.e., within four years) of revenue.
While it is possible for holders of IUPKOPs/IUPOPs to carry on exploration activities as well as operation production activities, dedicated exploration companies will, typically, only have Exploration IUPKs/IUPs because of the significantly increased dead rent cost associated with IUPKOPs/IUPOPs compared to Exploration IUPKs/IUPs.
Even without the IUPKOP/IUPOP requirement, very few dedicated exploration mining companies would be able to satisfy the minimum asset and revenue requirements of IDX Regulation I-A.1.
Mineral and coal exploration is a notoriously risky business with a very low success ratio and characterized by long lead times between discovery and commercial operation with an attendant revenue stream. While this may explain why the IDX has not previously allowed the listing of mineral or coal exploration companies, excluding exploration companies from IDX listing and access to the public offering market unquestionably adds to the difficulty of being a mineral or coal exploration company in Indonesia as it limits these companies’ access to the capital required to carry on mineral or coal exploration activity.
Given Indonesia’s geological profile as one of the world’s most prospective mining destinations, it is surprising that Indonesia has not previously followed in the footsteps of other mineral rich countries, such as Australia and Canada, which have long-allowed mineral and coal exploration companies to list on their respective stock exchanges.
In early November, however, the IDX’s Director of Corporate Valuation announced that the IDX was currently drafting revisions to IDX Regulation I-A.1, which revisions will allow, for the first time, mineral and coal exploration companies to list on the IDX (“Revised IDX Regulation I-A.1”). Revised IDX Regulation I-A.1 is expected to be issued in early 2019.
Although Revised IDX Regulation I-A.1 is not yet publicly available, even in draft form, reports in the business media have suggested that Revised IDX Regulation I-A.1 will allow IDX listings for companies which:
(a) hold Exploration IUPKs/IUPs only; and
(b) are projected to start generating revenue within six years rather than four years as is presently the case for holders of IUPKOPs/IUPOPs (“EC IDX Listing Proposal”).
1. Assessment of EC IDX Listing Proposal
1.1 EC IDX Listing Proposal in Isolation: Assuming the Revised IDX Regulation 1-A.1 is eventually issued in substantially the form that has been reported, the EC IDX Listing Proposal should make it possible for at least some mineral and coal exploration companies to list on the IDX.
The requirement for projected revenue generation within a maximum of six years means, however, it will only be those exploration companies which have already (i) established the existence of promising mineral or coal deposits on their mining concessions and (ii) carried out at least a preliminary feasibility study indicating the likely commercial viability of the development and exploitation of those mineral or coal deposits that are able to meet the requirements of Revised IDX Regulation 1-A.1. Accordingly, the EC IDX Listing Proposal should be properly seen as being directed at facilitating capital raising to fund the transition from mineral/coal exploration to mineral/coal exploitation rather than facilitating capital raising for pure mineral/coal exploration as such.
It should also be pointed out that, once a mineral or coal exploration company has (i) established the existence of promising mineral or coal deposits on its mining concession and (ii) carried out at least a preliminary feasibility study indicating the likely commercial viability of the development and exploitation of the relevant mineral or coal deposit, it becomes somewhat easier for the exploration company to obtain, from private investors, the financing required to fund the transition to mineral/coal exploitation.
Notwithstanding the above, financial institutions in particular have shown great reluctance to provide financing to Indonesian mineral and coal exploration companies even where the existence of promising mineral or coal deposits has already been established. Financial institutions almost always require that, at a minimum, the relevant company has (i) an IUPKOP/IUPOP with Clean & Clear Certificate status and (ii) established the existence of a JORC compliant mineral or coal resource/reserve in order to qualify for financing.
To the extent then that the EC IDX Listing Proposal will provide a previously unavailable capital raising alternative for financing the transition from mineral/coal exploration to mineral/coal exploitation, the EC IDX Listing Proposal should offer Indonesian mineral and coal exploration companies a clearer and more certain path forward so long as their initial exploration activity is successful. Reducing the uncertainty associated with obtaining transition financing, if and when promising mineral or coal deposits are discovered, may be seen as a modestly positive step in terms of encouraging more exploration activity in Indonesia.
1.2 Possible Evidence of Renewed Government Commitment to Exploration: The real importance of the EC IDX Listing Proposal may be that it represents possible evidence of a growing realization, on the part of the Government, that the lack of new mineral and coal exploration activity in Indonesia has reached a critically dangerous point that has the potential to hold back the development of the local mining industry on a long-term basis.
While the EC IDX Listing Proposal is, in and of itself, a modest initiative only, it could be seen as forming part of a series of recent Government initiatives that, together, have the potential to increase local mineral and coal exploration activity. In this regard, the writer would highlight the (i) de facto conclusion of the Clean & Clear List IUP review and certification process in late 2017/early 2018, (ii) the February 2018 issuance of Minister of Energy & Mineral Resources (“MoEMR”) Regulation No. 11 of 2018 re Procedures for Granting Areas and Licenses for Reporting in respect of Mineral & Coal Business Activities (“MoEMRR 11/2018”), (iii) the third quarter 2018 resumption of tenders for mining business license areas and (iv) the September 2018 issuance of MoEMR Regulation No. 43 of 2018 re Procedures and the Pricing Mechanism for Divestiture of Shares in respect of Mineral and Coal Business Activities (“MoEMRR 43/2018”) (together with the EC IDX Listing Proposal, the “New Exploration Initiatives”).
The long running moratorium on the issuance of new Exploration IUPKs/IUPs (while the Clean & Clear List IUP review and certification process was being completed) (“Moratorium”), the non-availability of new mining business license areas and the need to do something about the much disliked divestiture obligation and, more particularly, the even more disliked divestiture price determination mechanism, have all been major impediments to new mineral and coal exploration activity, especially by foreign investors. MoEMRR 11/2018 and MoEMRR 43/2018 go some way to reducing if not eliminating these impediments.
Readers interested in learning more about the recent initiatives reflected in MoEMRR 11/2018 and MoEMRR 43/2018 are referred to the writer’s earlier articles on the same being (i) “Availability of New Mineral Exploration Areas – Necessary but Not Sufficient to Generate Significant Exploration Activity” , Coal Asia Magazine, April – May 2018, Petromindo and (ii) “Divestiture Obligation – Some Real Progress at Last”, Coal Asia Magazine, November – December 2018, Petromindo.
2. Work that Remains to be Done
2.1 Overview: As the writer has pointed out in Part 1 above, it is certainly possible to, collectively, view the New Exploration Initiatives in a positive light and as indicating a renewed interest on the part of the Government in promoting mineral and coal exploration activity after a long hiatus that dates back to the coming into force of the 2009 Minerals & Coal Mining Law and the announcement of the Moratorium. There are, however, at least two fundamental problems with the New Exploration Initiatives if they are, in fact, intended to start reversing the decline in local exploration activity. These problems are (i) the lack of any public Government commitment to new exploration activity and (ii) “unfinished business” in terms of revoking or amending existing regulations and policies that continue to overtly discourage new exploration activity.
2.2 Public Commitment to Exploration: The Government has not publicly announced any commitment to reversing the decline in local exploration activity nor has it outlined any comprehensive and credible policy to reverse the decline in local exploration activity based on the New Exploration Initiatives and other initiatives still to be introduced. Instead, it has left it up to exploration companies (both domestic and foreign) to “connect the dots” for themselves and “read into” the New Exploration Initiatives the Government’s possible commitment to reversing the decline in local exploration activity if that is, in fact, what is intended by the New Exploration Initiatives.
Given the (i) poor drafting of MoEMRR 11/2018 and MoEMRR 43/2018 (which means that these regulations are open to widely differing interpretations), (ii) the fact that the EC IDX Listing Proposal is still very much a “work in progress” and (iii) the unfortunate track record of the Ministry of Energy & Mineral Resources (“ESDM”) in revising, reversing and even cancelling outright only recently issued regulations in the mining sector (i.e., the well-established “flip flop phenomenon”), exploration companies will be understandably reluctant to place much reliance on there being a possible change in Government policy towards new mineral and coal exploration activity unless and until this has been announced at the highest levels of Government and supported by a comprehensive set of coherent, pro-exploration activity regulations.
The Government’s failure to publicly announce any commitment to reversing the decline in local exploration activity may be understandable, from a political perspective, given the Indonesian public’s apparently poor perception of mining related activity (especially where foreigners are involved) and the fact that Indonesia will have a Presidential Election in April 2019, with its associated potential for resource nationalist sentiment to become increasingly strident. However, this political reality does not overcome the need for greater certainty as to the Government’s intentions regarding exploration activity. Foreign exploration companies (which have long “written Indonesia off” as a “no go” destination for new investment) can hardly be expected to quickly change their negative view of Indonesia, as a reliable investment destination, in the absence of a very public and protracted campaign by the Government to promote new mineral and coal exploration activity.
The 2014 Government policy for the achievement of Indonesian energy independence and energy security by 2050, as set out in Government Regulation No. 74 of 2014 re National Energy Policy (“GR 74/2014”) (“National Energy Policy”), provides a good model for what is required in terms of public Government commitment to reversing the decline in local exploration activity. The National Energy Policy sets out clear objectives to be achieved and deadlines for achieving the same. The National Energy Policy likewise sets out a tolerably clear “road map” for achieving these objectives and deadlines.
With a “National Mineral & Coal Exploration Policy” in place, it would then be relatively easy for exploration companies and potential investors to see how the New Exploration Initiatives fit into an overall plan for achieving sustainable levels of new mineral and coal exploration activity in Indonesia. At the moment, however and in the total absence of anything that even remotely approaches a National Mineral & Coal Exploration Policy, the New Exploration Initiatives are in great danger of just being ignored as unclear and uncoordinated developments that may or may not reflect some greater Government commitment to reviving local exploration activity. Leaving it up to exploration companies to “connect the dots” for themselves is definitely not the way to go.
2.3 Revoking or Amending Existing Regulations & Policies: There are a number of existing ESDM regulations and policies that continue to overtly discourage new mineral and exploration activity. This is the case notwithstanding the progress represented by MoEMRR 11/2018 and MoEMRR 43/2018.
In November 2015, the Indonesian Forum for Mineral Exploration and Development Association (“EMD Indonesia”) made a very detailed, written submission to ESDM on the problems facing the local mineral exploration industry and what was required to “encourage a healthy and contributory exploration sector” in Indonesia (“2015 EMDI Submission”). The 2015 EMDI Submission highlighted, among other things, (i) the inability to make direct application for Exploration IUPs in the case of metal minerals and coal (“No Direct Application Problem”), (ii) the inappropriateness of the 25% divestiture requirement applicable to existing Indonesian exploration companies that are converted into PMA Companies as part of the process of being acquired by foreign investors (“EC Divestiture Problem”) and (iii) the onerous domestic processing & refining requirements which adversely impact decision making by metal mineral explorers as to the number, size and complexity of targets, even encouraging them to simply go elsewhere (“DP&R Problem”).
Despite, once again, starting to make available new mining business license areas, MoEMRR 1/2018 has not done anything to alleviate the No Direct Application Problem in the case of private sector exploration companies. Indeed, MoEMRR 11/2018 has very arguably made the situation worse by discriminating against private sector exploration companies in favor of State-owned Enterprises (“SOEs”) and Regional Government-owned Enterprises (“BUMNs”) which can now directly apply for special mining business license areas without having to go through a tender process and while excluding private sector participation except as minority shareholders or in the event there are no interested SOEs or BUMNs.
In a similar fashion, MoEMRR 43/2018 has sought to address the inequitable nature of the divestiture price where designated Indonesian parties exercise their first priority right to acquire the divestiture shares of operation production PMA Companies. However, MoEMRR 43/2018 has left wholly unaddressed the EC Divestiture Problem.
Finally, the DP&R Problem continues to be an issue in the case of those metal minerals (eg, copper) where no sound business case can be objectively made for full domestic processing and refining. Exploration companies are not going to devote scarce capital to exploring for minerals that, if discovered, cannot be commercially exploited on an economically feasible basis given the attendant obligation to build a smelter.
The lack of action on the No Direct Application Problem, the EC Divestiture Problem and the DP&R Problem only serves to highlight the Government’s failure to address, in a comprehensive and credible fashion, the existing regulatory and policy impediments to encouraging more local exploration activity. This may be seen as the inevitable result of the lack of any carefully thought through Government policy to promote new exploration activity.
The absence of a National Mineral & Coal Exploration Policy makes it impossible to know whether or not the Government even understands the need to address the No Direct Application Problem, the EC Divestiture Problem and the DP&R Problem far less whether or not the Government has any timetable for doing so.
SUMMARY AND CONCLUSIONS
It may be the case that the Government now regrets having neglected the mineral and coal exploration sector for so long. It may even be the case that the Government has finally recognized that Indonesia and Indonesians as a whole risk being materially worse off, over the long term, as a result of the lack of new mineral and coal exploration activity.
The EC IDX Listing Proposal, if and when it is reflected in a workable Revised IDX Regulation I-A.1 in 2019, is a good idea. The same may be said for many aspects of MoEMRR 11/2018 and MoEMRR 43/2018 in terms of making available new mining business license areas and reworking divestiture price determination respectively.
What Indonesia lacks, however, is the Government’s public commitment to encouraging new exploration activity supported by a comprehensive and credible National Mineral & Coal Exploration Policy for achieving the same.
Political considerations may mean a piecemeal approach of miscellaneous regulatory changes, that leaves it up to individual local and foreign exploration companies to “connect the dots” for themselves, is all that can be realistically expected from the Government at least for the time being.
The absence, though, of a comprehensive and credible National Mineral & Coal Exploration Policy (or, indeed, any National Mineral & Coal Exploration Policy at all) makes it likely that the EC IDX Listing Proposal, along with the other New Exploration Initiatives, will do little to reverse the parlous decline in local mineral and coal exploration any time soon.
This article has been written by Bill Sullivan, Senior Foreign Counsel with Christian Teo & Partners and Senior Adviser to Stephenson Harwood LLP. Christian Teo & Partners is a Jakarta based, Indonesian law firm and a leader in Indonesian energy, infrastructure and mining law and regulatory practice. Christian Teo & Partners operates in close association with international law firm Stephenson Harwood LLP which has ten offices across Asia, Europe and the Middle East: Beijing, Dubai, Hong Kong, London, Paris, Piraeus, Seoul, Shanghai, Singapore and Yangon.