Indonesian Mining Industry Reacts to New Decree on Mineral Processing and Refining

February 20, 2012

“Decree 7” would ban concession holders and ore exporting companies from raw export of certain metal and non-metal minerals and stones after May of this year

Earlier this month the Minister of Energy and Mineral Resources issued Decree No.7/2012, “Adding Value to Minerals Through Processing and Refining Activities” (“Decree 7”). Decree 7 is already stirring the industry, particularly amongst concession holders and ore exporting companies.

At issue is that Decree 7 appears to move up the deadline at which mining companies and concession holders can no longer export raw ore, from 2014 to no later than May 2012. Concession holders had previously interpreted under Law 4/2009 regarding Mineral and Coal Mining (“Law 4”) that they had until 2014 to finalize their onshore processing and refining programs for the minerals produced from their mines, and until then they could still export raw ore. Decree 7 specifically prohibits export of ore or raw minerals beyond May 2012.

One question is whether Decree 7 contradicts Law 4 (which is ultimately a much higher regulation in the hierarchical order of regulations) and if Decree 7’s ‘new’ export deadline is enforceable. A further explanation from a senior official at the Directorate of Mineral Supervision and Development confirms that the new export deadline of May 2012 is indeed effective.

If Decree 7 holds up, ore exporting companies will have to immediately consider any contractual and legal repercussions. They will also need to urgently recalculate their budget and investments to be allocated for processing/refining activities. Decree 7 includes an attachment that sets out the 'minimum limit for processing and refining of minerals' and the rate differs from one mineral to another. Decree 7 imposes sanctions for failure to comply therewith, which includes temporary suspension of the mining activities and ultimately the revocation of the concession itself.

However, we are not convinced that this May 2012 deadline under Decree 7 will be strictly imposed. The Government is receiving a lot of inquiries and it will likely have to issue further directives. In the past, the Government has been known to re-consider the effective date of certain new regulations when an industry is found unprepared for the new requirements imposed thereunder.

Some of our doubts around Decree 7 are rooted in practical / industry considerations. Depending on the metal in question, the time and investment needed to build facilities to create fully refined metals is quite significant - not to mention the time required to secure permits / environmental studies and fulfill other requirements of installing this capacity. Moreover, it is questionable whether Indonesia even has the power infrastructure for a major uplift in metal smelting (much of which requires electrolysis). Metal mines would need to get serious very quickly about not just refining capacities but also captive power generations capabilities.

It is still quite early to predict the Government’s next steps - but some mining companies have told us that they will definitely bring this issue up for further discussion with the authorities. We will continue to monitor this issue. In the meantime, if you would like to discuss further, or would like an O’Melveny in-house translation of Decree 7, please reach out to any of the O’Melveny lawyers authoring this alert.

O'Melveny & Myers LLP is not licensed to practice law in Indonesia, and this Client Alert should not be construed as providing advice concerning the laws of Indonesia or of any other country or jurisdiction. The foregoing should not be construed as an opinion on the laws of Indonesia. Readers should consult with Indonesian counsel for legal advice on the matters addressed herein.

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