ESDM Regulation 7 of 2020 – Wins and Looking for More.

On the 6th March 2020, the Ministry of Energy and Mineral Resources (ESDM) issued Regulation 7 of 2020 on the procedures for granting licenses and reporting for the mineral and coal business. This quick informal review is based on a Google translation of the original 88-page regulation. I apologize for any omissions or errors that may accompany this review.

1. General Overview.

·    It would appear this regulation replaces ESDM Regulation 11 of 2018, and its numerous amendments, along with Regulation 48 of 2017. As such, it would seem to be an improvement to understand the regulation, with little change in content. This seems to be a missed opportunity to incorporate significant revisions to “push through” many of the well-recognised obstacles to stimulating investment in the mining sector.

·    This regulation deals with all types of business and commodities, but appears to skip over the aspect of small-scale community mining.

·    Overall, the regulation increases the Governments management control over the exploration, mining and smelting industries, and their service providers. This should be a positive move for the Director General to follow and report on the overall well-being and performance of the industry. It is herein suggested that a high degree of transparency, plus on-going training, may be required to maintain good business practice and good administrative practices.

·    The termination of the previous regulations, plus sections of this regulation rely upon further guidelines, determinations, stipulations, statutory provisions etc to be issued. The existing guidelines etc will remain valid so long as they do not conflict with this regulation.

·    It would seem this regulation does not take into account elements of the draft ombudsman law.

 2. Details.

Most of the articles reflect the original regulations. Only a select number of articles are commented upon here, wherein there may be other changes or points of interest for other observers.

·       Article 4 & 5 set out that new areas for tenement application are predetermined by the Governor or Minister, based on data or government research. This government approach towards “low hanging fruit” is a limited and short-term approach. This established government approach continues to not optimize the fundamentals underlying the shift in exploration outlook, in that creative new ideas and technology are the principals of stimulating exploration.

·       Article 14. The process to approve a new tenement area starts with the regent/ mayor, then Governor, then Director General, and final say by the Minister. This is positive in that there is good consensus towards issuing a new tenement. The negative impact is that there is some disincentive by creative prospectors to share their targeting concepts with the public.

·       Article 19 sets out a maximum of 1-month notification of auction, whereas a “minimum” of 1 month would tend to be more in line with good practices. Particularly as the auction process, and what follows, needs significant preparation time.

·       Article 23 defines the issuance of tenements into two (2) classes, that of less than 500Ha that excludes PMA, and greater than 500 Ha that includes PMA (foreign investment).

·       Article 25 stets out bid evaluation ranking, with 40% contribution technical prequalification and 60% with price quote. This suggests the ESDM is more interested in selling the tenements rather than seeking the best parties to explore and develop the projects into meaningful mines.

·       Article 27 reaffirms the ESDM’s authority to allocate the new tenements to the various State-Owned Enterprises (SOE’s). However, there continues to be no sanctions should the SOE’s fail to complete the administrative & financial obligations on time.

·       Article 39. After winning an auction, the winners need to apply for an exploration IUP/ IUPK within 5 working days, and must show work programs etc, along with proof of placement of seriousness bond. This bond is Rp 5 million for if area less than 40Ha, or Rp 150,000/Ha for larger areas. (Thus, estimate for 100,000 Ha area is about US$ 1 million). Note there are serious potential practical difficulties in seeking the return of the serious bond.

·       Article 41 sets out the IUP exploration periods, including 8 years for metallic minerals, 3 years for non-metallic minerals to do general survey, exploration and feasibility. This short time frame may suit some simple deposits, such as laterites, but is certainly a disincentive for more complex ore targets, particularly for large underground gold deposits etc. Again, this looks like the regulations are seeking low hanging fruit only.

·       Article 59 allows for applications for suspensions of time, and seems focussed on the mining side. This is an ongoing good feature, particularly as it is well known that exploration activities can be delayed due to local land access, but also due to sudden changes in regulations.

·       Article 62 sets out the minister’s appointment of provincial based Chief Mining Inspectors, who’s duties include issuing various supervising cards, approvals for a variety of mine operation works etc. Unfortunately, there is no mention of the source of budget for such activity. Past experience shows the provinces are responsible for operation budget, but the provincial government often do not approve adequate funds to support his initiative.

·       Article 64 continues with the existing regulations requiring changes in shareholdings, directors and commissioners to first seek approval from the ESDM. This is a good control mechanism for the ESDM. This is also a recognized factor in making fund raising and corporate compliance more restrictive, and thus less attractive for some investors in the mining sector.

·       Article 66 continues the practice that IUP / IUPK holders may not guarantee the IUP or IUPK, or its mining commodities to other parties. This is a good regulation to guide investment into good practices, but may require more clarification regarding forward sales and prepayments / loans based upon stockpiles.

·       Article 89 states that processing / refining permit holders can ask for only 1 change per year of their work plan (RKAB), unless for a force majeure situation, and sets out time limitations for such a requested change. This may make it difficult for such processing / refining industries to deal with commodity volatility or sudden changes in regulations that may impact on their business.

·       Article 100 on license revocation continues to include the responsible outlook in recognizing criminal violations committed by holders of IUP / IUPK based on court decisions. This is far more responsible approach than some of the proposed articles in the draft ombudsman law.