We now see higher risks for mining companies and a bigger challenge for the government to issue constructive implementation regulations. Until then, the mining sector is likely to remain in a status quo.
Implementing regulations the real challenge. The government is now drafting four decrees on mining areas, mining services, refining and development and implementation, respectively. This is the real challenge for the government, to ensure that the regulations accommodate all parties’ interests, abide by all preceding and active laws, and are yet constructive.
Concern No. 1: mining services. While mining services must be provided by national companies, the unclear part is the ban on participation by associates. The ministry’s team is not clear on this matter.
Concern No. 2: transitional phase. Companies are now drafting mining plans until the end of their concessions for submission to the government. These plans will form one of the bases for discussions with the government. The companies would need to convince the state of the benefits of their undertakings.
A bigger certainty is that the extension options on these CoWs and CCoWs will not be valid and that holders must apply for IUP (Izin Usaha Pertambangan, the new mining licences) at the end of their concessions. Among listed companies, Inco Indonesia stands the highest risk of changes to its CoW, in our view, specially on its mining area relinquishment and possibly higher contributions to state revenue.
Concern No. 3: what happens with KPs? KPs (Kuasa Pertambangan, existing mining rights) have not been mentioned in the law, and they would be governed by ministerial or government decrees. Ministerial circulars will be passed soon.
Concern No. 4: mining and state reserve areas. The law stipulates that mining must only be carried out within designated mining areas to be determined by the government and in consultation with Parliament. Mining of these state reserves could provide an additional 10% net profit to the state.
Maintain Neutral on coal mining sector and Underweight on mining sector. As we have understood previously, the government is trying to engineer a level-playing field between it and investors. We now see higher risks for mining companies and a bigger challenge for the government to issue constructive implementation regulations. Until then, the mining sector is likely to remain in a status quo. However, in the long run, we believe the new law would have positive implications for state-mining companies. Bukit Asam remains our top pick, while we see the highest risks for Inco Indonesia. CCoW companies could also see changes to their CCoWs, but the impact would not be very severe, in our view.
(edited by Moderator)
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