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Industry Overview: Indonesia Coal Mining Industry

 

In a country long renowned for its resource wealth, Indonesia has burst on the global mining scene in a big way over the past decade with huge reserves of coal, copper, gold and nickel. Over the past few years the mining industry has consistently contributed to almost 11% of GDP. In the second quarter of 2012, foreign direct investment soared to 56.1 trillion rupiah ($5.92 billion), over 16.3% of which was in the mining industry. Indonesia's mining industry value is expected to reach US$ 147bn in real terms by 2015.

Indonesia is the world's fifth largest coal producer, second largest coal exporter and the world's largest thermal coal exporter. It exported more than 350 million tonnes (MT) abroad in 2011. Coal production is expected to reach 816 million tonnes by 2015, an annual average growth of 17.8% from 2010 levels. With typically lower grade coal and lower transport and labour costs, Indonesia has become a popular source for emerging markets like China and India, while also acting as a major supplier for Japan, South Korea and Taiwan.

Moreover, the Government appears to have tried to diminish foreign investors ability to control mining companies actions through the prolonged divestment of ownership from nearly 100% to just 49%. This move is an interesting one that reflects the government's desire to retain Indonesia's natural resources within the country and also the country is seeking to increase participation by domestic investors in mining projects. The mining law provides that foreign capital-controlling shareholders must divest part of their interest in a mining concession company by the fifth year of production. At the end of ten years of production in Indonesia, foreign shareholders are allowed a maximum of 49% ownership.

With this, a South Korean consortium led by state-run Korea Resources Corp. (KORES) has bought a 30% stake in Indonesia's Kintap coal mine for $30 million, with KORES taking control of 15 percent of the stakes. The Consortium partners POSCO Energy and Aju Industry Company each have a 7.5% stake in the mine.

GMR Energy has already start mining activity at its coal mine in Indonesia from after it bought PT Barasentosa Lestari (PT BSL), a coal mining company in Indonesia, for about $100 million last year. It had also bought a 30% stake in Golden Energy for about $500 million. Golden Energy has coal reserves of over 860 million tonnes and coal resources of 1.9 billion tonnes.

Vallar, a resource investment group based in the UK has also bought a majority stake in Bumi Resources Ltd and Berau Coal Energy for US$3 billion. Australia-listed Exalt Resources Ltd has also secured rights to acquire ownership interest in six Indonesian projects of Singapore-based Odni Holdings Pte. Ltd. With a severe shortage of domestic coal supply, Indian private utility firm, Tata Power is also scouting for coal mines in Indonesia.

Despite the uncertainty in the regulatory environment, Indonesia appears to become a major player in thermal coal markets in the coming years. Low production costs are a major advantage for Indonesian coal producers. Coal mining will continue to drive growth in the industry given the aggressive expansion and acquisition plans of the coal miners in the country. 

 

(Source: Insight Alpha)
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Korea Resources Corp. (KORES)