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Seven producers' CCoWs expiring in coming years

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Singapore — The fate of seven major Indonesian thermal coal producers is hanging in the balance amid government regulation uncertainties after a mining contract for one of the miners was revoked, stoking fears of a similar rejection for other contracts coming up for renewal in the next couple of years.

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According to local media reports, three coal mines operated by Tanito Harum were suspended last week after the Indonesian government revoked the firm's 20-year contract extension.

Some market players said the suspension of Tanito's mine operation is setting a precedence for the industry, and overall production might be affected without regulation clarity.

Seven other major coal producers are having their first generation Coal Contracts of Works (CCoW) mining licenses expire over the next five years. These producers include majors like Bumi Resources, Adaro Energy, Kideco and Berau.

As much as 70% of the total Indonesian production is accounted for by the CCoW miners. Indonesia produced about 528 million mt in 2018, exceeding its initial target of 485 million mt. This year, the country is targeting a production of 490 million mt.

A company source at one of the CCoW miners said they will "try to be organized and well prepared for the upcoming renewal."

"This will send a negative sign for investment and create uncertainties for longer-term investment, while production next year onwards might be impacted if there is no clarity on the issue," Hendra Sinadia, executive director of the Indonesian Coal Mining Association, told S&P Global Platts.

LONG-TERM PLAN DIFFICULT

Ratings agency Moody's said in a recent report that there has been no clear guidance from the government on the contract renewal, "which diminishes the ability of companies holding CCoWs, such as Bumi Resources and Indika Resources, to prepare long-term mine production and investment plans."

"Also, a price cap on thermal coal sales to domestic utilities limits the potential upside for Indonesian coal companies from the strengthening of coal prices, and will constrain miners' earnings," Moody's added.

In the case of non-renewal or revocation of such mining licenses of major producers like PT Bumi and PT Adaro, the impact will be huge due to the volume involved and the tax revenue received by the government, Vishal Kulkarni, associate Director of S&P Global Ratings, Analytical, said.

In April, Bumi Resources said its production target this year is around 88-90 million mt, while Adaro's production target for this year will be at around 54-56 million mt.

"In our base case, we expect the Indonesian government to look at the renewal of the licenses of these major coal producers, but such renewal will likely come with additional taxes for them to continue mining operations," said Kulkarni.

TANITO IMPACT

Tanito Harum's CCoW expired on January 14, and its contract extension was revoked after Indonesia's Corruption Eradication Commission (KPK) found that the extension was not in line with the mining law, a government official was said in late June.

Tanito did not respond to requests for comment.

Tanito mainly produced the Indonesian mid-calorific value 5,600 kcal/kg GAR grade, with annual production volume between 2-5 million mt, sources said.

Prices did not see a significant impact considering its production volume, and the supply impact on Japan as a major mid-to-high calorific value coal consumer should be minimal, an Indonesian producer said.

Last year, the Indonesian government said it was in the process of issuing a new regulation for coal miners, and planned to phase out CCoW and replace it with a special mining permit (IUPK).

-- Hui Min Lee, hui.min.lee@spglobal.com

-- Fred Wang, fred.wang@spglobal.com

-- Edited by Shashwat Pradhan, shashwat.pradhan@spglobal.com