The Bakrie Group: Coal Hard Cash and Chinese Whispers

By webadmin on 10:23 pm Dec 02, 2009
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Janeman Latul

To many observers, last month’s sale of a total 24 percent stake in copper and gold miner PT Newmont Nusa Tengarra to a consortium led by the Bakrie group is yet more proof of how powerful the politically wired conglomerate has become. But the deal, which could see the Bakrie’s end up with a controlling stake in the miner, also represents a major bid for the nation’s mineral wealth by the Chinese, analysts say.

On Nov. 23, PT Multi Daerah Bersaing, a consortium made up of Bakrie subsidiary PT Multicapital and three West Nusa Tenggara local governments clinched a second deal to take 14 percent of Newmont Nusa Tengarra (NNT), after securing 10 percent at the beginning of that month.

The victory saw the Bakrie-led consortium beat out the central government’s preferred partner for the lucrative asset after state miner PT Aneka Tambang suddenly pulled out of the negotiations.

Backed by $1.9 billion of Chinese loans, the consortium is now set to take the additional 7 percent to be divested next year. The remaining 20 percent is held by local company PT Pukuafu Indah, and the Bakrie-led group now looks set on taking that too, as part of its plan to eventually acquire a controlling stake in NNT.

The prize, NNT, is a subsidiary of US-based Newmont Mining. It owns the rights to the Batu Hijau mine in West Nusa Tengarra, and other proven copper and gold reserves. It is valued at a conservative $3.5 billion.

Some reactions to the stake sale were predictable. Aburizal Bakrie, the group’s patriarch, is a key backer of President Susilo Bambang Yudhoyono and the head of the Golkar Party. Not only does the sale to Bakrie and the local governments not “look good,” his detractors say, it has also robbed the central government of much-needed potential revenue.

Pri Agung Rakhmanto, an energy analyst at the Reforminer Institute, summed up many of the reactions when he called the sale of NNT to Bakrie consortium a “negative-sum game” for the nation. “What Indonesia’s government gets now is only tax earnings and royalties, nothing more.” It could have had the whole company and the mines, he said.

Marwan Batubara, head of the Committee to Save State Assets (KPKN) doubted the sale would benefit the three local governments in the consortium because they would be beholden to Bakrie interests.

“[In allowing the sale of Newmont to the Bakrie-led consortium] the central government has abandoned state-owned enterprises and the national interest,” he said.

Meanwhile, Dileep Srivastava, the senior vice president for investor relations at the Bakrie group’s PT Bumi Resources, which owns 99 percent of  Multicapital, couldn’t agree less.

“Bumi’s true strategic intent is to reclaim high-value, foreign-owned assets, take them back into Indonesia hands and grow them,” Dileep told the Globe. The Bakrie group’s Multicapital is 99 percent owned by Bakrie coal mining flagship PT Bumi Resources.

He said Bumi had already demonstrated its commitment when it took over a number of companies from foreign firms, including East Kalimantan’s PT Kaltim Prima Coal, South Kalimantan’s PT Arutmin Indonesia, and PT Herald Resources in Sumatra. “Despite this, Bumi doesn’t even get credit for this patriotic intent.”

However, as Dileep acknowledged, it is not only local governments and Bumi who will benefit from the divestment deal — but also the Chinese.

The Chinese government gained access to Indonesia’s lucrative mineral resource assets through a $1.9 billion six-year loan to PT Bumi Resources from its sovereign wealth fund, China Investment Corporation, in October.

Part of the money was used by Bumi to pay off the debt on its acquisitions of two coal miners and one coal contractor worth a total of Rp 6.2 trillion ($657 million), according to Bumi’s statement to the Indonesia Stock Exchange (IDX) in October. Insiders said the loan was also likely to be used to fund the recent Newmont purchase.

Referring to the loan as a “debt-like instrument” with a 12 percent coupon plus an internal rate of return of 19 percent annually, Dileep described it as more of a “strategic partnership” rather than a straight loan.

“This is the first of such agreements between the two nations,” he said. “What China needs from Indonesia is the supply of mineral resources, and Bumi has this, while Indonesia and Bumi need the access to loans and the coal markets,” Dileep said.

“There will be a future joint partnership to acquire Indonesian mineral resource assets. We have an agreement [with CIC] that on any Bumi investment plan above $75 million, we will give CIC the first right of refusal” to come on board as a partner, he said.

According to the International Energy Agency, China is easily the world’s biggest thermal coal importer, representing 46 percent of the total consumption of 5.1 billion tons of thermal coal in 2008. The nation is also the world’s No. 1 coal producer with total 2008 output at 2.2 billion tons.

Meanwhile, Indonesia, the world’s fourth-largest thermal coal producer in 2008, produced 245.4 million tons of coal but only consumed 70 million tons. Bumi, Asia’s single biggest producer of the fuel, is expected to make up more than a quarter of the country’s total production this year.

Sources close to the Bumi-CIC deal note that China’s move to support the miner came after it failed to take a stake in Australia’s BHP Billiton through its aluminum company Chinalco when public pressure in Australia caused the government to veto the deal.

Purbaya Yudhi Sadewa, an economist at the state-owned Danareksa Research Institute, said that with CIC’s huge war chest of funds, “the sky will be the limit for Bumi to acquire major mineral assets across Indonesia.”

Indeed, Bumi seems poised for a major resource grab.

The firm is currently in the driver’s seat to become an equal partner with BHP to operate a coking coal mine in the Maruwai area of Central Kalimantan. Backed by the Chinese, Bumi’s special relationship with BHP, which is Bumi’s sole marketer of Arutmin coal, could help it outmaneuver three other local contenders and clinch the deal, which is scheduled to be announced this month.

Meanwhile, PT Recapital Advisors, which is backed by the Bakrie group, is reported to be close to acquiring a major share in PT Berau Coal, the country’s fifth-largest producer, worth $1.5 billion. If Bakrie wins a controlling stake, this too would likely be put under Bumi Resources.

Many investors view the Bumi-CIC deal positively and, like Dileep, believe it is part of an unstoppable march to closer cooperation between the two countries.

Edwin Sinaga, president director of brokerage firm PT Finacorporindo Nusa, said the partnership could attract more big Chinese investors to Indonesia. This was especially likely to happen in the wake of the Association of Southeast Asian Nations free-trade agreement signed with China, which comes into affect on Jan. 1, he said.

“The flow of goods [between Indonesia and China] will have less barriers and mineral imports to China will have no stumbling blocks any more,” Edwin said.

Ban Yong Zhi, the third secretary for the economy at the Chinese Embassy, agreed. He told the Globe that Chinese companies were keen to begin investing in Indonesia and were looking forward to expanding here.

However, not all analysts are so upbeat about the partnership. They  note that Bumi’s high levels of debt could lead to it becoming a pawn of the Chinese if coal and other mineral prices dropped.

Norico Gaman, a mining analyst at PT BNI Securities, estimated Bumi’s current debt would be at 150 percent of its total equity by the end of the year. “This is extremely high compared to other coal producers in the region, and may cause Bumi to struggle to repay its debt to CIC, meaning the Chinese could end up becoming a major shareholder in the coal miner.”

CIC is expected to gain “at least a 5 percent stake” in Bumi by January as a result of the strategic partnership, according to a source close to the deal. Other shares in Bumi subsidiaries KPC and Arutmin are believed to have been pledged as collateral for the $1.9 billion loan.

“The high debt means Bumi needs to book strong financial performance in both revenue and profit by increasing its coal capacity production and acquiring other mineral resources companies, including Newmont, in order to help the company generate enough money,” Norico said.

If coal and mineral prices dropped and Bumi failed to secure this revenue, “then CIC could end up executing their rights to ultimately own a large portion of Bumi’s shares, up to 49 percent,” the most allowed under Indonesian law, he said.

Norico also warned that the Bumi-CIC deal could hamper the domestic supply of coal in the next few years, especially after both phases of the “fast-track” power generation program eventually came on line.

With as much as 20,000 megawatts of extra electricity generation up and running by as early as 2014, the majority of this as coal-fired plants, demand for coal could rise rapidly from its current rate. This could cause local supply problems if the ministry did not properly enforce domestic market obligations for miners, Norico said.

“We cannot let foreign nations like China end up benefitting from our coal resources, if we’re struggling to fulfill our own local needs,” he said.