Bloomberg News

Illegal Coal Trade at Indonesian Mine Said to Widen: Commodities

March 05, 2014

At one of the world’s largest coal mines in the Indonesian province of South Kalimantan, enough of the fossil fuel is being stolen every three days to fill a vessel almost the size of the Chrysler Building, according to two people with knowledge of the situation.

The illegal shipments are undermining global prices for thermal coal, already near a four-year low, and have prompted a London-listed stakeholder in the Arutmin mine run by Jakarta-based PT Bumi Resources (BUMI) to ask its lawyers to review the claims. The people who discussed the thefts with Bloomberg asked not to be identified because the details aren’t public.

Coal thefts across the Indonesian archipelago totaled about $6 billion last year, a local industry group estimates. Illicit mining at Arutmin is claiming about two million metric tons of coal each month, according to the people. Those volumes are valued at about $150 million at current prices and are bypassing a marketing contract for shipments with Glencore Xstrata Plc (GLEN), the world’s biggest exporter of the fuel, they said.

Bumi’s Arutmin mine is one of the key assets at the heart of an ill-fated venture founded by U.K. financier Nathaniel Rothschild and Indonesia’s Bakrie family, now known as Asia Resource Minerals Plc (ARMS), or ARMS.

ARMS owns 29 percent of Bumi and it asked law firm Macfarlanes LLP to assess allegations of illegal mining in January, three people said.

Exit Deal

The claims have come to light weeks before the Bakries are due to complete a deal to withdraw from the ARMS venture, which has been marked by conflict between the family and their former partner, Rothschild. The alleged thefts from Arutmin may divert revenues from Bumi, whose falling share price the Bakries have cited as a factor in repeated delays in completing their exit from ARMS. Bumi has not been accused of any wrongdoing.

The Bakries are due to close the $501 million transaction on March 21. That deal sees them buying back the 29 percent stake in Bumi sold to ARMS and regaining control of the operator of Arutmin. Bumi stock has slumped 85 percent in Jakarta trading since the start of 2012, while ARMS has slipped 75 percent in London.

Elizabeth Mercer, a London-based spokeswoman for Macfarlanes, declined to comment. A spokesman for ARMS declined to comment.

Dileep Srivastava, a Jakarta-based director of Bumi, said the company isn’t aware of “any specifics” around coal-theft claims at Arutmin. “But I’d think ‘informal’ mining in Indonesia has been a reality for decades, well before Bumi entered mining,” he said in an e-mail.

‘Far Fetched’

The Bakrie Group, a family-run palm oil-to-property business empire and a shareholder in Bumi, questioned the accuracy of the coal-theft allegations.

“These accusations seem wild and extremely far fetched,” Chris Fong, a spokesman for the Bakries, said in e-mailed comments. “Mining operations in Indonesia are well regulated, documented and monitored across the entire chain of custody. There is no doubt that illegal activities surrounding the resource sector are well documented, however we doubt at the scale as claimed.”

The Indonesian Coal Mining Association estimates that 71 million tons of the country’s 2013 production can’t be tracked, Pandu Sjahrir, chairman of the group’s commercial committee, said this week. At average benchmark Asian prices last year, that amount of coal is valued at about $6 billion.

Glencore Contract

Arutmin coal is allegedly being sold outside of a marketing contract Bumi has with Glencore, the people said. The volumes would be enough to load a 190,000-ton capacity capesize vessel, similar in length to the iconic Manhattan building, every three days, according to data compiled by Bloomberg. Glencore owns about 4 percent of Bumi, a list of shareholders on the Indonesian company’s website dated February 2012 shows.

“Coal traders are now seeing in excess of 2 million tons of distinctive Echo Coal, unique to Arutmin, being sold monthly outside Glencore’s historic marketing arrangement,” Rothschild said today an e-mail. “This is a highly sophisticated system on an unprecedented scale, and Bumi Resources shareholders appear to be receiving immaterial or no benefit.”

Indonesia exports more coal for burning in power plants than any other country, shipping 380 million tons in 2012, the World Coal Association estimates.

Trigger Rally

Ivan Glasenberg, chief executive officer of Glencore, said he didn’t expect Indonesia to halt the illicit trade.

“There is no real reason for them to do it, so I’m not sure they will,” Glasenberg said in a phone interview yesterday. “I would love them to, anyone would love them to stop 70 million tons of exports, and the market will rally.” He declined to comment on the Arutmin allegations.

Indonesia may restrict the number of terminals allowed to export coal as it seeks to “avoid illegal deliveries” and boost revenue, Edi Prasodjo, the coal director at the Energy and Mineral Resources Ministry, said in a September interview. He didn’t respond to a request for comment this week. Most Indonesian miners use barges to transport coal along a network of rivers before loading the fuel into bigger vessels.

ARMS CEO Nick von Schirnding has written to Jakarta-based Bumi seeking an explanation of the allegations, two of the people said. Bumi has responded by saying it will look into the claims, one of the people said.

Presidential Election

The Bakries are among Indonesia’s most influential business families. Aburizal Bakrie is the Golkar party’s candidate for July’s presidential election, ranking second in a January poll by the Indonesian Survey Circle. Jakarta Governor Joko Widodo, who has not announced whether he will run, topped the poll.

ARMS, formerly known as Bumi Plc, was in talks with the U.K.’s Serious Fraud Office and contacted Indonesian authorities as part of a Macfarlanes investigation started in 2012 to assess allegations of financial irregularities, it said in January last year.

At the time, ARMS said it would seek to recover missing funds identified in the four-month investigation. ARMS said it was unable to release details of the probe “due to exposure of unacceptable legal risks.”

The Bakrie Group claimed then that some documents used to justify the initial Macfarlanes investigation, provided by Rothschild, who said he received them from a whistle-blower, were stolen, accessed by hacking and doctored to give a false impression of transactions at Bumi.

Arutmin operates six open-pit mines in South Kalimantan. It’s one of the largest sources of power-station coal in the world, producing 28.2 million tons of the fuel in 2012, according to the company’s website.

Founding Chairmen

Bumi Resources acquired an 80 percent stake in Arutmin from BHP Billiton Ltd., the biggest mining company, in 2001 for $148 million. At the time, PT Bakrie Brothers, a Bakrie family entity, owned the remaining 20 percent.

Rothschild created Bumi Plc with the Bakries after striking a deal in 2010 to invest in two Indonesian coal producers -- Bumi Resources and PT Berau Coal Energy. (BRAU)

Rothschild was co-chairman of the group with Indra Bakrie before a public dispute resulted in both leaving the board. The deal severing links between the Bakries and ARMS will result in Chairman Samin Tan doubling his holding in the London-listed company to 47.6 percent by buying out the Indonesian family’s interest. Rothschild remains a shareholder, owning about 21 percent of the voting rights.

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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