Bumi's mine deal falls through

Indonesia's largest coal exporter, PT Bumi Resources, said on Friday (August 25) that it failed to reach a final agreement with PT Renaissance Capital to sell its two largest mines for $3.2 billion.

Bumi agreed in March to sell its PT Arutmin Indonesia and PT Kaltim Prima Coal (KPC) mines to PT Borneo Lumbung Energi, an affiliate of Renaissance Capital, in what would have been Indonesia's second-biggest acquisition.

According to sources, Renaissance will cancel a $2.1 billion loan since the deal fell through. He adds that at one of the mines, production costs had increased beyond expectations in the second quarter. KPC is the largest coal producer and exporter in Indonesia and Arutmin is the fourth-largest coal producer and third-largest exporter, according to the Ministry of Energy and Mineral Resources.

Borneo is majority-owned by Renaissance Capital chief Samin Tan who co-founded Renaissance Capital in 2002 with his fellow former senior partner from Deloitte & Touche, Surjadinata Sumantri. Tan could not be reached for comment.

Meanwhile, Bumi is a part of the Bakrie Group, which is controlled by the family of Indonesia's Coordinating Minister for Welfare, Aburizal Bakrie. Bumi had planned to sell its core business of coal mining to invest in the oil and gas sector, as it is in the process of taking over oil explorer PT Energi Mega Persada Tbk – a deal that has been scheduled to go through mid-September.

Indeed, it needed the proceeds from the Arutmin and Kaltim mine deals to finance its plans to explore Energi Mega Persada's mostly undeveloped oil and gas blocks. The market has been less than enthused about the overall plan though: Bumi shares have fallen more than 20% since it announced the coal deal on March 17.

Bumi had planned to sell the mining operations for roughly $3 billion (the second-largest transaction in Indonesian history, behind last year’s record deal by the Sampoerna family when it sold its entire stake in cigarette producer HM Sampoerna to Philip Morris International for $4.6 billion).

But one could say these mines have been perennially marked by troublesome deals. Bumi paid $149 million for 80% of PT Arutmin from BHP Billiton in 2001; it already owned the remaining 20%. In 2003 it paid $500 million for the entire share capital of KPC from BP and Rio Tinto.

It got the mines on the cheap thanks to outstanding agreements (signed almost 20 years previously) that called for the then foreign owners to eventually divest 51% of their respective companies to local Indonesian investors.

Despite the fact that Bumi was an Indonesian company, the future ownership of KPC came under question because Bumi purchased KPC through two entities -Sangatta Holdings and Kalimantan Coal - that had foreign investment status. So the East Kutai government, where KPC mine is located, then claimed the company itself under the 51% divestment rule. But it was never able to raise the money to buy the mine - and yet a cloud still hung over the Bumi mines.

Now a new cloud for Bumi is how it will fund its oil and gas deals scheduled for next month. The Jakarta bourse on Friday halted trading in Bumi and Energi Mega Persada until further notice.