Lanna Resources & Indonesian Coal Play

The Thailand-based Lanna Resources Public Company Ltd reports significant activities on its Indonesian subsidiaries: PT Lanna Harita Indonesia, PT Lanna Mining Services, PT Citra Harita Mineral, and PT Singlurus Pratama in the first half 2011. Long time no see!

In working up their mining activities, Lanna Resources has teamed up with Harita Group, the owner of PT Cita Minerals Tbk. Lanna has two major Coal Contract of Work (CCoW) in East Kalimantan, covering more than 50,000ha within the region. How’s their progress so far?

In May 2011, PT Lanna Harita Indonesia, the 99.99% owned subsidiary, entered into the sale commission agreements with an oversea company. The agreement stipulates that such oversea company is to receive a commission fee of coal distributed by a subsidiary company to a customer provided by such oversea company. Commission fees are charged at the rate as stipulated in the agreement.

Since 1998, Indonesian government has granted Coal Contract of Work (CCoW) to exploit coal on 30,018ha area in Tanah Merah district, Samarinda Regency, East Kalimantan for up to 30 years. In 2012, the government has expected Lanna Harita to contribute 620,000 tons of coal as DMO.

Something interesting:

As at 30 June 2011, a subsidiary company in Indonesia (Lanna Harita) had contingent liabilities in respect of lawsuits, which were brought by an outside party, claiming for damages of Rupiah 62,000 million or equivalent to approximately Baht 238 million, in relation to rights over the land used by the subsidiary company for mining. On 8 April 2009, the Court of Samarinda rendered a judgment that the plaintiff has rights over the subsidiary’s mined land. However, the court ordered the subsidiary company to pay only the trial fee amounting to Rupiah 0.66 million or equivalent to Baht 2,500. The plaintiff is in the course of filing a petition for the case.  However, the subsidiary company's management believes that the case will be settled in its favour, and it will not suffer any significant losses as a result of the above litigation. Therefore, the subsidiary company has not made any provision for loss from the lawsuit in its accounts.

On June 2011, Lanna Resources divests a small interest in its coal distribution company, PT Lanna Mining Services from 99.99% to 99.95% to United Bulk Shipping Pte Ltd, an associated company, at US$1,970.  This is to comply with the regulation of the Board of Investment of Indonesia, which stipulates that a shareholder in PT Lanna Mining Services must hold shares worth a minimum of USD 1,000. The sell and purchase of ordinary shares in such subsidiary is expected to complete within the third quarter of 2011.

Lanna Resources also had granted THB45 million of unsecured loan in July 2011 to PT Lanna Mining Services, with a term of 3 months at interest rate at 6% per annum. The loan will be used as a working capital.

Another Lanna’s coal miner, PT Singlurus Pratama, also expected to bring 370,000 tons of coal to Indonesian market by the government. The company captured CCoW from the government in 1997 to work up a coal concession covering 24,760ha in Kutai, East Kalimantan for 30 years. In march 2009, Singlurus received a consent from Indonesian government to start the production activities.

How’s Singlurus’s performance so far?

On 6 March 2008, the Company and PT. Indocoal Pratama Jaya (“IPJ”) entered into agreement of transferring service fees for service provided to the concession area of PT. Singlurus Pratama (SGP) for the first 15 million tons of coal produced and distributed at a price of USD 0.75 per ton, in accordance with the Service Agreement, which stipulate that IPJ is to receive a fee of USD 0.75 per ton of coal produced and distributed from SGP.

IPJ has an agreement with a creditor who provided it with financial support, whereby IPJ agreed to pay the creditor the fees it receives at a rate of USD 0.75 per ton for the first 15 million tons of coal produced and distributed from the SGP concession.

That creditor agreed to transfer such fees to the Company at a negotiated price of USD 3.75 million, or equivalent to Baht 118.28 million, with the Company making a lump sum payment.  Such fees will be amortised according to the quantity of coal sold from SGP and the Company had already started amortising the fee since July 2009.

However, recently Regent of penajam Paser Utara intends to resize Singlurus’s coal concession following overlapping reports. Not so long after, East Kalimantan governor Awang Faroek stated the company is willing to reduce their land for toll road development. Part of win-win solution?

Some names inside the company are Hitler Singawinata (CEO PT Semen Gombong, VP of PT International Nickel Indonesia), Loekman Kartanegara (Retired PT Pertamina Director), Rusdy Harmayn (son of ex-Indonesian Ambassador for Sri Lanka Ali Chanafiah), and Ashadi Tjahjadi (ex-Head of Staff of Indonesian Air Force, ex-Indonesian Ambassador for Germany Republic, Advisory Board of Minister of Technology & Research, Technology Study and Implementation Board (BPPT), and English airplane maker Rolls Royce).

Next is PT Citra Harita Mineral, Lanna’s only coal transportation subsidiary. On February 2—0, Citra Harita had signed an Agreement on Coal Processing Service, Coal Loading Service and the Use of Jetty Facilities with a coal operator in Indonesia, for a period of 3 years commencing April 2009. Service fees are charged at the rate as stipulated in the agreement.

Again, another interesting story:

In 2008, a company claimed that the Company did not comply with the sea coal transportation agreement dated 2 September 2008 for coal transportation from a harbor in Indonesia to Thailand. This company claimed a damage of USD 1.14 million or equivalent to Baht 34.50 million. There have been extensive negotiations with respect to the services but there is no written agreement. However, this company sued the Company in the US court and the Court froze cash of the Company which was to be paid to and received from the related companies for services, totaling USD 0.52 million or equivalent to Baht 17.40 million. However, in the second quarter of 2009, the US court cancelled the freezing of the cash of the Company and ordered it to be placed with the Court instead. The Company recorded cash which was placed with court as assets awaiting for return from the court. The Company received such money from the court in January 2010. However, as at 31 December 2010, the Company remained provision for litigation loss which approximates the amount placed with the Court until the case is finalised. Later, on 28 February 2011, the Court ordered dismissal of the case. The Company therefore reversed the provision for litigation loss of Baht 17.40 million to the income statement for the six-month period ended 30 June 2011.

Finished with all those subsidiaries, let’s take a look on Lanna’s one interesting Indonesian agreement. On April 2008, Lanna and Saraburi Resources Pte Ltd, which own a right to sell coal from PT Saraburi Batu Hitam, made an agreement to deliver 2 million tons for two years. Lanna has an obligation to pay 4 million for all purchase.

Saraburi Resources Pte. Ltd. will refund the advance payment in the form of a deduction from the price of coal delivered to the Company, at a rate of USD 2 per ton, until the advance has been covered. Other conditions are specified in the agreements.  PT. Saraburi Batu Hitum and two directors of Saraburi Resources Pte. Ltd. are guarantors for performance in accordance with the agreement and a shareholder of PT. Saraburi Batu Hitum has pledged 3,000 shares of PT. Saraburi Batu Hitum and the shareholders of Saraburi Resources Pte. Ltd. have pledged 10,000 shares as share charge to guarantee performance bonds as required under the agreement.

Unfortunately, Saraburi failed to deliver any coal within January 2009. Lanna had sued Saraburi for the default and on 23 May 2011, the arbitrator of Singapore International Arbitrage Centre (SIAC) ordered to pay advance for purchase of coal of US$2 million, together with interest and other expenses to Lanna. However, for a prudent reason, Lanna has set full allowance for doubtful account for this advance payment.

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