The coal mine giant that's hot to handle

Despite a dramatic last-minute sell-off to help pay a $1.35bn loan, the future's still bright for Bumi and Indonesian coal, says Tom Bawden

Indonesia's Bakrie brothers ended weeks of uncertainty yesterday, agreeing a last-minute deal to sell nearly a quarter of Bumi, the FTSE 100 listed, Indonesia-based coal giant, to pay off their debt mountain. In a deal cobbled together hastily following the collapse of parallel refinancing talks with a range of parties, the brothers agreed to sell half of their 47 per cent stake in Bumi to PT Borneo Lumbung Energy, the Indonesian coal-mining and infrastructure company, for $1bn (£623m).

They will use the money to pay off most of a $1.35bn loan made by Credit Suisse to Bakrie & Brothers, their sprawling Indonesian conglomerate that takes in energy, telecoms, property, shipping, banking, insurance, media, construction and plantation businesses and owns the stake in Bumi.

The brothers had used their shares in Bumi to back that loan and Credit Suisse called it in last month after fears that a global economic slump, and its effect on the demand for coal, helped push down Bumi's shares by more than a third in the past three months and, in turn, their value as collateral.

The brothers' deal with Borneo Lumbung Energy, the night before its loan repayment deadline, is not the first time they have sold assets to pay off debts. They narrowly escaped bankruptcy in 1997 and 2008 by selling off assets.

Yesterday's deal marks the latest transaction in a highly complex series of deals and attempted deals around Bumi, involving some very similar company names, some of Indonesia's richest men and Nat Rothschild, of the British banking dynasty.

The story of Bumi on the London Stock Exchange began 18 months ago when Nat Rothschild launched Vallar Resources, a £707m cash shell, to invest in mining assets. Four months later, Vallar completed his first deal, in the form of a three-way $3bn cash and shares transaction with the Bakrie Brothers to create a London-listed coal giant that could benefit from the huge demand from China.

The Bakrie family interests are controlled by Aburizal Bakrie, Indonesia's former chief economic minister, who is one of the country's richest men and the head of one of its biggest political parties. He is expected to become President in 2014.

Essentially, the transaction saw the brothers reversing a 25 per cent stake in Bumi Resources, Indonesia's biggest coal producer, and three-quarters of Berau Coal Energy, its fifth biggest, into Vallar, which was renamed Bumi.The brothers took a 47 per cent stake in Bumi – cut yesterday to 23.5 per cent – with Mr Rothschild holding 34 per cent.

"In one swoop we are buying control of the number one and number five coal companies in Indonesia and we are combining them to create the most dominant supplier of coal to China," Mr Rothschild said at the time.

In the final part of the listing process, Bumi shares began trading on the London Stock Exchange in June.

In 2009, Bumi Resources produced 57.4 million tonnes of coal and Berau 14.3 million, but Mr Rothschild intended to nearly double that to about 140 million tonnes by 2013.

Although the brothers' rationale for the deal was to raise much needed cash, their deal with Borneo yesterday should help them to achieve that ambitious goal. Borneo, a specialist in coking coal, which is used to make steel, is run by Samin Tan. It is an expert at developing new mines and wants to use its stake in Bumi to tap the billions of dollars of unexploited coat assets the group controls in Indonesia.

But, as in the words of one fund manager, "it's a win-win deal for the Bakries and Borneo", it hasn't all been plain sailing for Bumi and the brothers.

In the run-up to refinance the Credit Suisse loan, talks between the brothers and a range of groups such as Glencore, the world's largest commodities trader, and Vitol, its biggest oil trader, fell through amid rising concerns that a deal might not get done in time.

Adding to shareholder concerns, Bumi abandoned plans to buy Bumi Resources Minerals (BRM), the diversified mining group from the Bakrie brothers for $2bn. In a terse statement, Bumi blamed "acutely uncertain market conditions".

There are also some corporate governance concerns hanging over Bumi. In the prospectus ahead of Bumi's shares trading in June, the company pointed out that Indonesia ranks 110th out of 178 countries in Transparency International's 2010 Corruption Perceptions Index and concluded that, "it may not be possible for the group to detect or prevent every instance of fraud, bribery and corruption in every jurisdiction".

It also highlighted allegations made by an Indonesian tax official at the centre of a high-profile corruption trial, Gayus Tambunan, who said subsidiaries including Bumi Resources paid him $3m to settle tax disputes. Mr Tambunan was convicted in January for bribery and abuse of power.

Bumi said Indonesian police had found insufficient evidence to file charges against Bumi Resources and that internal investigations found the allegations "groundless".

The bottom line is that, despite recent shudders, Bumi looks to have a good future. China's total imports of coal trebled to a record 126 million tonnes in 2009, compared with 2008 and its appetite for coal is only likely to get stronger.

Indonesia, the world's largest exporter of thermal coal – used for power plants – has identified coal resources of 105 billion tonnes.

Last minute deal: the key players

Indra Bakrie

He is chairman of the board of Bumi and younger brother of clan head Aburizal. He graduated from the University of Southern California in 1976 after majoring in business administration.

Samin Tan

An ethnic Chinese Indonesian who is a backer of Borneo Lumbung Energi & Metal, a good friend of Bakrie brother Nirwan and owner of Renaissance Capital, the Indonesian investment bank.

Aburizal Bakrie

The billionaire head of the family empire, Mr Bakrie is expected to run for Indonesia's presidential elections – and win – in 2014. He is a former chief economic minister of Indonesia.

Nat Rothschild

Mr Rothschild is developing a taste for setting up cash shells and reversing natural resources into them. He's done the same with oil in Vallares, a venture with ex-BP chief executive Tony Hayward.