October 17, 2014 / 8:39 PM / 5 years ago

UPDATE 2-Indonesia raises Vale nickel royalty, forces share sale

* New nickel contract to raise costs, Vale executive says

* Vale must sell 20 percent of Indonesia unit within 5 years

* Accord with government cuts landholdings by 38 percent (Adds Vale comment, additional Indonesia smelter plans, updates prices)

By Wilda Asmarini and Jeb Blount

JAKARTA/RIO DE JANEIRO, Oct 17 (Reuters) - Brazil’s Vale SA said on Friday that a revised nickel-mining contract with Indonesia will raise maximum royalties, cut land holdings and require its Indonesian unit to sell another 20 percent of its shares to local investors.

Royalties were set at 2 percent in the deal and could rise to as high as 3 percent, more than double the previous 0.6 percent and 0.7 percent, said Nico Kanter, chief executive of Vale’s Indonesian subsidiary PT Vale Indonesia TBK.

The royalty hike will “definitely affect our bottom line,” Kanter told reporters in Indonesia. He didn’t elaborate on the impact. Vale officials in Rio de Janeiro were not immediately available for comment.

Vale preferred shares, the company’s most-traded class of stock, have lost about 20 percent in Sao Paulo in the last 12 months. The shares rose 0.3 percent to 23.08 reais in Sao Paulo on Friday.

Vale, which owns 59.2 percent of Vale Indonesia, controls the subsidiary in partnership with Japan’s Sumitomo Corp. , which owns 20.1 percent, Vale’s press office in Rio de Janeiro said. Indonesian investors have already purchased 20 percent of Vale Indonesia.

The sale of the additional 20 percent will be done within five years and come out of Vale and Sumitomo’s stakes, a Vale press officer in Toronto said in an e-mailed response to questions.

The increased costs and obligations come as Vale and other nickel miners face rising intervention by Indonesia’s government. The country has banned the export of raw nickel ore, requiring miners to process ore in local smelters.

Vale plans to invest $4 billion in Indonesian smelters. Smelters use heat and chemicals to remove oxygen and other elements from the ore, leaving pure, metallic nickel behind. The money will be spent upgrading smelters on the island of Sulawesi, half at Vale’s plant at Pomala and the other half at its Sorowako facility, Kanter said.

The company is also considering an additional $2 billion investment to increase smelting capacity on Sulawesi, Vale said.

Vale executives have recently expressed the belief that increasing costs in countries such as Indonesia would be offset by rising prices for nickel, at least in the short term, as Indonesian policies reduced world supplies of metallic nickel.

Like iron ore .IO62-CNI=SI, Rio de Janeiro-based Vale’s main product, the price of nickel has fallen in recent months. After reaching a two-year high of $21,000 a tonne in May, nickel has fallen 26 percent to $15,575 a tonne.

The new agreement with Indonesia also cuts the area of Vale’s mineral rights by 38 percent to 118,435 hectares (457 square miles), an area about the size of Hong Kong, from 190,510 hectares, Vale said in a statement.

Vale can extend the contract, originally scheduled to expire at the end of 2025, through 2045 with two 10-year renewals. (Reporting by Wilda Asmarini; Additional reporting by Jeb Blount in Rio de Janeiro; Writing by Jeb Blount and Fergus Jensen; Editing by Tom Hogue and Alan Crosby)

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