Contract mining: how most Indonesian coal gets dug

Many Indonesian coal licence holders don’t dig their own coal. They hire a mining contractor with its own fleet of excavators and dump trucks to strip the overburden, dig the coal and haul it to a stockpile or a jetty. The licence holder plans the mine, sells the coal and deals with the state.

That makes the mining contract one of the largest costs in the business and one of its biggest risks. The law is clear that hiring a contractor doesn’t move responsibility for the mine away from the licence holder.

What the law requires

A mining services company needs its own licence, the mining services business licence (Izin Usaha Jasa Pertambangan, IUJP), which is one of the business licences listed in Law 3 of 2020. The services it can cover include exploration, mine construction, transport, reclamation, mining safety and the mining itself.

The law puts three conditions around the arrangement:

• licence holders must use local or national mining service companies, and may use a foreign-invested Indonesian company only when none is available
• the mining service company must give priority to local subcontractors and local workers
• when a licence holder uses a contractor, responsibility for the mining stays with the licence holder

The last point carries the weight. If the contractor mines outside the licence area, breaks safety rules or damages a river, the licence holder answers for it. The licence holder also appoints the mine’s technical head, who is responsible for safety and good mining practice across the whole site, the contractor’s crews included. Rules on hiring an affiliated contractor have their own approval requirements, so ask a mining lawyer before you put a related company in that role. If you plan to set up a contracting company yourself, its business code decides how much foreign ownership is allowed (see which sectors foreign investors can enter).

How the work is priced

A coal mine moves far more waste than coal. The overburden, the soil and rock above and between the seams, has to be dug and dumped before the coal can be reached. The stripping ratio, measured in bank cubic metres (BCM) of overburden per tonne of coal, is one of the main drivers of a mine’s cost.

Contracts usually price the work in separate parts:

• overburden removal, per BCM, with the rate rising for longer haul distances to the dump
• coal getting, per tonne of coal dug and loaded
• coal hauling, per tonne or per tonne-kilometre from the pit to the stockpile, port or jetty

A bank cubic metre is the volume of material in the ground before it’s dug. Once dug, rock swells, so measuring in BCM avoids arguments about loose volumes. Some contracts add charges for drilling and blasting, dewatering the pit, building and maintaining roads, and mobilising the fleet.

The alternative is to rent equipment by the hour and run the mine with your own staff. That gives more control but leaves productivity risk with you.

Fuel and other adjustments

Diesel is one of a contractor’s biggest costs, so contracts deal with it in one of two ways. Either the licence holder supplies the fuel, or the rates include fuel and move up and down with a published diesel price under a rise-and-fall clause. Read that clause closely. It should name the price source, the base price and how often rates reset.

Fuel itself has changed. Indonesian diesel is blended with palm-based biodiesel, and the required blend rose from 40% in 2025 to 50% from 1 July 2026. A higher blend can change fuel use and engine maintenance, so the contract should say who carries that cost.

Volume matters as much as price. A contractor prices its rates on a planned annual volume, often with a minimum it gets paid for. Since 2026 the ministry approves each mine’s production quota every year, and many mines got lower quotas for 2026 than they had planned. A contract that ties you to a minimum volume above your approved quota can cost you money for work you aren’t allowed to do. Ask for a clause that adjusts volumes to the approved work plan and budget (RKAB).

Choosing a contractor

Large contractors usually run big fleets with their own workshops and formal safety systems. Smaller local contractors can be cheaper and closer to the community, but their equipment can be older and their balance sheets thinner. A contractor that runs out of money or loses its fleet to a lender can stop a mine within weeks.

Check the IUJP and the services it covers, the fleet list with the age and condition of each unit, the safety record, the financial statements and references from other licence holders. Haul distance and road quality decide how many trucks the job needs, so visit the site with the contractor before agreeing rates. Hauling is covered in hauling, barging and ports.

Before you sign a mining contract

Agree how volumes will be measured, because many disputes start there. Use regular pit surveys, reconciled each month against the contractor’s claims, the weighbridge and the surveyor’s figures at the port. Keep the right to audit.

Tie the work to the approved mine plan and the licence boundary, in writing. Make the contractor follow your technical head’s instructions on safety and environment, and make it carry insurance. Set out what happens to the fleet, the site and unpaid invoices if the contract ends early.

Remember the obligations that stay with you: reclamation, guarantees and community relations. A contractor that leaves a pit unreclaimed leaves the cost with the licence holder (see reclamation and closure). When you buy into a mine with a contractor already in place, read that contract as part of due diligence on a coal concession.