Koba Tin to seek arbitration if Indonesia scraps mining permit

* Indonesian officials have said Koba Tin's mine permit won't be renewed

* Mining concession being reviewed; decision on renewal due this week

* Malaysia parent firm says non-renewal to lead to arbitration in Singapore (Adds comments from Indonesian minister)

By Niluksi Koswanage

KUALA LUMPUR, Sept 19 (Reuters) - PT Koba Tin, a subsidiary of the world's second-biggest tin producer, will seek international arbitration if Indonesia's government refuses to extend its permit to operate a mine, the chief executive of the Malaysian parent company said.

It is the latest corporate wrangle to raise questions over Indonesia's openness to foreign investment. Southeast Asia's biggest economy had pushed for more control over its natural resources, ranging from coal to gold, in the past few years but is rethinking the policy after a recent slide in its currency.

The dispute has been brewing since last year when Indonesian government officials said Koba Tin's permit would not be renewed and that state-run PT Timah should take over the concession in the Bangka-Belitung islands off the east coast of Sumatra island. PT Timah is a minority shareholder in Koba Tin.

The government has since softened its stance, launching a review of the concession, which is eight times the size of New York's Manhattan island. It was due to announce a decision this week.

"Under the terms, Koba Tin is entitled to a second extension of 10 years to 2023," Mohammad Ajib Anuar, chief executive of Malaysia Smelting Corp Bhd (MSC) , told Reuters in an interview.

"As a foreign investor with significant investment in PT Koba Tin, MSC seeks fair treatment from the government of Indonesia."

He said Koba Tin would file for arbitration in Singapore. Such a case would need Indonesia's cooperation to proceed.

Indonesia's chief economics minister Hatta Rajasa said on Thursday an independent team evaluating Koba Tin's operations had recommended that the permit not be extended.

"If they (Koba Tin) want to go for arbitration, it is their right," Rajasa told reporters in Jakarta. He did not elaborate.

MSC, via its 75-percent-owned Koba Tin, has built smelter and dredging facilities valued at $60 million, industry analysts said.

Mohammad Ajib said uncertainty over the permit and rampant illegal mining on the concession had sent output plunging by 70 percent last year to 1,901 tonnes, with unlisted Koba Tin incurring $40 million in losses.

Indonesian officials have justified the possible non-renewal of the permit by saying Koba Tin was not contributing enough revenue to the nation's economy. Indonesia is the world's largest exporter of refined tin.

Jakarta extended Koba Tin's permit by five months from March 2013 to enable a government team to evaluate the permit.


POLICY UNCERTAINTIES STOKE DISPUTES

Indonesia has veered between resource nationalism and rolling out the welcome mat for investors. Fraser Institute's annual mining survey in 2012-2013 ranked Indonesia the worst of 96 countries to operate in when it came to policy changes.

Last year, Indonesia said it would limit foreign ownership in mines to no more than 49 percent after a decade of production, only to relax the rule this month after the plan dented the country's credibility with foreign investors.

The policy uncertainties have fostered a series of disputes over ownership. Among them is Britain's Churchill Mining Plc, which is suing the Indonesian government for $2 billion over lost rights to a coal project.

To justify a contract extension to the government, Mohammad Ajib said Koba Tin invested more than $50 million in exploring and developing the mine that now has an estimated 50,000 tonnes of total tin resources - sufficient for another 10 years.

He said PT Koba's total production costs could stabilise at around $18,000 per tonne if the issue is resolved. Based on current physical tin prices of $23,000, that would yield up to $250 million of profits for 50,000 tonnes of tin.

"We shouldn't be fighting. But Koba Tin has been unfairly painted as the villain when it has been the victim," Mohammad Ajib said. (Additional reporting by Adriana Nina Kusuma and Fergus Jensen in JAKARTA; Editing by Stuart Grudgings, Muralikumar Anantharaman and Dale Hudson)