RECENT ECONOMIC REPORTS

Indonesian Mining Sector -- Mixed News 

Summary

The gloomy news continues regarding investment in Indonesia's mining sector. In addition to the long-planned closure of five mines, a coal-mining association official revealed that 24 investors have canceled or suspended coal-mining projects worth a total of US $1 billion since 1998. The negative trend is continuing -- BHP Billiton is seeking to suspend Contract of Work requirements for development of its Gag Island nickel project. The GOI is working to resolve some of the regulatory difficulties inhibiting new investment, in particular by developing new guidance that will allow mining exploration in protected areas. The Ministry of Energy and Mineral Resources (MEMR) is also seeking to revoke five new local government regulations imposing new tax requirements on mining operations. An MEMR official confidently claimed, perhaps with some bravado, that 13 gold mining companies and one coal miner were interested in investing in Indonesian projects. In a more concrete development, Canadian-based Apolo Gold has acquired rights to an Indonesian area with promising gold and silver potential. End summary.

Five Mining Firms To End Operations

Five big mining concerns will end their Indonesian operations due to contract expiration and exhaustion of recoverable reserves. Four of the five are gold mining companies - PT Newmont (Minahasa, North Sulawesi), PT Nusa Halmahera Mineral (Maluku), PT Indomuro Kencana (Central Kalimantan) and PT Kelian Equatorial Mining (East Kalimantan). The fifth, PT Candello Coal, operates a coalmine in South Kalimantan. Based on their contracts, the companies must meet several requirements as they wind down mining operations. The requirements include conducting mine area land reclamation and instituting programs to benefit local residents.

Aurora Gold Ltd appears to be the first out the gate with the announcement that its Indonesian subsidiary, PT Indomuro Kencana, will close the Mt. Muro gold mine in Central Kalimantan by the end of May or early June. Mt. Muro began operating in November 1994. Over its life, the mine will have produced 1.7 million ounces of gold and gold equivalent, exceeding the original 1.2-million ounce forecast. The Mt. Muro mine yielded 211,484 ounces in 2001, down 16 percent from the previous year's production. Aurora Gold attributed the decline in part to incursions by illegal miners, which hindered mine operations. The Australian gold mining company is set to pull out completely from Indonesia with the sale in April of its 85-percent stake in the Toka Tindung gold mining project in North Sulawesi.

Declining Mining Investment

Australian mining company BHP Billiton Plc/Ltd announced on January 26 that "PT Gag Nickel, the joint venture vehicle between BHP Billiton and Aneka Tambang, is seeking a suspension of the Gag Contract of Work and will review its options going forward." BHP and Canadian nickel miner Falconbridge initially signed a joint venture in June 2000 to develop the project's estimated 240 million tons of nickel reserves. Falconbridge pulled out of the project, however, after a new Indonesian law banning open pit mining operations in protected forests forced the suspension of the Gag Island project. Indonesian state-owned mining company Aneka Tambang is now looking for other partners to keep the project going.

The Indonesian Association of Coal Mining Companies (APBI) said on April 10 that 24 investors abandoned or canceled coal-mining projects worth a total of US $1 billion since 1998. APBI Chairman Jeffrey Mulyono said three companies pulled out in 1998, fifteen companies in 1999, and six in 2001. He blamed a difficult investment climate and unfavorable mining regulations. Government regulation PP 144/2000 effectively abolished a restitution facility on the 10-percent value-added tax (VAT) that coal mining companies pay on capital goods or services. Mulyono said, "Our costs increased between 6 and 10 percent because of this new tax policy." Adding insult to injury, Law No. 34/2000 expands the range of taxable commodities to include previously exempted heavy equipment used in coal mining. Mulyono predicted the collapse of the coal industry and said recovery could take up to 20 years.

Planned Remedy I: Allowing Exploration In Forests

An MEMR spokesman said the cabinet had begun discussing the problem of conflicting regulation in January 2002, and the Indonesian Government was working seriously to resolve the problem so as to encourage renewed mining investment in Indonesia. He said the government is contemplating new rules to allow mining companies to resume their operations in protected forests, despite a 1999 forestry law that bans open-cut, or open-pit, mining in conservation areas. Law No. 41 of 1999 prohibits such mining operation in preserved forests, even though about 90 percent of mining concessions are located inside such protected areas. Mining companies argue that the Law is too rigid and has caused mining investors to put as many as 150 mining projects on hold.

Planned Remedy Ii: Revoking Local Taxes

Mining companies have complained that many local governments are imposing additional taxes after Jakarta granted wide-ranging autonomy to regions in January 2001, further deterring foreign companies from making additional badly needed investment. For example, one Kalimantan local government issued a regulation instructing coal mining companies to pay a tax of 250 rupiah per metric ton of coal mined. The Home Affairs Ministry, however, has not yet revoked the regulations. In March, the Indonesian Chamber of Commerce said it found over 1,500 new local government regulations, which caused confusion among businesses.

In February 2002, MEMR finally took some action. It asked the Home Affairs Ministry to revoke five local government regulations that conflict with central government regulations. Local governments in Kalimantan issued most of the five regulations, which impose additional levies on both foreign and domestic mining companies to raise additional revenue.

Providing Interim Guidance

In a bid to provide greater legal certainty, the Energy and Mineral Resources Ministry issued Government Regulation PP No. 75/2001 on General Mining Activities on November 30, 2001. The regulation provides interim guidance until Parliament passes a new mining law to replace Mining Law No. 11/1967. (The new law is needed, among other reasons, to regulate local governments' new power over mining activity under new regional autonomy and fiscal decentralization laws implemented in 2000.)

New Investment On The Horizon?

MEMR Director General for Geology and Mineral Resources Wimpy S. Tjetjep announced in January that 13 gold mining firms and one coal mining company were set to resume their investment plans. The planned investments include a Rio Tinto gold mine and BHP/Billiton coal mine. He said each company could potentially invest $2 million to $4 million to start its exploration activities. (Mining investment in 2001 amounted to only Rp 400 billion (US $43 million).)

Canadian-based Apolo Gold Inc. announced on April 16 that it had acquired "Napal Gold Property," located about 60 kilometers southwest of Lampung, Sumatra. According to the company's press release, the 734-hectare Contract of Work area contains several high-grade veins with impressive gold and silver content. The extensive exploration work yielded samples averaging 19.78 grams per ton of gold and 1,096 grams per ton of silver. Apolo Gold will pay the Indonesian Government quarterly and semi-annual installments of US $25,000 until it reaches a total payment of $375,000. It will be able to retain 80 percent of net profits once production has started. The company plans to carry out a five-month exploration program immediately.

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