Tax spurs Indonesia mine investor fears

15-May-2012 Intellasia | Financial Times | 7:01 AM Print This Post

Indonesia’s announcement of a new tax on mineral exports helped demonstrate why foreign investors have been wary of investing in the country’s rich mineral resources.

The government this month finally laid out the details of a 20 per cent tax on exports of unprocessed metals, including nickel, tin and gold. Companies without plans to build processing facilities onshore will be banned from exporting.

The confusion surrounding the new taxes – set after weeks of conflicting proposals and public comments from ministers – reinforces Indonesia’s reputation for regulatory uncertainty at a time when the country is courting foreign investment. ministers had initially suggested that the tax could be as high as 50 per cent.

Analysts say that tax will hit hardest the country’s smaller and newer miners, rendering some mines unprofitable and driving up the cost of nickel for buyers, particularly those from China who have come to rely heavily on Indonesia.

Most larger companies, including Newmont and Freeport-McMoRan, will not be affected because they hold long-term contracts that the new rule cannot change.

“There’s no intention to kill the mining companies, for sure,” says Jero Wacik, Indonesia’s energy minister, when announcing the tax.

But the measures could reinforce a reluctance on the part of global miners to invest in Indonesia – and other countries that chop and change rules regarding mining operations.

“Resource nationalism of this type discourages investment, poses a serious barrier to the exploration and development of new mineral deposits around the world, and is another reason why we see long-term constraints to gold supply,” says Tye Burt, chief executive of gold miner Kinross.

As Karsten Fuelster of the International Finance Corporation in Jakarta says: “Would you want to do a multibillion-dollar investment in a mine project if you don’t have certainty over what the governing regulation is going to be?”

Only 5 per cent of the industry’s exploration spending last year went to the Pacific region, including Indonesia, the Philippines and Papua New Guinea, down from 7 per cent in 2010, according to Metals Economics Group.

Regulatory uncertainty and outbreaks of violence, such as sporadic attacks on Freeport-McMoRan’s Grasberg mine in Indonesia’s far east, meant few miners decided to enter the region, “despite [its] high prospectivity for gold, copper and nickel”, MEG says in its report.

Indonesia also recently said that companies must divest majority control of their mines within 10 years of starting production, and are discussing new rules limiting exports of coal.

“As a junior miner today trying to raise money for an outstanding highly prospective tenement in Indonesia it would be harder than it was a year or so ago,” says Owen Hegarty, vice-chair of G-Resources Group, a Hong Kong-listed gold miner with operations in Indonesia. “That doesn’t mean its impossible.”

The debate reflects the challenge facing regulators from Chile to Australia as they balance the growth of the mining industry with the demands from citizens and governments for a greater share of that success.

Mining has in recent years contributed 4-5 per cent of Indonesian economic output, according to PwC. But its share in some areas is much higher and many of Indonesia’s regions richest in minerals, such as Papua, home of the Grasberg mine, are among the poorest in the country.

Indonesian regulators “tend to make very big statements and then they pull back on certain things. There is an awareness that there is a need for foreign investors and there is a lack of local capital to develop the mining industry,” says one Singapore-based lawyer. “That balancing going on is … a learning process for them.”

The tax is expected to hurt smaller, private sector miners who predominantly export to China for the production of nickel pig iron, a nickel substitute used in making stainless steel. About 55 per cent of China’s nickel ore imports came from Indonesia last year, according to Macquarie Securities.

However, Chinese nickel producers have been stockpiling ore in recent months, anticipating export restrictions, lessening the impact on prices. Nickel is down about 8 per cent this year, trading close to two-year lows.

“We have not yet seen any movement in the price of Indonesian nickel ore, suggesting that the miners may be taking the hit,” says Colin Hamilton, analyst at Macquarie. “But we expect there to be some pain-sharing and the tax could increase the volatility in nickel prices between the top and bottom of the cycle.”

Lucky Ariesandi, an analyst with Kim Eng Securities in Jakarta says: “The margin for [nickel miners] with the highest profit is 40-50 per cent, the cost [of the new tax] is 20 per cent… There will be some miners with lower profitability that cannot make money if they bear the cost themselves. I think the Chinese buyers will have to bear the cost.”

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Category: ResourceAsia

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