Indonesia digs hole for itself with new mining laws

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Published October 01, 2012

| Reuters

One evening in late September, Peter Wesser and his club of veteran minerals explorers met at Jakarta's Hotel Kristal to swap stories and exchange news. Beer and roast beef were on the menu - on the agenda was trying to figure out how to stay in business.

For decades explorers have enjoyed a place on the cutting edge of the country's mining boom as they scoured the earth for fresh mineral deposits, a process that can take years and cost hundreds of millions of dollars before payback.

But now they complain that new rules aimed at boosting state revenue from natural resources have slashed investment in mineral prospecting and could threaten the entire $93 billion sector.

"Exploration is by nature optimistic," said Wesser, 73, an Indonesian, born to Dutch parents, with decades of mining experience. "The government doesn't understand the importance of exploration ... Mining without exploration is an industry that goes downhill."

The explorers are not the only ones struggling with the impact of the regulations that have caused industry-wide uncertainty in Indonesia, compounding the effects of a global commodities downturn.

Small miners in particular have been hit, leading to mine closures and lay-offs in regions such as Sulawesi island, with some resorting to bribing central government officials to continue to export, according to interviews with four mining executives.

An analysis of official data shows the rules have also caused a slump in exports of ore, leading key buyer China to seek supplies from elsewhere.

The government of President Susilo Bambang Yudhoyono is reforming the minerals sector in a plan to propel the G20 country into a global top-10 economy by 2025.

Mining already contributes 12 percent to GDP, and Indonesia is a world leader in nickel ore, thermal coal and refined tin exports, while bauxite exports have spiked in recent years.

"If we do not begin the efforts to increase mining added value, we will be economically colonized forever," said Deputy Energy and Mineral Resources Minister Rudi Rubiandini.

The regulations restrict the export of raw ores, force foreign miners to divest over half their assets after 10 years of production and require domestic processing of ore by 2014.

SURGE THEN PLUNGE

The most dramatic effect of the new rules has been on mineral exports, which surged as companies fought to beat a May 6 export tax deadline and plunged thereafter.

In August Chinese imports of nickel ore from Indonesia dropped 39 percent to 1.48 million tonnes, following steep falls in July and June, Chinese data shows. China's imports from the Philippines nearly doubled over the same period.

Nowhere is the human impact of the slide more visible than in the remote mining communities of Sulawesi, an island east of Borneo and the country's main source of nickel.

Prior to the regulations coming into force in May up to a dozen ships could be seen standing off the port of Kolaka, waiting to collect nickel ore as fleets of trucks scooped mud from nearby hills and transported it down to the docks.

Now the rudimentary ports stand idle and only security guards patrol the abandoned piles of mud. Workers in Sulawesi said the situation for miners was worse now than in 2009 when the global financial crisis hit commodity exports worldwide.

The plight of Rasiun, a father-of-three, illustrates the impact on miners. The former fisherman and farmer sold his land to miner Prima Nusa Sentosa, who offered him $5 a day to pull tarpaulins over ore to protect it from rain.

When the mine closed because of the new regulations he lost his job, but mining pollution has stained the sea red and made it impossible to go back to fishing.

"We thought we could change our fate with the company. Our land is now owned by the company and run-off from the company has flowed into the sea, so now we are unemployed," he said, adding he was "half-dead" with worry over how he would feed his family.

WORLD-CLASS DISCOVERIES

Thousands of firms are affected by the laws and there is a backlog at the mining ministry in Jakarta as many seek the license, quota and recommendations needed to resume exports.

To cut red tape it helps to pay the ministry between $500,000 and $1.5 million, said a senior mining executive, who declined to be identified. Three other executives at different mining firms also said bribes were required.

"Miners have to get a recommendation from the Energy and Mineral Resources Ministry. What does the word 'recommendation' mean here? You can work that out by yourself," said Juanforti Silalahi, a spokesman for miners' union Spartan.

The mining ministry denies there is corruption in the permit process.

The new regulations do not apply to miners who hold older Contracts of Work (CoW), including some of the most prominent industry names such as the Indonesian units of Freeport McMoRan Copper & Gold Inc , Newmont Mining Corp and Vale .

They also do not apply to coal producers, although for both groups the rules have caused unease that the government's regulatory drive will extend to them through higher royalties.

It is not clear whether the export slump, which coincides with a general downturn that has lopped about a quarter off iron ore and thermal coal prices this year and halted major mining investments in Australia, is a blip or part of a realignment that will hurt mining for a generation.

As they ate and drank at the Jakarta hotel, the members of the Forum for Exploration and Mineral Development were pessimistic about their business, which is crucial for long-term industry growth.

Wesser's last firm, Oxindo, a copper explorer owned by Chinese mining group MMG <1208.HK>, closed its Jakarta office in September, one of five members of the group to quit since May.

"There will be no more world-class discoveries in Indonesia," said forum head Malcolm Baillie, about a country that is home to a mine with the world's biggest gold reserves.

(Additional reporting by Michael Taylor and Yayat Supriatna in Jakarta and Sonali Paul in Melbourne; Writing by Matthew Bigg; Editing by Alex Richardson)

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