Indonesia Mining 2012 - GBR

Mining IN Indonesia
ing concession to 51% by the end of the
10th year of production. The government
has put in place intermediate divestment
thresholds starting from the sixth year of
production where a foreign investor will
be required to divest 20%. The rationale
behind this decision is hard to decipher,
given that continued foreign investment
will be necessary to sustain the sector’s
growth in the years to come.
Michael Corey, president director, PT
MMG Indonesia, Indonesian subsidiary
of MMG Resources Ltd., believes that the
divestiture requirement will greatly affect
the degree to which foreigners will be able
to make significant capital investments in
the future, as 10 years is not sufficient
time for many companies to make a return
on investments, particularly for capital-intensive
precious metals mining operations.
“Requiring foreign companies to decrease
their equity to 51% after 10 years of production
could be feasible for small-scale,
low-capital expenditure, stand-alone gold
projects. However, with respect to our Gorantalo
porphyry projects, it is a multibillion-dollar
development project; investors
will not be getting their money back in 10
years’ time. Implementing this regulation
kills the incentive to invest in Indonesia,”
said Corey.
However, others are of the view that
the ramifications will not significantly diminish
interest from foreign investors. According
to Bill Sullivan, partner, Christian
Teo Purwono & Partners, a law firm with
expertise in mining and natural resources,
while the average Western multinational
company may be deterred from investing
due to these recent developments, interest
will remain strong for Chinese and
Indian investors. “Companies from India
and China, which are much more used
to an opaque regulatory framework, do
not seem to be as discouraged as western
companies are by the lack of clarity
and legal certainty. Also, it must be said
that some second- and third-tier Western
mining companies have a very high appetite
for risk which causes them to be less
concerned about the uncertainty of regulatory
change in Indonesia than might have
otherwise been thought to be the case.”
Reiterating these views, Guy Des Rosiers,
partner, Makarim & Taira S., a leading Indonesian
law firm, said: “currently the majority
of our clients are from India and China,
mainly looking for coal, and having an Asian
mindset are not so adverse to the Indonesian
mining laws. Canadians and Australians,
amongst others, are reluctant to enter Indonesia
with its current mining laws.”
Aside from the divestiture requirements,
the issue that foreign miners appear
to find most troubling is the fact that
the government has yet to provide clarity
on the means by which foreigners will be
required to complete the task. For example,
how will the price of sold shares be
determined? Legislators have yet to clarify
this issue. According to Sahala Situmoran,
partner and head of Transaction Advisory
Services, Ernst & Young Indonesia, a company’s
net present value (NPV) should be
the determining factor. “Discounted cash
flow analysis should be used to determine
the company’s NPV at the time of divesture.
That being said, there are number
of other variables that must be taken into
consideration, namely total reserve, mine
life, the technical difficulty involved for
mining operation, and, most importantly,
proximity to coastline. Only after examining
all these variables can the price of the
asset be determined.”
Foreign Mineral Explorers Hit
Hard by New Law
While the detrimental effects of the 2009
Mining Law are often analyzed through the
scope of large multinationals, the ramifications
of this legislation extend beyond this
market segment, and have had the biggest
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