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Indonesia Implements Export Taxes on Miners: The Investment Exodus

COMMENTARY–ProspectingJournal.com–

What was once a prominent mining destination is perhaps not so much anymore. Last month Indonesia surprised many of us when it declared Government Regulation No. 24, a rule that would compel all foreign mining companies to sell majority stakes in their mining operations to locals. Compounding matters, today Indonesia announced it would start imposing a 20 percent tax on mining exports to be implemented as early as next week, dealing a double blow to the industry. The new mining tax will apply to 14 mineral ore exports, including copper, gold, silver, tin, lead, chromium, platinum, bauxite, iron ore and sand, nickel, molybdenum, manganese and antimony. Jero Wacik, Indonesia’s Energy and Resources Minister, added, “also under the decree, from May 6 miners can no longer export raw materials unless they submit plans to build a smelter for completion by 2014”. The new rules will apply to holders of mining business licenses issued after 2009, meaning companies like Freeport McMoRan and Newmont Mining will be allowed to ship ores until 2014. The initial reactions amongst major miners in the region is perhaps best described as blind optimism, in a bid to keep their mining stocks attractive. In reality, Indonesia’s mining giants are an unhappy bunch, and for good reason, because the actions of the local government are likely to force serious repercussions within the industry.

Indonesia is South-East Asia’s largest economy. It is rich in gold, copper and tin and also boasts status as the world’s largest thermal coal exporter. It has been a mining haven for quite some time now and the industry has grown so large that it accounts for 12 percent of its economy. A combination of abundant resources and favorable government policies traditionally marked it out as an attractive destination for foreign direct investment and over the years a number of giants have established a presence in the region. US-based Freeport McMoran is amongst these. The company owns the Grasberg mine in West Papua, one of Indonesia’s provinces. It is without a doubt one of the world’s largest mines, boasting the world’s richest gold deposits and the world’s second richest copper deposits. And Freeport McMoran is only one of many. According to government data last year, Indonesia enjoyed a record $20 billion of foreign direct investment, of which $3.6 billion went into mining. The figures helped spur a strong economic growth rate of 6.5 percent and you will be hard-pressed to find many who wouldn’t agree that mining has long been its economic driver. But now, in the span of just a few months, its government has fundamentally altered its investment climate.

Indonesia has joined a long list of countries in converting to resource nationalism. It is logical in that they yearn for a greater share of resources they consider their own. But at what cost? For one, a global tendency towards resource nationalism has prompted many mining companies to venture into more unstable regions. Indonesia today, the Democratic Republic of Congo tomorrow. That trend has made investing in mining stocks less attractive, because investors naturally grow wary in climates that cannot guarantee the survival of businesses. Mine closures are no new phenomenon, but the numbers of related incidences are quickly escalating worldwide. In Indonesia’s case it would be presumptuous to think that its big miners are now ready to pack up their bags and relocate. In most cases, they are big enough to whether any storm. But what about the juniors? Michael Blakiston, a mining advisor and partner at Perth-based law firm Gilbert + Tobin, stated, “once you start squeezing project margins, the little guys can’t raise the money…you’re put in a position where no financier will want to lend to [them]”. There is a real risk that the new government regulations will have a profound impact on both juniors based in Indonesia and those considering investing in Indonesia. The laws considerably jeopardize its image as an attractive destination for investment.

Many analysts unanimously agree that its attractiveness is now a thing of the past. Syahrir Abubakar, Indonesian Mining Association’s Executive Director, stated that change in law “will threaten Indonesia’s mining investment climate”. Three analysts from Deutsche Bank also claimed as much. Daniel Brebner, Xiao Fu, and Cheir Khoeng exclaimed, “it appears likely that the government will claim a larger share of domestic resource earnings going forward, through either higher taxes or increased ownership…[t]his could adversely impact production in the longer term if investment from foreign companies decline as a consequence”. There are very real worries that the Indonesian government itself could lose out. Some statistics already give credence to the notion that any short-term tax gains could be offset by a long-term dip in mining revenues. In fact, according to data from the Central Statistics Agency (BPS), Indonesia’s export of copper declined by 29 percent in the first quarter, to $825.5 million. For all other metal ores, exports dropped by 33 percent to $1.32 billion. These are worrisome figures, giving added consideration to the fact that they appeared prior to recent regulatory changes.

In a very short time span the Indonesian government has opted for a quick-fire source of cash. They have added to anxieties by suggesting there will be further tax hikes for the following year, taxes that may be set as high as 50 percent. It will likely prompt many smaller miners to abandon their plans in the country. Many will still be able to finance operations, but by doing so they risk losing out to more policy changes. Consider this, two weeks ago the Indonesian government took pains to deny that a tax implantation was being planned. Actions have now proven otherwise. Nobody wants to be associated with so much uncertainty and risk. Indonesia was once an attractive mining destination, and that is a thing of the past.

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Jason Staeck

ProspectingJournal.com

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