Indonesia’s shocking changes

Earlier this year the ­Indonesian Government stunned international investors and resources companies by announcing strict new changes to mining regulations. 
The changes were met with a mix of shock and skepticism, but sent analysts and miners to the drawing board to assess their impact. 
Initial reports were mixed, but most stakeholders have since moved to quell earlier fears over unmanageable regulations. 
Most analysts and companies agree that so long as the Indonesian Government continues to be transparent about its intentions companies will be able to work with the regulator. 
The Government has already defended itself against the changes and marketed the legislation as protection against foreign interests. 

Lowering the tension

Intrepid Mines managing director Brad Gordon, who leads a gold, silver, and copper-gold project in Indonesia, has joined with most other companies in playing down fears over the laws. 
"The implications are limited," he said.  
"The two clear messages from us are really that the most significant effects of these regulations won't occur until well into the future – at least 10 years or more. Secondly the divestment will be done at a fair, commercial value. So it won't be value destructive." 
The most significant changes stipulate that some foreign mining companies must divest 51 per cent of their projects within ten years. 
The sell-off will focus on approvals granted after 2009. 
The new laws also propose a ban on the export of some unprocessed minerals by 2014. 
Ratings agency Standard & Poor's said the regulations were likely to drive up Indonesian mining costs but they would not be completely negative. 
The agency said while the Government was taking a tough line on the international industry it was also unwilling to enact anything that would "kill the sector". BIS Shrapnel mining analyst Adrian Hart told Australian Mining while the changes would pose some challenges to companies their impacts would be manageable. 
"Mining companies are usually mainly concerned about unforeseen changes in the regulatory environment – sovereign risk," he said. 
"Most companies will adapt to changes in regulation and taxation if it is a clear and transparent process, and well signposted in advance." 
Hart's comments endorse the prevailing view in the industry that so long as the Government works with companies the changes will be manageable. 
On initial announcement of the changes mining analysts at Deloitte said the move would "make Indonesia a lot less attractive to foreign investors". 
But most stakeholders have taken a softer line. 
Gordon said while the changes would have a limited impact they had also strengthened the Intrepid's resolve "to look for other world class assets, which we've been doing for several years now anyway". 
With respect to the company's two projects at Tujuh Bukit in East Java, Gordon said the laws may result in changes or delays to the company's plans. 
"We actually have two projects at Tujuh Bukit. We have a gold oxide project and a much larger copper porphyry project," he said. 
"We were going to bring the gold oxide project into production first, but if these regulations remain in place it may be preferable that we delay the gold oxide project and start both projects at the same time. 
"It would mean we would hold 49 per cent of the copper porphyry project around 10 years after we get into production." 
Gordon said the changes would also have Intrepid assessing their exploration budget in Indonesia, though that was something that was regularly looked at. 
"We have to be prudent in how we manage our cash in these circumstances," he said. 

Changes on the wind

While unexpected Indonesia's mining changes should not have been a total shock to the industry, and represent the tightening of an already strict Government. 
The changes build upon a ruling several years ago stipulating foreign countries must divest 20 per cent of their projects within the first five years of production. 
They were also followed by calls from some Government ministers to hike the tax on mining exports. 
Government officials said atop of stricter foreign ownership laws Indonesia should place a 25 per cent tax on mining exports this year rising to 50 per cent next year. 
The moves were also marketed as a step to develop Indonesia's own mining industry and ensure locals had the most privileged access to their own resources. 
Now the industry has had a chance to assess the changes beyond initial reactions most of the earlier fear over the regulations has dissolved. 
But while there doesn't seem to be a wholesale move away from Indonesia for international companies the region has lost some of its shine for the time being. 
With its high quality deposits companies will no doubt keep an eye on Indonesia for the future, but where industry is heading is uncertain. 

To keep up to date with Australian Mining, subscribe to our free email newsletters delivered straight to your inbox. Click here.