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Indonesia surprised the global mining community last week after a new rule – Government Regulation No. 24 of 2012 – was quietly announced on the mining ministry’s website.
The country – southeast Asia’s largest economy – will now require all foreign mining companies to sell majority stakes in their mining operations to locals by the tenth year of production.
Indonesia, with a population of 240 million, is the world’s premier thermal coal exporter, a tin powerhouse and is also rich in gold and copper.
Freeport McMoran’s Grasberg mine in the west Papua, a province of Indonesia, is one of the world’s biggest mines. It has the globe’s richest gold deposit and is second in copper.
Grasberg has been the site of violent clashes, sabotage and strikes over many years. Mining makes up roughly 12% of Indonesia economy and Grasberg is the country’s largest taxpayer.
Freeport and other miners operating in Indonesia are currently locked in royalty discussions with the government and some in the industry have speculated that the new regulation is not much more than a ploy to strengthen the government’s hand in negotiations.
An editorial in the Jakarta Post argues that Rule 24 should not have come as a surprise, but nevertheless takes the Indonesian government to task over its timing which “seems to make things even murkier and heightens uncertainty as, over the last few months, the government has been strong-arming foreign miners over contract re-negotiations […] and [to] submit concrete business plans to build processing plants or smelters as they can no longer export unprocessed minerals after 2014.”
A growing list of nations – and not just radical fringe territories such as Zimbabwe or Venezuela – but stable jurisdictions including Poland, Ghana and Botswana are pushing for greater control and ownership of the resource sector on top of higher taxes and royalties.
South Africa recently stepped back from nationalization, but is nevertheless tightening its grip on the industry. Other countries, including Indonesia are putting a stop to raw exports and requiring domestic processing and beneficiation of mining output.
Last year according to an Ernst & Young survey of the world’s 30 largest miners, resource nationalism jumped to the top of the risk list in 2011 from fourth in 2010, after 25 countries announced their intentions to increase their take of the mining industry’s profits and others contemplate outright nationalization.
The Vancouver Sun reports smaller operators would be hurt much more than major projects and sums up the situation this way: “Cash-rich mining companies, raking in profits from metal prices that are well above historical levels, have emerged as easy targets for governments. Higher taxes and royalties on big miners are often used by politicians as populist moves to help rally the public and serve as platforms ahead of elections.”
MINING.com reported in January as attractive deposits become harder and harder to find in traditional markets, miners – especially those exploring for gold – are pushing the limits of the political risk they are willing to take on.
Research house Maplecroft in its 2012 political risk atlas identifies DR Congo, South Sudan, Myanmar, Turkmenistan, Iran, Guinea, Zimbabwe, Venezuela, Iraq, Bolivia, Russia, Kazakhstan, Angola, Nigeria and Libya as resource nationalism hotspots.
As an indication of how Indonesia’s move has surprised the industry it was missing from Maplecroft’s list released in January of countries that faced “extreme risk” and the researcher actually said investment risk in the country had decreased from the year before.
Also missing was Papua New Guinea which this year heads into elections that many observers have warned is bound to lead to civil unrest. In August last year the country’s leaders introduced a plan to hand state ownership of mineral and energy resources to landowners, a move that may prove disastrous to foreign miners developing massive projects and pushing into new regions of the resource-rich country.
Eurasia Group points out that already the world’s biggest gold mines are in so-called frontier markets:
And new mega-mine projects such as Newmont’s $4.8 billion Conga project in Peru, Barrick’s Pascua Lama (straddling Chile and Argentina) face opposition from environmentalists and locals.
7 Comments
Leonleon403
I see governments all over the world now wanting majority stakes in new projects and I am not against that. However, should you want a stake in anything, how much risk and funding will you be standing in for? The mere fact that the resource is a state asset should not automatically make you a partner………
Serminesincusa
Wally Spider: I can assist you in good properties in Latin America and Mexico my email [email protected]
drift123
I can appreciate the fact that countries do no want their natural resources shipped out of their country without any benefits like taxes or decent paying jobs. However, I believe these countries could do or (start to do in the future) a better job of working with all parties involved to make sure everybody is taken care of.
Minors want good pay, but if the pay is too high then a companies profit margin goes down and perhaps it would be better to look for other places to mine. Mines probably provide one of the major sources of taxes. However, just like with wages if taxes are too high maybe it is time for the company to move on.
Finally. No company wants to invest $3 billion dollars in a mine only to have their mine be taken away from them (Nationalized). My motto has always has been “keep’ everybody happy.”
If the mine unions, if they have one, the country and the company get together ahead of time before the first machine is started up to begin creating the mine I think it would be better for everybody.
I know that might sound pollyanna, but investors and companies are much more likely to invest in a country with a stable work environment.
If a company know ahead of time that the company owns the mine, but in 30 years 51% of the mine will go to the country where the mine is located , investors will know what to expect and will know ahead of time what they are getting into.
I would like to invest in Gold, Silver and Copper mines in South America and Africa but nationalization has me keeping my pennies in the Northern Hemisphere.
BKayTRE6
How we can contact each other drift123 ?
Smithgiblin
Frik Els : Why are you so negative about Ivnhoe (ivn) in all your articles?
MINING.com Editors
Thanks for the comment Smithgiblin.
Not sure I understand why you think I’m negative about Ivanhoe. The reference in the article is to Ivanhoe and Rio’s successful defence of Oyu Tolgoi after Mongolian politicians wanted to go back on the original deal that gave the state 33%.
Sure, Friedland talks big, but he’s got guts to take on such massive projects and pull them off.
Wally Spider
Hello,
In relation to your comments, which are thoroughly well thought out and presented, I can only say from the perspective of playing devils advocate that your closing remark :
‘I would like to invest in Gold, Silver and Copper mines in South America and Africa but nationalization has me keeping my pennies in the Northern Hemisphere’
It would seem to me that China exerts an increasing amount of influence in relation to the mining sector generally, it may well be that 49 percent of resources outside of China would be a position that is more than attractive and they ( China ) have the capital to invest and the expertise to lend to any novice mining nation.
As regards:
‘If a company knows ahead of time that the company owns the mine, but in 30 years 51% of the mine will go to the country where the mine is located , investors will know what to expect and will know ahead of time what they are getting into’
I would tend to think that the nature of politics ( in any nation ) is such that a prediction on exactly what any nations ‘political leaders’ will be thinking in 30 years time is could not with any certaintly be considered reliable – just think back to where we were 30 years ago.
With a very recent interest in the mining sector, I admit to having very little experience, however surely we are presented with a macro-economic issue here.
Wally