UPDATE 1-Indonesia's industry minister wants mining export tax soon

Thu Apr 12, 2012 5:42am EDT

By Matthew Bigg and Yayat Supriatna

JAKARTA, April 12 (Reuters) - Indonesia should quickly impose a tax on mining exports, the industry minister said on Thursday in comments likely to worry miners in the world's top exporter of thermal coal and refined tin.

Government officials say a 25 percent tax on mining exports is being considered for this year and a 50 percent tax for next year, though miners and industry analysts have speculated that such plans are likely to be toned down.

The tax plan is the latest in a series of proposed regulations that have rattled Indonesia's mining sector both because they could increase the cost of business and because of a perception of inconsistent policymaking.

"The mining export tax has to be imposed as soon as possible," Mohamad S. Hidayat told Reuters.

Other new regulations include a plan under which some foreign mining companies must divest 51 percent within 10 years and a proposed ban on the export of some unprocessed metals by 2014.

The government says its proposals aim to develop its domestic mining industry, create jobs, win access to higher streams of mining revenue and allow the state to earn more from a fast-growing sector at a time of high commodity prices.

Stringent regulations are likely to drive up the cost of mining in Indonesia but the outlook for the sector remains stable, ratings agency Standard & Poor's said on Thursday.

"The cost of business in Indonesia will increase. But we don't think the regulations will be extremely negative," S&P analyst Xavier Jean said after the agency released a report.

"Basically, we don't think the government will want to kill the sector," he told Reuters.

He said government strategy also aims to give Indonesia greater leeway when it comes to the renewal negotiations for mining companies that operate under Contracts of Work in a sector that overall contributes around 12 percent of GDP.

The most prominent of those contracts is with Freeport-McMoRan Copper & Gold's Indonesian unit, which is due to renegotiate its agreement to run the huge Grasberg copper and gold mine in Papua.

"STRONG INCENTIVE"

The report posed a question that has exercised many in the mining sector in recent weeks: will mining policy be driven solely by attempts to derive more state benefit from the sector, a policy sometimes called "resource nationalism"?

Or will that drive be tempered by fear of scaring off mining investment from a country whose resources include, coal, gold, copper, tin, nickel, bauxite and silver.

Prudence would ultimately determine policy and Indonesian officials were mindful of the global competition for mining investment, S&P said.

In the short run and while commodities prices are high, the government will benefit and the companies can absorb higher taxes but when commodity prices fall the higher taxes will hurt the companies' ability to generate revenue, said Jean.

"This is a lose-lose situation in the medium term and will come back with a vengeance during the next down cycle for commodities," said Jean, who is based in Singapore.

S&P is likely to release a report soon on the Indonesian government's sovereign rating.

Fitch and Moody's upgraded the country to investment status in recent months in a reflection of its stable fiscal policy framework, big internal market and strong growth rate at 6.5 percent in 2011.

One factor complicating policy making is that four related ministries play a role in the process and they do not always speak with one voice.

There is also political advantage in voicing nationalistic sentiment ahead of elections in 2014 when President Susilo Bambang Yudhoyono must stand down and that fact is not lost on rival parties both within and outside the governing coalition.

Another complication for mining companies is legal fights over mining assets.

In one example, London-listed miner Churchill Mining Plc said on Thursday it was heading to international arbitration in May after Indonesia's supreme court moved to reject its appeal.

Churchill has been fighting Indonesia's Nusantara Group for almost four years over the rights to develop a $3 billion undeveloped coal asset in East Kalimantan province, which is said to contain 2.8 billion tonnes of coal reserves.

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