--Clyde Russell is a Reuters columnist. The views expressed are
By Clyde Russell
LAUNCESTON, Australia, Sept 1 In the high-stakes
poker game being played between the Indonesian government and
mining companies, it has come as a bit of a surprise that
Jakarta appears to be playing the winning hand.
So far the Indonesian government has successfully stared
down two U.S. mining giants, imposed a ban on exporting some raw
metal ores and is deaf to the squeals of the beleaguered coal
industry as it tightens rules on what had been a cowboy sector.
When the government started down the path of changing the
laws and regulations in order to ensure a greater share of the
Southeast Asian nation's mineral wealth stayed at home, it was
widely assumed that it would lack the resolve and the ability to
stand up to the powerful mining industry.
Previous attempts had resulted in compromises that favoured
miners and the government was widely viewed as inefficient,
inconsistent and largely ineffectual.
But in recent weeks the government has been shown to be
holding a stronger hand than its opponents, and it has been
willing to call their bluffs.
First, U.S. mining major Freeport McMoRan signed a
memorandum of understanding with the outgoing administration of
President Susilo Bambang Yudhoyono that should result in the
government getting what it wanted, without giving up much in
The deal allows Freeport, which operates Grasberg, the
world's second-largest open-cut copper mine, to resume exports
of copper ore after providing a $115 million bond for the
building of a smelter with partners.
Freeport also agreed to higher royalties, an export tax and
to divest 30 percent of its Indonesian unit, while in return the
government committed to providing the U.S. company with a mining
licence between 2019 and 2021 to allow it to continue operations
This was important for Freeport, as the Grasberg site is
believed to contain large deposits of copper and gold, but will
need exploration and other investments to develop.
Newmont Mining Corp, which like Freeport had halted
copper ore shipments earlier this year in dispute over the
government's hike to export taxes, had taken a different path to
Freeport in attempting to force Indonesia to international
However, the Denver, Colorado-based group withdrew the claim
last week, almost immediately leading to a breakthrough in its
seven-month dispute with Jakarta.
Newmont will resume copper exports next week after agreeing
to pay increased royalties, a government official said on
It could be argued that Freeport's more conciliatory
approach worked better than Newmont's now abandoned hardline
stance, but that ignores the two companies had different
priorities with their Indonesian assets.
Freeport's Grasberg is a world-scale mine sitting on vast
potential untapped reserves, and is thus a strategic asset for
the company, giving it more incentive to negotiate a deal to
ensure it remains with the company's portfolio.
Newmont's Batu Hijau mine is considerably smaller than
Grasberg and may not be worked much longer than the 2030 expiry
date of the existing licence.
This meant Newmont had less incentive to re-negotiate a
contract that it believed the government would be forced to
honour had the case proceeded to arbitration.
It may also be the case that the Freeport deal helped
Newmont realise that compromise was possible, or put another
way, once the first domino fell it was always going to be easier
for the government to get other companies to fall into line.
NEW GOVERNMENT, SAME POLICIES
No doubt the incoming government of President-elect Joko
"Jokowi" Widodo, which takes office next month, will be keen to
get off to a good start with the mining industry.
But that doesn't mean the government will be stepping back
from its plans to extract more from the resource sector.
Coal miners are also feeling the pinch, saying some will go
under if the government pushes ahead with rules to force them to
register with a central authority and pay export royalties in
The new rules aim to stamp out illegal mining, which is
estimated at about 50 million tonnes per annum, or about
one-seventh of forecast legal exports in 2014.
The coal industry says it can't afford to pay royalties in
advance, but the government appears unconvinced.
If past patterns are repeated, it's likely the authorities
may well stick to their plans, having already shown they are
prepared to take the pain of loss of revenue from lower exports
of metal ores if they believe the long-term gains are worth it.
While the Indonesian government has so far played better
poker, their strategy isn't without risks.
The main problem the authorities are likely to face is
declining investment in mining, as the rules become more
burdensome and the expected returns lower.
This will ultimately have a negative impact on production as
existing reserves are mined and not replaced by new projects.
After all, if you are too good a poker player, the other
players may decide to go to another table and try their luck
(Editing by Himani Sarkar)