June 8, 2011 / 10:35 AM / 8 years ago

Indonesia's nationalist push could scare off miners

JAKARTA, June 8 (Reuters) - Indonesia’s push to renegotiate mining contracts to increase its royalties could scare off new investors willing to take on a number of other risks to tap abundant natural resources in the Southeast Asian country.

The government’s move to revisit existing contracts is mandated by a 2009 mining law, but analysts said a string of recent comments by politicians suggested a rising tide of nationalism aimed at shoring up domestic political support.

The country, the world’s top exporter of thermal coal and tin, has this year seen a pick-up in interest from global miners and a boom in investment in coal assets, after years of being sidelined for investment because of political uncertainty, red tape and corruption.

“The problem with Indonesia in the eyes of many investors is the question of sanctity of contract,” said Keith Loveard, an analyst at Jakarta-based security firm Concord Consulting.

“I don’t think anybody in the business world is going to like the idea of walking in and signing a contract to find in two or three years that someone wants to renegotiate it.”

Darwin Zahedy Saleh, Energy and Mines Minister, said on Tuesday the government was seeking to renegotiate royalties paid by miners, but gave no details or timeframe. [ID:nL3E7H71UH]

The government said last year it was in talks with miners to try and adjust their contracts, but no public details have emerged.

“This could be a degree of posturing,” said Loveard, adding investors should watch whether words turned into action against a major operator.

Major miners in Indonesia include Freeport-McMoran Copper & Gold Inc , Newmont Corp and a unit of Vale . BHP Billiton and top nickel producer Norilsk Nickel have projects in the country.


Factbox on Indonesia political risks: [ID:RISKID]

Coal producers debate demand: e.reuters.com/kub89r

S&P analysis on Indonesia mining law: [ID:nL3E7GA086]


The 2009 mining law, replacing one dating back 41 years, was meant to increase certainty for investors but also aimed to squeeze more benefits from rich mineral reserves in Indonesia, also a key producer of copper, nickel and gold.

There has been little strong public opposition of the law by the mining industry, perhaps signalling that commodity prices are high enough to ensure sufficient return on investments despite any increased royalties.

Prices for gold , silver , tin and copper all hit records this year.

“The renegotiation must be from two sides,” said Thamrin Sihite, a director general for coal and minerals at the energy and mines ministry, telling Reuters higher royalties would come “only if it’s possible”.


Indonesia is aiming to not only increase its share but also spur investment in higher value processing, to use coal to make steel and to refine copper.

Efforts to attract foreign firms clash with regular nationalist noises — a reflection of a long-running battle between a handful of government reformers versus more domestic-focused parties and entrenched local business interests, heightened as players eye the next 2014 presidential elections.

Pressure from potential voters over foreigners and mineral wealth in the world’s fourth most populous nation was highlighted this week by Australian miner Sihayo Gold , who said locals burnt an exploration camp. [ID:nL3E7H70FL]

President Susilo Bambang Yudhoyono, who cannot stand again in 2014, launched an economic “masterplan” last month to attract investment, overhaul infrastructure and become a top-10 economy by 2025. But he also cited broken investor promises as one of the “diseases” that could cause the plan to fail.

The biggest push in the sector by investors, from utilities such as Coal India and private equity firm TPG , is in coal, where local firms such as Bumi Resources dominate.

Bumi’s prize assets came from majors BHP, Rio Tinto and BP after they were required to sell stakes following a certain period of production and then faced rising pressure from nationalists.

David Thurtell, metals analyst at Citigroup, said the new push would mainly impact smaller to medium coal companies, since others had contracts called “Coal Contract of Work” that spelled out exemption from new changes in regulations.

This kind of contract has already come at a price.

“For this, they have been paying higher royalty of 13.5 percent, versus a maximum of 9 percent for those with non Coal Contract of Work, and corporate income tax of 45 percent (versus 30 percent),” said Thurtell. (Additional reporting by Alfian; Writing by Neil Chatterjee; Editing by Muralikumar Anantharaman)

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below