John McBeth, Jakarta – His office overlooking Jakarta's central business district, the shirt-sleeved boss of a Western mining company gestures to a graph on his computer screen. It looks very much like the outline of Switzerland's Matterhorn, the right rock-face plunging precipitously onto a flat plain about the year 2005. That, declares the executive, is how his research sees the future of Indonesia's gold bullion industry, with three producing mines due to close in the next two to three years.
Leave aside mining giants Freeport Indonesia and Newmont, whose gold from the Grasberg and Batu Hijau mines is shipped out mixed with copper concentrate, and the graph could very well be tracing the free fall of the whole mining sector. In one of the world's most minerally rich countries, few if any new resources have been found since the 1980s. Worse, and almost inconceivably, a worrying combination of decentralization, misguided nationalism, higher taxes and new regulations is doing more to deter investors than attract them.
Ever since the Busang gold scam and the economic crisis sent small exploration companies scrambling for the exits in 1997-98, it has taken an act of sheer bravery to put a foot in Indonesia's door. Buoyed by higher gold prices, Archipelago Resources is one of the few that have. "This is elephant country – if you want really big prospects, these are the sort of places you come to," says Colin Loosemore, managing director of the Perth-based company that recently bought the properties of Aurora Gold in Central Kalimantan and North Sulawesi.
Loosemore senses times are changing in Indonesia. Anyway, he points out, "our strategy is to buy straw hats in winter." Whether that optimism is justified is another question. Indonesian officials are already wincing over the impact of the controversial court declaration of Manulife Indonesia as bankrupt – since overturned by the Supreme Court. "That's a bad, bad thing," says Benny Wahju, chairman of the Indonesian Mining Association, referring to a case that has aroused memories in Canada of the skulduggery surrounding the Busang bust in 1996-97.
Officials had hoped time would lay to rest the $5 billion Busang scandal, in which geologists working for Bre-X, a small Canadian company, salted their core samples with alluvial gold, creating the impression of a bonanza that sent its share price through the roof. It was Indonesia's handling of the case, as much as the scam itself and the subsequent economic collapse, which ended funding for the small Canadian and Australian exploration companies that had flocked to Indonesia in search of a mother lode.
The industry itself has been changing as well. Over the past decade, large mining outfits with an eye on the bottom line have found it more cost-effective to take over junior companies and buy up their projects, rather than gambling on grass-roots exploration. But with investors becoming increasingly hard to find, the result has been a lot less exploration. According to PricewaterhouseCoopers, spending on exploration in Indonesia dropped from $160 million in 1996 to $67 million in 2000 and an estimated $22 million last year. This year, according to some industry sources, it could be as low as $4 million. More than 170 exploration projects have either been suspended or withdrawn and rendered inactive over the same period, leaving barely 12 of the 268 contracts of work signed since 1973 still in operation.
Falling investment
There's more bad news. Total investment in the mining industry plunged from $915 million in 2000 to only $413 million last year – with a similar drop estimated for 2001. Revenue is also heading downhill, peaking at $888 million in 1999 then sliding to $738 million last year. The industry's contribution to the economy also fell last year after topping out at $1.6 billion in 2000.
The reason why Indonesia gets only a 1% share of exploration dollars worldwide is not just political risk. Tax and other costs already put the country well down the list of mining nations that offer gold companies a good deal. Indonesia's rate of return is just 11.2% on current contracts, compared with 18%-19% in competing countries like Australia and Argentina. That margin will widen even further under new tax laws which abolish VAT refunds and double royalties from 2% to 4% of gross sales; in most countries, royalties are only paid on net profits or have been scrapped altogether.
Archipelago's positive outlook therefore seems almost breathtaking, particularly given the problems Aurora Gold had with illegal miners on both its sites. Indeed, it got so bad in North Sulawesi that the company eventually gave up trying to develop its million-ounce Toka Tidung mine. Loosemore insists, however, that those problems are over. Now that they have stripped out the accessible gold, he says most of the wildcat miners have left – at least for now.
A small handful of other companies, including Canada's Placer Dome, are also continuing to take a quiet punt on Indonesia. But even that tentative look-see – and the operation of many existing mines – could come to an abrupt end if the government fails to heed World Bank advice and amend sections of the 1999 Forestry Act that dramatically expand the boundaries of protected forest where open-cut mining is banned.
Scores of contracts are affected by the ban, including the long-established operations of Canada's International Nickel Indonesia in southeast Sulawesi, Newmont's Batu Hijau project in Sumbawa, Newcrest's gold mine in North Maluku and two major coal deposits in Kalimantan owned by BHP and Kaltim Prima Coal (KPC). "Some of these areas of so-called protected forest have no forest at all," says one analyst, pointing to the lack of coordination between the Forestry, Mining and Finance ministries in efforts to kick-start the economy.
Miners also have to contend with the vagaries of decentralization. When Indonesia's new, long-delayed mining bill is finally passed, it will be compatible with the local autonomy law promulgated in January 2001. Under government regulations already introduced that means contracts signed before that date will remain under central government control, while those signed thereafter will be administered through kabupaten, or district governments which have had little or no experience in dealing with complex mining issues.
Impatient over the foot-dragging in Jakarta, some local bodies have literally taken the law into their own hands. South Sumatra and Bangka provinces have both issued their own mining laws. One tin-mining executive calculates the affect of the Bangka regulations would be to impose an $85 million charge just for the right to begin exploration. Drafts are also being prepared by North Maluku province, two districts in East Kalimantan and another two in Papua – all home to significant deposits of copper, gold, nickel and coal.
Many local governments are also adding on new taxes for such things as street lighting and mine vehicles. In North Sulawesi, local authorities taxed construction materials Newmont used to build a public road at its own expense near its soon-to-be-closed Minahasa gold mine. In East Kalimantan, KPC has found itself with a different problem: It is being sued by the local government for losses incurred due to delays in the divestment of 51% of its shares which the administration wants to acquire.
What concerns companies is the way the draft mining legislation weighs them down with additional social responsibilities, the result of intensive lobbying by community-based groups long ignored by Jakarta. Says one senior executive: "In effect, they're asking us to take the place of the government." Critics are also worried about the loose wording in the bill that tends to undermine the sanctity of contracts and make it difficult for firms to seek recourse in a legal system whose credibility is already in tatters. In Indonesia these days, it is the same old tired story of a government which just keeps on compounding the mistakes of the past in the belief that sooner or later greed will bring Western investors back.