Bill Guerin, Jakarta – Jakarta plans to sell small stakes in three state-owned mining companies this year as part of efforts to meet its privatization target of Rp5 trillion (US$590 million). Up to 14 percent stakes in miners Tambang Batubara Bukit Asam (Bukit Asam), PT Timah Indonesia (Timah) and Aneka Tambang (Antam) will be offered.

These are all healthy, well run companies, and shares in several mining companies rose last week upon news of the planned share sales. But the rally masks pessimism about the sector in the long run.

Coal miner Bukit Asam expects to post a net profit of over Rp200 billion ($23 million) for last year helped by stronger coal prices.

Timah, the world's largest integrated tin miner, expects final net profits of around Rp80 billion, a massive jump from Rp11.28 billion in 2002 though still puny compared with its Rp331 billion earnings in 2000. Sales last year rose to $200 million amid higher tin prices and rising volume, and this year may be better. Timah forecasts world tin prices rising above $5,500 per ton and demand 5 to 10 percent higher thanks to more buoyant electronics and automotive industries. Gold and nickel miner Antam is one of Indonesia's top diversified mining companies and its largest nickel producer. It also won the 2003 Annual Report Award in the publicly listed company category. Despite depressed markets at present, Antam is pressing ahead with a third smelter project, FeNi III, to process low-grade nickel, projected to boost annual production by about 15,000 tons in 2006.

Bleak prospects

In spite of the success of these three companies, Indonesia's mining sector ranked 27th out of 35 countries for "attractiveness" in a 2001-2002 industry survey, and that ranking surely hasn't improved in recent years. Though Article 33 of the 1945 constitution specifically requires the land and natural resources of Indonesia to be used for the benefit of the people, mining analysts say unfulfilled potential costs the state vast prospective revenue from taxes, royalties and profit sharing, while local communities miss out on thousands of job opportunities.

Industry analysts predict only a handful of miners – PT Freeport Indonesia (gold and copper), PT Inco (nickel), PT Kaltim Prima Coal, PT Newmont Nusa Tenggara (gold and copper), and PT Adaro Indonesia (coal) – may still be operating in Indonesia by the end of the decade.

Investment and exploration in the sector has ground toward a halt over the last six years due to illegal mining, uncertainty about government policy, high taxes, lack of security guarantees, corruption and concerns over regional autonomy legislation.

This slowdown is costing the government dearly. Energy and Mineral Resources Minister Purnomo Yusgiantoro said state revenue from the mining sector amounted to only Rp1.07 trillion ($127 million) in 2003, down from Rp1.3 trillion in 2002.

Ironically, Indonesia is still one the world's most geologically promising countries, but as existing mineral reserves become exhausted, many mining companies are closing up shop and leaving Indonesia for better digging abroad.

Rio Tinto, for example, has been in Indonesia for three decades, but is now rapidly downgrading its operations. Its Kelian goldmine in Kalimantan will shut down this year, and its Citra Palu mine in Sulawesi is up for sale.

Last year's move by Rio Tinto and BP Plc to sell their stake in the country's second largest coal producer, PT Kaltim Prima Coal (KPC), to local company PT Bumi Resources, was the beginning of the end for the Anglo-Australian giant.

Rio Tinto's Indonesian exploration activities have been scaled down, and its only remaining investment will be its interest in the Grasberg mine in Papua, operated by American giant Freeport.

The changes follow years of frustration with the uncertainty in the country's mining policy. In 2002, Aurora Gold packed up and left, claming it was helpless against the ravages of illegal miners.

No confidence vote

Indonesian Mining Association (IMA) warned that more foreign companies might follow suit without improvements in the investment climate for mining. "It has become a growing trend now among foreign mining companies to sell their mining interests in Indonesia," IMA executive director P L Coutrier said. "They simply have no confidence in the country's mining policy."

BHP-Billiton's proposed nickel mine in a protected forest on Gag Island, off West Papua, has been delayed for years because of environmental concerns. The Raja Ampat archipelago (which includes Gag) contains some of the richest coral reefs in the world, and UNESCO says the plan for submarine tailings disposal would introduce mining waste into a highly biodiverse marine environment, inviting disaster.

The major battles are being fought over forestry law 41/1999, which prohibits open pit mining in protected forest areas. Protected forest areas currently stand at 11.4 million hectares out of an estimated total 85 million hectares of forest, while current mining concessions cover an estimated 47 to 67 million hectares of forest and other areas.

However, miners say that virtually all of Indonesia's forests include rock that may contain commercially viable deposits, including the protected areas. "Most of the mineral deposits are located in the forests, so if all forests are considered protected forest, we won't have any new mining areas to work on," Antam's development director Darma Ambiar said last month.

BHP-Billiton and fellow multinationals Rio Tinto, Freeport MacMoran, Newmont, BP and Inco have been in the forefront of lobbying the government to open up protected forests for mining, but there is no end in sight to the conflict.

The government planned to issue permits to 15 mining companies to resume their work in protected forests. Those companies – Freeport Indonesia in Papua; Newmont in Nusa Tenggara; International Nickel Indonesia (Inco), Indominco Mandiri, Arutmin Indonesia, Aneka Tambang, Karimun Granite, Nusa Halmahera Minerals in Maluku; Natarang Mining in Lampung; Meares Soputan Mining, Nabire Bakti Mining, Meratus Sumber Mas, Weda Bay Nikel, Gag Nickel and Citra in Palu – all signed their contracts before the law was enacted and their working areas became classified as protected forest.

According to Minister of Energy and Mineral Resources Purnomo Yusgiantoro, the decision to grant permits was taken at a ministerial meeting on June 18 last year. He said at the time that the new permits only awaited President Megawati Sukarnoputri's approval. The government later prioritized 13 companies that had all actually been mining before the ban.

Lightning strikes

Legislators from House of Representatives Commission III on forestry affairs and Commission VIII on mining affairs screened the sites in a series of what miners termed "lightning" visits, and in November, Commission III rejected the proposed permits.

Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti immediately appealed to legislators to reverse the decision, saying companies with signed contracts should be allowed to proceed. Kuntjoro-Jakti added that Indonesia needs additional investment of $170 billion over the next five years to develop mining infrastructure, particularly in eastern Indonesia. "After 2007, there will be no new activities," he warned. "Please allow these 13 companies to go in."

Government documents assert the 13 mining companies have invested $7.6 billion in Indonesian projects. They claim the new projects would lead to $380 million annual revenue and jobs for 47,269 local workers. Analysts estimate the government could also face $22.8 billion in costs and compensation payments through litigation if it fails to honor the mining contracts.

While acknowledging concerns over environmental degradation, Kuntjoro-Jakti noted the 13 companies' mines would occupy only 2 percent of total protected forest areas. But with April's legislative elections only weeks away, lawmakers are very unlikely to reverse their decision and risk the wrath of rural voters. A long awaited presidential decree on mining reportedly due soon may override the House on these 13 permits, but it won't end the conflict over mining.

Mining is one of Indonesia's biggest industries. According to Energy and Mineral Resources Minister Purnomo, investment from the four biggest concessions alone amounts to $9 billion. But mining also can destroy natural resources on which many millions of rural and urban Indonesians depend for their livelihoods, and it can endanger their health.

An Indonesian non-governmental organization coalition led by Mining Advocacy Network, known by its Indonesian acronym JATAM, has spearheaded a campaign to maintain the ban. The coalition argues that if the government caves in to mining multinationals, the outcome will be continued conflict with local communities whose lands will be taken for mining. On Thursday, paramilitary police in North Maluku shot dead a local man demonstrating for an end to mining in a protected forest area.

Blind eye

Opponents of mining also predict more fatal floods and landslides will take place as forest cover is lost. They accuse the government of turning a blind eye to environmental and social consequences for the sake of big corporations.

During a single week last July, protests against mining in protected forests took place in 13 cities in Sumatra, Kalimantan, Nusa Tenggara Timur, Sulawesi, and Java, including the capital, Jakarta. In both Central Sulawesi and South Kalimantan, provincial governments have refused permission for mining in their protected forests, and Kalimantan has declared a province-wide mining moratorium. These local rules conflict with national mining laws, adding another layer of uncertainty to the industry.

Amid the web of restrictions and regulations, rampant illegal mining is inflicting massive losses on the government. Last month, retired general Muzani Syukur, chairing the government team tasked with implementing Presidential Decree No.25/2001 on the eradication of illegal mining, fuel smuggling and electricity theft, said illegal mining caused annual losses of Rp 3.3 trillion ($389.4 million), three times previous estimates.

"The losses exclude environmental destruction, pollution and other forms of damage whose impacts are far greater than the material losses," Syukur said, blaming the problem on "reform euphoria, weak law enforcement and the poor performance of state officials".

But he added it was impossible for the government to take stern measures against illegal miners because there are so many of them. "Around 75,000 people currently engage in illegal mining. If each of them has four family members to feed, will we take action against all of them?" he asked.