Indonesia's Mining Sector Likely to Attract $6 Billion in Investments During 2010-12

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Jakarta Post reports that the Indonesian mining sector could see investments of about $6 billion in 2010-12, partly influenced by the enactment of a mining law that is likely to create some certainty in the sector, although no revolutionary changes are expected.

The recently enacted law proposes equal treatment to both domestic and foreign investors, with the two earlier origin-specific mining rights systems being replaced by a single system that governs mining permits. Previously, foreign investors were granted a contract of work to invest in companies awarded long-term mining contracts by the government. The Kuasa Pertambangan (KP) license was awarded to local miners and was utilized by foreign firms. The firms usually entered into mutual contracts with local partners holding KP licenses, as procuring contracts of work was a time-consuming process.

Under the new law, business licenses for mining, also known as IUPs, have been categorized into two types: exploraion and production. Production IUPs, initially valid for 20 years, are applicable to both coal and ferrous minerals mining. They can be further extended by two 10-year spans, rendering the venture operable for a total of 40 years. On the other hand, the validity of exploration IUPs varies for coal and ferrous minerals, with a seven-year validity period for coal mining and an eight-year term for ferrous minerals. Foreign investors will be able to avail the IUP license only in collaboration with a local holding company, in which the investor concerned will be allowed to hold a stake of 100% during the initial five years of production, after which 20% of holdings are to be divested to Indonesians. The divestment operations can be completed during a four-year period. Eventually, foreign investments in all mining ventures will stabilize at 80%.

The IUP allotment process also has undergone changes, which are likely to cause bureaucratic delays as projects across regions are now required to obtain clearances from the central and regional governments. The law also does not permit export of raw ore. The excavated ore has to be processed and smelted locally, allowing local smelters to participate in the potential growth ventures. This clause is likely to cause concern among investors. In addition, the Indonesian government is likely to set production or price caps on the mineral output, especially that which is targeted for exports. The law is expected to reduce instances of illegal mining, apart from conserving rare mineral resources by regulating or banning production.

Although the sector is predicted to experience an imminent short-term setback due to initial uncertainty in interpreting the law, it is eventually expected to draw foreign investments into Indonesia's mining sector. Several mega-mining projects, both current and proposed, such as the two large nickel projects in the country, are anticipated to ramp up investments across all mining operations, including the development of new smelter capacities.

The $4.6 billion Halmahera nickel smelter coming up at the Weda Bay in North Maluku is being promoted by three foreign firms and state-run PT Aneka Tambang Tbk (JAK:ANTM) (Antam) (Jakarta, Indonesia). Halmahera is based on the vast unexplored nickel resources of the Weda Bay, which is estimated to contain 5.1 million tons of deposits. The project is capable of producing up to 65,000 tons per year of nickel. The nickel block belongs to PT Weda Bay Nickel, a 90:10 joint mining venture between Eramet SA (EPA:ERA) (Paris, France) and PT Antam. Eramet had agreed to offload 33.4% of its stake to Mitsubishi Corporation (TYO:8058) (Chiyoda-Ku, Japan) last year.

The other nickel venture, based in Gag Island, which is off Papua, and jointly owned by Antam and BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia), will comprise a smelting unit built at an investment of more than $4.5 billion. The venture includes the development of laterite nickel deposits in Halmahera, North Maluku and Gag Island.

BHP Billiton also resumed coal mining operations in Indonesia to develop a mine in eastern Kalimantan. The venture was slated to commence operations by the end of 2008. Rio Tinto Limited (NYSE:RTP) (London, England) is also a potential investor in nickel mining ventures in the country.

Mineral-rich Indonesia is reported to have recorded a 2.5% growth in investments from 2007 to 2008. The country is hoping to draw investments of about $2.15 billion in the mining and energy sectors this year, with about $250 million coming during the first quarter. Oil refinery ventures also are likely candidates for hefty investments. However, it is too early to expect results, as foreign investors are expected to wait for the new mining law to sink in, before actually deciding to scale up investments in the country.

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