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TABLE OF CONTENTS Jan 27 - Feb 2, 2014 Volume 99 Number 50 - 0 comments

Editorial: Shockwaves from Indonesia's unprocessed minerals export ban

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By: John Cumming

The crisis for miners in Indonesia that quietly built up over late December has exploded in the new year, as miners active there grapple with sweeping new restrictions on exports of raw concentrates from the country.

Indonesia’s unprocessed minerals export ban was proposed in 2009, but only came into force on Jan. 12. Importantly, not all commodities are treated equally and, thanks to some last-minute manoeuvering, the ban is not structured in the way it was first proposed.

On the part of miners, the broad attitude of denial — that the Indonesian government was playing chicken with concentrate exporters — is now giving way to more sober assessments of how to work under the new rules.

There are already mineral concentrates that have been exempted from the export ban and can still be exported: copper, lead, zinc, iron ore, iron sands and manganese.

But — and it’s a big but — the exports of the above concentrates will be subject to a 25% sales tax that will rise every six months until it reaches 60% in 2017, at which time all exports of unprocessed minerals will be banned.

While there is some copper-smelting capacity in Indonesia, higher-level processing capacity is minimal for the other exempted concentrates, leading to the conclusion that mining the exempted metals economically is impossible in the near-term.

For juniors such as Kalimantan Gold, the world has been turned upside down. Its deep-pocketed partner at its technically impressive KSK copper project in Central Kalimantan, Freeport-McMoRan Copper & Gold, started the new year by walking away from the project after having spent $33 million since the joint venture was formed in April 2011. Kalimantan Gold will regain 100% ownership of the project, including all the data generated by Freeport’s work, which is highlighted by 30,000 metres of drilling.

In the bigger picture, of course, the copper crunch is focused on the country’s two huge copper–gold mines: Freeport’s Grasberg in Papua province and Newmont Mining’s Batu Hijau on Sumbawa Island. Their continued operation at current rates is dependent on existing plans going forward to build three new copper smelters in Indonesia.

Freeport says the new restrictions "conflict with PT Freeport Indonesia’s Contract of Work (CoW), and PT-FI is working with the Indonesian government to clarify the situation and defend its rights under the CoW."

Newmont similarly says it is "evaluating potential impacts to its operating plans at Batu Hijau" and is considering legal action, as the new rules contravene its CoW. It will update the markets on Jan. 31.

The key mineral products that aren’t exempted under the ban are concentrates of bauxite, tin, gold, silver, chromium and nickel.

China gets about three-quarters of its bauxite from Indonesia, and importers there have reportedly built up stockpiles that will carry them through the near-term until further exemptions and aluminum-smelter construction plans can be negotiated with the Indonesian government. Globally there has already been substantial aluminum-smelting overcapacity in recent years, so adding newly built Indonesian smelters to the mix can only mean more pain for existing players.

Oddly enough, Indonesia’s critical tin market isn’t affected by the new rules, as exports of unprocessed tin concentrates were already banned 12 years ago, and tin was thereafter exported as low-grade ingots and similar products, with the government recently tightening the purity requirements of tin exports. No doubt, the whole experience has served as partial inspiration for the government’s latest clampdown on other concentrate exports.

The biggest shake up from the new rules is in nickel, as Indonesia accounts for a third of global nickel production, much of it destined to be used to make a low-quality variety of nickel product called nickel pig iron (NPI), and with almost all nickel concentrates having been shipped to China, where NPI output has grown dramatically in recent years.

While China has reportedly built up nickel-concentrate stockpiles over the past year in anticipation of the export ban, nickel prices still rallied 6.7% in mid-January to US$14,595 per tonne, giving a much-needed boost to the share prices of nickel companies active anywhere but Indonesia.

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Freeport-McMoRan's Grasberg copper-gold mine in Papua province. Credit: Alfindra Primaldhi (Wikimedia Commons)
Freeport-McMoRan's Grasberg copper-gold mine in Papua p...

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Batu Hijau Mine
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