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DAILY NEWS Mar 8, 2012 7:58 PM - 0 comments

Nationalization agendas will take a bite out of industry revenues

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2012-03-08

Vancouver— Indonesia’s new indigenization legislation aimed at foreign mining companies opens another chapter in a resource-nationalization saga amongst developing countries.

According to new regulations ratified by Indonesian President Susilo Bambang Yudhoyono on Feb. 21, foreign firms will be required to increase domestic ownership to a minimum of 51% by the tenth year of production.

The announcement comes in the midst of contract re-negotiations between the Indonesian government and major mining players Freeport-McMoRan Copper & Gold (FCX-N) and Newmont Mining (NMC-T, NEM-N).

Freeport owns the rights to the Grasberg mining district in Indonesia’s Papua province, which holds the world’s largest single recoverable copper reserve and largest single gold reserve based on December estimates.

Grasberg has reserves of 825 million tonnes grading 1.09% copper and 1.03 grams gold per tonne totalling 31.6 billion lbs. contained copper and 32.2 million oz. contained gold. The company owns 91% of the project, with 9% held by the Indonesian government.

 Freeport’s current contract of work has included US$13.8 billion in royalty and tax payments since the agreement was signed in 1991. Indonesian production accounted for 19% of Freeport’s 2011 revenues, and last month the company said it is in negotiations with the government to run Grasberg beyond 2021.

Newmont is involved in the Indonesian joint-venture company, Newmont Nusa Tenggara that includes Japanese-partner Sumitomo Corp. The companies have signed agreements over the past year to divest the required 51% ownership of the Batu Hijau copper-gold mine in the West Nusa Tenggara province.

Indonesian government-owned consortium Bumi Resources already holds 24% of the project, and agreements with central governments will see another 7% stake change hands in the next few months. Batu Hijau is the second-largest copper mine in the country with reserves of 563 million tonnes grading 0.4% copper or 4.5 billion lbs. contained copper.

BHP Billiton (BHP-N, BLT-L, BHP-A) will also be pulled into the fray on account of its 75% position in the IndoMet Coal project on the Indonesian part of Borneo island. Adaro Energy an Indonesia-based integrated coal mining company — owns the remaining 25%. The joint-venture agreement was signed in May 2010, and BHP announced a US$1.34-billion mine development plan in November. The proposed Haju mine location is 220 km northwest of Balikpapan, and construction is slated to begin at the end of 2012.

BHP reports it is reviewing the updated Indonesian ownership requirements, and has yet to respond to requests for comment.

Exploration outfits including Intrepid Mines (IAU-T) were hit by the news on March 8. Intrepid’s share price dropped 22¢ or 18% to $1.02 on the Indonesian government’s announcement. The company controls 80% of the Tujuh Bukit gold-silver-copper project located on the island of Java through a joint-venture agreement with Indonesian company Indo Multi Niaga. Intrepid is reportedly reviewing the new legislation and will be in touch with the Ministry of Energy and Mineral Resources to determine the best course of action.

Resource nationalization has become a hot-button topic in developing countries as rising metal prices, and existing work contracts have central and regional governments calling for foreign mining firms to hand over tighter financial control to domestic interests.

Zimbabwean Indigenization Minister Saviour Kasukuwere levied nationalization threats against 30 foreign-owned mines in late February under the nation’s new Indigenization and Economic Empowerment Act, requiring 51% ownership in all mining operations be held by local interests.

According to reports from the country’s parliamentary development committee, 200 mining companies have submitted indigenization proposals, but only 54 have met the criteria imposed by the new government legislation.

Caledonia Mining (CAL-T, CLDN-L) reached a US$30-million agreement to divest 51% of its Blanket gold mine to Zimbabwean interests in late February. Blanket produced 10,500 oz. gold in fourth-quarter 2011 at average cash costs of US$582 per oz. Caledonia reported unaudited after-tax revenues of $19.2-million last year.

South Africa’s Impala Platinum (IMP-J) continues to wage a battle with the Zimbabwean government over control of its subsidiary, Zimplats. The world’s second-largest platinum producer has ignored demands to concede 30% of its outstanding shares. Zimplats’ Ngezi Mine is 150-km southwest of Harare and, according to a June 2011 technical report, accounts for 80% of Zimbabwe’s platinum group metal resources.

In a March 2statement, South African Trade and Industry director-general Lionel October said domestic interests operating in Zimbabwe were protected by a bilateral investment agreement that should trump any new requirements from local governments. October classified South African interests in Zimbabwe as “secure”.

Canadian companies are protected by similar bilateral investment treaties with 27 countries world-wide, according to the United Nations Conference on Trade and Development. The majority of Canada’s treaties involve Europe, South America and Asia; the country maintains no such treaties with any African nations. 

Industry veterans will remember increased taxation pushes by governments in the mid 2000s that narrowed exploration budgets and capital expenditures in a number of resource-rich areas, eventually compounding recessionary conditions that hit in 2008. With metal prices rising to start the year and production and revenue growth now common, it appears escalating taxation and royalty rates are still on the table for 2012.



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