Friday, September 17, 2010

Observations on Indonesian Exploration

It seems every day a new chum is arriving in Jakarta to check out opportunities in Indonesia’s steadily reviving mining sector. Old hands are also gearing up for a new tilt, particularly now that Indonesia no longer strikes fear amongst investors on the TSX and ASX.

This is all very good for Indonesia which has experienced a more than decade-long drought of significant exploration investment - the result of foreign capital markets recoiling from the combination of the Bre-X Busang scandal and Asian monetary crisis of the 1990s and the domestic suspension of direct foreign investment in mining activity from the introduction of regional autonomy in 2001 until the proclamation of the new mining law in 2009.

The China- and India-induced coal boom since 2003 certainly kept the local industry ticking over but much of the new (and good to see) Indonesian investment into that sector funded expansion of existing mines or was used to acquire great coal mines, such as Arutmin, Kaltim Prima and Adaro, that were developed by foreigners years earlier.

Other legacies of this period include the issuing of domestic exploration and mining permits by local governments - jumping from hundreds to many thousands - without the oversight or recording by the central government’s Department of Energy and Mineral Resources; huge tax obligations avoided by illegal mining and illegal export; and easy-to-win coal mined without a thought for remaining resources or rehabilitation.

And now the ‘juniors’ are back, with cash, and offering a new opportunity for investors, local and foreign, to seek out not just coal but also base and precious metals and industrial minerals; resources essential for Indonesia’s development.

However, as the numbers of international exploration companies and professionals ‘on the ground’ increase, closer attention is being paid to aspects of the new mining law that are counter-intuitive to encouraging exploration and to problems with government departments and levels with overlapping responsibilities.

Issues already being canvassed – both within and outside of the Indonesian Mining Association – include forest conversion and permitting, pinjam pakai, local taxes, centralisation of mining regulations, access to international capital, illegal mining, moratorium on new concessions, IDX reporting regulations, and the proposed tenement tendering process.

Getting the mechanism right is a forever task for both government and industry, no matter how mature a country is in minerals development (think of Australia!). It will be interesting to see how Indonesia responds to the latest advice of those experienced in exploration around the world.

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