Fall in gold production continues

Fall in gold production continues

Sudibyo M. Wiradji, Contributor, Jakarta

The falling trend in gold production in the country is showing
signs of continuing due to a decline in new exploration
activities. The drop in new exploration results from an
unfavorable fiscal regime combined with the absence of a mining
policy that can ensure the sustainability of mining activity.

Indonesia's geological potential is vast but many investors
feel that the business climate is not promising enough for them
to enter the mining sector.

In addition to uncertainties in investment policy, the high
tax payment that should be filed by investors adds to the main
factors why the mining sector is becoming less attractive.

"With a combined tax payment (taxes, royalties and other
levies) of over 60 percent, chances of exploration are very low.
Some exploration is going on but that's not at a sustainable
level to maintain production," said Richard B. Ness, acting
chairman of the Indonesian Mining Association.

The high taxes and royalties set by the government in the
mining industry has discouraged investors from investing in the
industry. "Most countries do not have a royalty system," he said,
adding that additional costs, such as levies imposed on dead
rental areas and water services make the cost of producing
minerals, including gold, less competitive on the international
market.

According to data available at the Indonesian Mining
association (IMA), Indonesia's pure gold production was projected
to drop to 33,511 kilograms in 2002 from 42,824 kg in 2001.

The data also shows that this decline will continue for the
next three years, with production projected to reach 15,386 kg in
2003, 9,532 kg in 2004 and 3,677 kg in 2005.

Ness underscored the importance of establishing a new mining
policy that would attract investment, saying that the new policy,
a combination of the mining, fiscal, corporate and forestry
policies, was expected to remove the barriers to ensure the
sustainability of mining activities of gold and other minerals in
the country.

He emphasized, however, that getting the policy right was the
most important thing.

Ness cited Law No. 41 on forestry as one of the reasons for
declining gold mining activities in the future, saying that the
law that bans open-pit mining operations in protected forest
areas had impeded new mining projects. "The concession holders
that have the right (issued before the implementation of the law)
to explore cannot continue their exploration activities and as a
result, overlapping or conflicting legislation stops the
exploration," he said.

In addition, for new potential areas, there is no framework in
place that would allow operators to mine.

"Exploration slowed down beforehand and this will be slowed
down further," he said, adding that when production increases,
exploration has to increase to make mine production sustainable.

Another foreign mining expert said that political and economic
certainty plays a predominant role in attracting foreign
investment. The absence of a contract of work system has also
been cited as hampering foreign investment in gold projects.
"There should be more certainty surrounding the fiscal regime and
regulatory conditions under which new foreign investors will
participate in the Indonesian mining sector," said the expert who
remains anonymous.

The mining industry in Indonesia is inseparable from what is
happening in the rest of the world. Ness elaborated that factors
affecting the country's mining activities include international
mining companies moving to merge and consolidate, more countries
moving to open and update mining policies and investors having
more choices in what to invest. "Over the last 20 years about 110
nations have updated their mining policies. Consequently,
investors have more choices than they did 20 years ago," Ness
said.

Exploration activity in Indonesia peaked in 1996 at the height
of the excitement over Bre-X Minerals' Busang gold deposit
finding in 1977. The finding was claimed as the largest gold
deposit in the world but was later found to be a massive salting
operation.

"This, along with the prices of weak metals, has had a
substantial impact on exploration activities globally and in
Indonesia, the legacy of which is over 170 Indonesian exploration
projects currently suspended, withdrawn or inactive," according
to PricewaterhouseCoopers.

Junior exploration companies, without funding and stock market
support, have largely withdrawn from Indonesia's mineral sector.
"This decline in exploration spending is a cause for concern as
the long-term success of the Indonesian mining industry is
dependent on continued exploration and the discovery and
development of new deposits," it said.

It said that spending on exploration in Indonesia dropped from
US$160 million in 1996 to $67 million in 2000 and an estimated
$22 million in 2001. Some industry sources said the spending for
this year could be as low as $4 million. Investment is also seen
to be down. Total investment in the mining industry slid from
$915 million in 2000 to only $413 million in 2001.

Gold-producing companies in Indonesia include: PT Aneka
Tambang which operates gold mining operations in Sulawesi,
Halmehera and Java; PT Kelian Equatorial Mining in Kalimantan, PT
Newmont Minahasa Raya in Sulawesi; PT Newmont Nusa Tenggara in
Sumbawa and PT Freeport Indonesia in Irian Jaya or Papua.

The Grasberg Mine operated by PT Freeport, a subsidiary of the
U.S -based Freeport-McMoran Copper Gold, dominates copper and
gold production in Indonesia.

The Grasberg Mine, located in Tembagapura, Irian Jaya,
produced 2.6 million ounces of gold in 2001, making it the
world's largest individual gold producer.

PT Newmont Minahasa Raya discovered a 1.9 million ounce gold
deposit in 1988 and began production in March 1996. In 1999, the
company produced a record 344,000 ounces of gold, up from the
production of 261,000 ounces in 1998. "Mining activities in
Messel Minahasa may be completed by the end of 2003," Ness, who
is also president director of PT Newmont Pacific Nusantara, said.

Newmont's other Indonesian-affiliated company, PT Newmont Nusa
Tenggara, started to produce copper and gold two years ago from
its Batu Hijau mining area in West Sumbawa. "The primary product
(in West Sumbawa) is copper but it contains gold in a
concentrated form," he said.

Ranked as one of the largest undeveloped copper and gold
deposits in the world, Batu Hijau contains reserves of 10.6
billion pounds of copper and 12.5 million ounces of gold.
Commercial production commenced on March 1, 2000 and at full
production the project will achieve an average of 245,000 tons of
copper and 564,000 ounces of gold.

"We are still conducting explorations in North Sumatra. This
area is not mined, but there is exploration activity," he added.

Other gold producers include state-owned PT Antam Tbk and Rio
Tinto's Kelian Equatorial mine in East Kalimantan.

Antam still continues with its exploration projects throughout
the country. Antam operates the Gosowong Gold Mine on Halmahera
island in Sulawesi under a joint venture with Newcrest Mining,
which owns an 82.5 percent interest. Gosowong Gold Mine is
expected to produce 155,000 troy ounces of gold per annum over
its short five-year lifespan.

Gosowong is operated by PT Nusa Halmahera Minerals, which is a
joint venture 17.5 percent by Antam.

Antam's mineral resources and ore reserves for gold total
6,175,000 weight metric tons (wmt), with an estimated remaining
production of 15 years. In 2001, it held 32 mining licenses and
work contracts, with a total area of 2,221,8884 hectares.

Last year Antam's gold production was stable at 127,928 troy
ounces or 3,979 kg and 129,278 troy ounces or 4,021 kg in 2000.
The company saw a significant increase in gold production in
1999, with 95,038 troy ounces or 2,956 kg, compared to 50,444
troy ounces or 1,569 kg in 1998. The increase was partly due to
the company's expansion project in Pongkor in West Java.

Antam's gold production in 2002 is expected to slightly
decrease to 3,500 kg from the targeted 4,100 kg due to
unexpected soft walls in the new Ciurug stope at Pongkor