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