MAC/20: Mines and Communities

Indonesia Update

Published by MAC on 2007-02-03


Indonesia update

3rd February 2007

Although Indonesia has banned sand exports to Singapore, farmers in the Indonesian central Java region. recently hit by an earthquake, abandoned farming for sand mining.

The Newmont pollution trial in Indonesia continues with former president director of the Newmont Minahasa Raya operations, Richard Ness, presenting his case last week. Ness denies that Newmont polluted Buyat Bay and made people sick. Ness also stated that the company had not violated any Indonesian regulations.

Indonesia's uncertain mining investment climate continues to be of concern to the mining industry as new laws are about to be ushered in giving greater control to the provinces in contracts with the mining companies in their regions. Both Newmont and Rio Tinto have compared Indonesia unfavourably to the more liberalised taxation regimes prevailing in the Philippines and Chile.


Banful Paddy Farmers Switch to Sand Mining

By Slamet Susanto, Bantul, The Jakarta Post

22nd January 2007

Farmers in southern coastal areas of Bantul, Yogyakarta, are abandoning their traditional ways of rice paddy planting and are turning to sand mining. Many Bantul farmers have begun excavating their rice fields in search of sand. This practice has proved more profitable than rice growing.

Rice fields along the Opak River in Sanden and Kretek districts are dotted with holes, the result of farmers digging some 50 centimeters before hitting sand. This new practice has raised fears the land will no longer be fit to grow rice.

"We mine sand as much as we can," said Rintono, a sand miner from Srigading village in Sanden.
Increased demand for sand for use in Yogyakarta's reconstruction efforts following the May 27 earthquake was what initially prompted farmers to adopt sand mining.

The quake hit Yogyakarta and Central Java, with Bantul being the worst affected. "All we have to do is dig up our rice fields and trucks are waiting in line to pick up the sand. We don't have to work to sell the sand, it's sold right away," he said.

Rintono said with help he could fill between six and nine trucks with sand at Rp 200,000 (US$22) to Rp 300,000 per truck. Between Rp 25,000 and Rp 50,000 is given to the rice field owner.


Indonesia Newmont Boss Says No Complaints On Mining

Source: Reuters, Manado, Indonesia

23rd January 2007

The head of the Indonesian unit of Newmont Mining Corp. <NEM.N> told a court on Tuesday that authorities had never told the firm its mining activities might be breaking environmental or mining laws.

PT Newmont Minahasa Raya, which operated a gold mine in North Sulawesi province, and its president director Richard Ness face charges over allegations the miner dumped toxic substances into a bay close to its now defunct gold mine and made villagers sick. Ness told North Sulawesi's Manado court that the company had received permits from the energy and mines ministry for all activities and was regularly monitored.

As president director, Ness told the court he had complied with all applicable mining and environmental laws. His legal argument was read by one of his lawyers in Indonesian. "Throughout the life of the mine, PT NMR has never once received any complaints from related ministries, underscoring the company's compliance to all applicable regulations," he added.

The court is due to hear more of the Newmont chief's 306 pages of legal argument on Wednesday. The prosecutor has called for a three-year jail term for Ness over allegations he failed to stop the firm from polluting the environment and also demanded he pay 500 million rupiah ($55,020) or serve an additional six months in prison.

The prosecutor also demanded the company be fined 1 billion rupiah. Environmentalists see the case as a test of whether Indonesia is serious about tackling pollution, while some business groups say the charges are unjustified and the action will scare off foreign investors.

Under Indonesian law, a prosecution sentencing demand serves as a strong recommendation for the court. But judges have the right to ignore the advice when considering their verdict.

The pollution trial against Newmont began in August 2005. The company had denied any wrongdoing and said the government had approved its water disposal process. Newmont opened the North Sulawesi gold mine in 1996 and closed the site after the last ore was processed in August 2004. The company also operates Asia's second-largest copper mine, Batu Hijau, on eastern Sumbawa island, which produced 718 million pounds of copper and 719,000 ounces of gold in 2005.


New Laws Won't Solve Indonesia Mining Investment Woes

By Reuben Carder, Dow Jones International News

30th January 2007

JAKARTA (Dow Jones)--Indonesia is home to some of the world's richest deposits of copper, gold and nickel, but outdated policies have stalled foreign investment in its mining sector as other developing nations race ahead.

Revamped investment regulations, mooted for Indonesia's mining sector since late last century, are finally due to be implemented in March. But analysts and executives say the changes will strengthen the influence of regional governments over foreign investment and may worsen Indonesia's investment climate.

Parliament plans to replace the current mining contract-of-work system with mining licenses issued by regional governments, to resolve a dispute over control of resources that has led Jakarta to put issuance of new contracts on hiatus. This has led to an investment slump at a time when global commodities prices are soaring to record levels, Indonesian Mining Association executive director Priyo Pribadi Soemarno said.

The mining license system will grant regional governments more direct control over their resources, allowing those administrations to set their own investment regulations and wield an effective veto on licenses, Soemarno told Dow Jones Newswires.

The regional government will decide whether investors qualify for a mining license by assessing proposed exploitation sites and checking the company's balance sheet. The central administration will receive only a copy of the investor's application for its records, Soemarno said.

Newmont Is Test Case For Foreign Investors

Under former dictator Suharto, 80% of royalties on revenue gained from mining activities went to state coffers in Jakarta, with only 20% earmarked for the government and people of the province in which the mine was located.

After the country shifted to democracy in 1998, regional administrations demanded a bigger slice of the royalties, and in response Jakarta simply stopped granting contracts, virtually drying up investment.

Foreign companies have since been able to invest in Indonesia only via a local partner with a mining license granted by a regional administration.

Despite accounting for about 95% of regional copper production, 84% of nickel production and 77% gold production in the Association of South East Asian Nations, Indonesia is outpaced in terms of foreign investment growth in the sector by ASEAN neighbors like the Philippines and by Latin American nations such as Chile.

Official data show that Indonesia's mining sector logged foreign direct investment approvals in the mining sector of $285.6 million from January to November last year, compared with $613.5 million in the same period in 2005.

Some foreign companies already operating in mineral-rich provinces such as Sulawesi and Kalimantan face legal uncertainty, with the most high-profile case involving American Richard Ness, who heads a local subsidiary of Newmont Mining Corp. (NEM) of the U.S.

Ness, the president-director of PT Newmont Minahasa Raya with two decades experience in Indonesia's mining industry, has been on trial for the past 18 months in a district court in Manado, Sulawesi, on charges the company polluted a bay with toxic levels of mercury and arsenic.

Studies by the World Health Organization and Australia's Commonwealth Scientific and Industrial Research Organisation found negligible levels of either pollutant in Buyat bay.

The case was thrown out of a court in Jakarta due to a lack of evidence, but analysts say the central government has little jurisdiction in Sulawesi.

Ness and his legal team earlier this month began presenting evidence for the defense, and a decision is expected by the court within weeks.

George Haley, director of the University of New Haven, Conn.-based Center for International Industry Competitiveness, said Newmont may have been targeted for political expediency.

The Sulawesi provincial government couldn't be reached for comment.

Mining Investment In Chile, Philippines On The Rise

While foreign investors keep to the sidelines, local companies are filling the investment vacuum and keeping up metals output; exports of nonferrous metals in January-November last year jumped from to $4.85 billion from $2.46 billion from the same period in 2005.

But without the exploration resources of large foreign players, analysts say Indonesia's production and exports of metals will stall in the long term.

"Indonesia is receiving less than 1% of the world's exploration dollars; nobody's replacing reserves," Ness told Dow Jones Newswires.

The incoming laws have already cast doubt over Rio Tinto Plc's (RTP) plans to pump $2 billion into a nickel deposit in Sulawesi that the company says could produce 46,000 metric tons of the metal a year.

The Anglo-Amercian giant has been negotiating with the federal government since 2004 to develop what would be its first nickel asset, but says the mining license system may not provide the security it needs.

"We need to determine whether the project could proceed under such a regime," Charlie Lenegan, Rio Tinto's managing director for Australia, told a conference Tuesday.

Even if exploration dollars were to flood back into Indonesia, commercial production would only be realized from successful exploration after 10-15 years, Ness said.

Ness and Soemarno say Indonesia should take a leaf from the book of countries like Chile and the Philippines, whose mining-sector growth rates are surging ahead of Indonesia.

Chile's mining policy "offers not only stability... but offers incentives to reinvest capital in the country itself," Ness said.

While Chile's effective income tax rate is comparable to those of the U.S. and Australia, foreign companies in Chile pay withholding tax on dividends that are repatriated to home countries. That encourages companies to reinvest profits in Chile, Ness said.

In Indonesia, foreign companies pay royalties in addition to income tax on revenue, with the royalties "becoming an operating expense rather than a tax credit," he said.

Under the new law, each province will be able to set its own policy on the royalty system, Soemarno said.

In the Philippines, fast becoming Indonesia's closest ASEAN challenger in terms of metals exports, the government in 2004 launched a new policy to open borders to foreign investors. It has come under criticism from some nationalists and by people who say the mining sector has prospered at other industries' expense.

Net foreign investment into the Philippine mining sector reversed from an outflow of $7.15 million in full-year 2003 to an inflow of $2.26 million in January-September 2006.

-By Reuben Carder, Dow Jones Newswires; 62 21 3983 1277; Reuben.Carder@dowjones.com

 

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