MAC: Mines and Communities

JATAM welcomes Gag withdrawal

Published by MAC on 2008-11-24

In the wake of BHP Billiton's recent withdrawal from the Gag Island nickel project in West Papua, Indonesia's leading mining communities' advocacy organisation fills in some of the background.

The Australian Financial Review speculates that the company walked away from the project due to the continued unattractiveness of Indonesia's mineral legislation. - citing the experience of Rio Tinto and Newmont.

Flying in the face of the evidence, the newspaper claims that opposition to the Gag Island mine had diminished of late. See:

BHP Billiton Backs Off from the Gag Islands; A decision worth following

JATAM Press Release

18th November 2008

BHP Billiton has announced its decision to withdraw its nickel mining proposal in the Gag islands last Thursday. (The Australian,14/11).

Should the mining continue, it would destroy the Gag Island in Papua, which covers a total of 9,200 hectares. Gag Island is part of the Raja Ampat archipelago, renowned for its mega biodiversity.

This region is on the top list of proposed world heritage sites. JATAM welcomes BHP Billiton's decision and is grateful to the investors who have rejected their financial support to this project.

In 1998, BHP-Billiton signed a work contract with the repressive Soeharto regime, obtaining a permit to mine the nickel deposits -together with PT Antam Indonesia. They registered the company responsible for the project as PT Gag Nikel and gave them a concession area covering the entire island and those around it. The mine proposal involved an open pit mine, extracting 660 thousand tons of ore a day and disposing 627 thousand tons of tailing waste into the sea.

The mine proposal threatened to destroy Gag Island and cause serious marine biodiversity loss in a place that contains 64% of the world's coral biodiversity.

Previously, the nickel mine had been hampered by the Forestry Law No. 44/1999 that forbade the practice of open pit mining in reserved forests. The company threatened to sue the Indonesian government in an international court. Former Indonesian President Megawati gave in and agreed to the demands of the company. She released a Presidential Decree that eventually became law that enabled the multinational mining company BHP Billiton to continue its plans to mine Gag island.

A total of US$75 million was spent on the project, which was shelved last Thursday, when BHP Billiton announced it was discontinuing its agreement with PT Antam and would not be pursuing a feasibility study for the Gag Island project.

Conservationists and social justice activists as well as academics welcome the decision. "This is good news for Raja Empat, home to enormous marine biodiversity. BHP would not mine the Great Barrier Reef of Australia and now they are acknowledging the importance of the Raja Empat area. Their decision will reduce barriers of proposing the Raja Empat as a World Heritage Site. BHP Billiton has to also ensure that Queensland Nickel, one of their subsidiaries, will discontinue buying laterite nickel from small mines around Raja Empat", said Jason MacLeod from the Australian Centre for Peace and Conflict Studies at the University of Queensland in Australia.

"JATAM welcomes this decision by BHP Billiton to abandon mining plans on Gag Island. Other companies should follow their example and abandon plans to destroy small islands and protected forest. The government should also support the Raja Ampat becoming a World Heritage Site, which would not only protect the local marine biodiversity, but it would also ensure that local residents have access in managing their marine resources", said Siti Maemunah, the National Coordinator of JATAM.

BHP's decision has also been welcomed by the local residents. "Thank you BHP for making this wise decision. This decision will protect our lovely island," said Yohanis Goram from the Nazareth Foundation and a member of the Ma'ya community.

JATAM calls for an end to other mining in the Raja Empat area, and urges the local government to stop issuing mining permits in these areas. Mining is not a solution to economic concerns because it is only a short term solution and it is destructive. "Mining investment is also prone to problems should an economic crisis occur, like the one nowadays. The government should instead look to more sustainable economic options that involve local residents," added Siti.

Media contact: Luluk Uliyah, 0815 9480 246,

Why BHP Aborted $5bn Project

by Angus Grigg

The Australian Financial Review

19th November 2008

Every few months a story emerges from the Indonesian parliament suggesting the country's long-awaited mining law is "imminent".

The story always quotes a high-level government official saying a compromise has been reached, but for the past seven years that official and his promised compromise has not eventuated.

Last week, as parliament continued to prevaricate, Indonesia paid for its intransigence.

With one little-reported announcement, BHP Billiton cancelled its $5 billion Gag Island nickel project in eastern Indonesia.

It was not suspended or delayed; the mining giant just walked away and, in doing so, killed off its only major project in Indonesia.

The official reason was the failure of its joint-venture partner, PT Aneka Tambang, to secure regulatory approval for a related project by October 31.

On the surface that's true, but mining companies don't usually cut billion-dollar deals just because a deadline is not met.

Delays in such mega projects are inevitable. Even the nickel price falling 75 per cent to around $US5 a pound does not tell the full story, as such a project takes years to build, by which time prices may well have recovered.

So what's going on?

Indonesia has what trade officials call "a high degree of difficulty".

It means doing business is not easy.

In the end this was probably the main reason for BHP's departure as it clearly had easier projects to develop in other parts of the world.

This is Indonesia's problem - it's the last place foreign miners come during boom years and the first place they leave when things cool down.

It has nothing to do with a lack of resources. On the value of its mineral resources Indonesia ranks third in the world behind Chile and Peru, with a rating of 97 out of 100. On investment conditions, however, it ranks last, with a rating of 22 per cent.

The new mining law, which has been before parliament since 2001, is only part of the problem. The transition regulations, which could see new terms imposed on old contracts of work, are the main concern miners have with the new legislation.

But Indonesia also suffers from overlapping provincial and federal regulations, a poor legal system, unclear forestry laws and a difficult-to-negotiate bureaucracy.

For BHP all these factors clearly made Indonesia just too hard at a time when capital expenditure budgets are being trimmed.

Environmental factors would have also played a part, but it's important not to overstate this.

In a series of interviews conducted by The Australian Financial Review over the last month it became clear that much of the old hostility towards the Gag Island mine had dissipated.

This followed BHP saying it would not dispose of its tailings underwater and therefore not directly threaten nearby coral reefs which are likely to win World Heritage listing in coming years.

Green groups like The Nature Conservancy said they could work with BHP on the project, while the likes of UNESCO pointed to the likely health and education benefits for the West Papua region. Both stressed Gag Island had to be developed with "sensitivity" and "caution" but were not flatly against it.

President Susilo Bambang Yudhoyono and key mandarins in the bureaucracy were also supportive.

But in this environment that support is not enough and is no guarantee against long delays.

In heading for the exit BHP might have also noted Rio Tinto's experience in Indonesia.

Like the mining law itself, approval for Rio's $US2 billion ($3.1 billion) La Sampa nickel mine has been "imminent" for many years.

The approval could be won by the end of this year but that is far from certain and there's no guarantee Rio will not walk away if there are further delays.

For miners, like any business people, it comes back to the risk-reward ratio. When commodity prices were high Indonesia was probably worth the risk and time required. But in the current environment there are better places to mine.

Newmont is another good example of this. The world's biggest gold miner has had nothing but problems with its Batu Hijau mine on the island of Sumbawa this year.

The American company has had trouble winning the required regulatory approval to expand its operations. This will result in lower production for Newmont in the short term but also reduced royalties and taxes for the government.

Newmont has also been obstructed at every turn in its attempt to sell 31 per cent of the mine to local parties, as required under its contract of work.

This dispute has gone to international arbitration and is likely to be resolved early next year.

But, regardless of the outcome, it has been a giant headache, making the company reluctant to pursue other Indonesian investments. Of a $US240 million ($370 million) exploration budget this year, it will not spend a cent in Indonesia.

This is the clearest sign of how foreign miners view this country and it will not change until parliament and other sections of the government provide some certainty.


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