Under Indonesian law, foreign mining companies operating in the country are required to sell 51% of their local holdings back to the government after 5 years of commercial operation. However, Newmont (NYSE:NEM), will only be asked to relinquish 17% of its subsidiary, PT Newmont Nusa Tenggara (PTNNT), as 20% of this entity is already held by a local partner. An international arbitration panel on March 31 gave Newmont and minority partner Sumitomo Corp. (OTCPK:SSUMY) a 180-day deadline in which to divest 17% of PTNNT to local buyers, ruling that the companies were in default of their contract of work for failing to meet divestiture schedules in 2006-2008.
With the Indonesian government estimating the total value of PTNNT at $4.9Bn , Newmont & Sumitomo are locked in a valuation battle with the government and local companies, who are keen to pick up a share in the companies' gold and mining concerns. Some 10% of PTNNT is earmarked for regional governments in Sumbawa, the location of the company’s Batu Hijau copper and gold mine, and the central government will have first right of refusal on the rest of PTNNT.
“We are still discussing the pricing formula for the stake in PTNNT, with other government departments,” said Bambang Setiawan, director general at the Department of Energy and Mineral Resources. “The department is also conducting preliminary negotiations with Newmont over the sale of the unit as yet it is unclear when a deal might be reached.”
It’s not all grim news for Newmont though. This week, Indonesian officials met regarding mining rights in areas of protected forest. As we have written before, (Indonesia the long road back), the country has vast natural resources that Indonesia is keen to exploit, using the above formula to develop modern facilities in the country. Now ministers are expected to pass a decree that will allow mining companies to carry out underground mining activities in areas of protected rainforest.
“The presidential decree will give legal basis so that underground mining is allowed in protected forest areas. The existing law only forbids open-pit mining in protected forest areas,” said Setiawan.
Information from the mining & energy ministry show that Indonesia has mineable nickel reserves of 547 million tonnes, 112 million tonnes of bauxite and 43 million tonnes of copper, tin stand at 336,911 tonnes, measured in terms of refined tin, while gold reserves were 4,341 tonnes,
Two other mining majors that will also look to profit from this law change are Rio Tinto (RTP) & Freeport-McMoran (NYSE:FCX).
Rio Tinto is currently looking to develop a new nickel operation on the island of Sulawesi, Rio estimate that the mine could produce up to 46,000 tonnes of nickel metal a year, estimated investment costs stand at $2 Bn. Sulawesi is densely forested and the change in law should mean that the company can expand its operations significantly.
Meanwhile, Freeport-McMoran has been active in Indonesia for a much longer time. PT Freeport Indonesia has operated the Grasberg mining complex since the early 70’s, Grasberg is one of the world’s largest single producers of both copper and gold and as Freeport claims, contains the largest recoverable reserves of copper and the largest single gold reserve in the world. Grassberg will continue surface mining until 2015, at which time it will then begin sub-surface mining, according to Freeport’s website.
Indonesia looks to be well on the way to attracting large amounts of FDI into its commodity sector, providing an economic boost to local populations spread across this vast country. India and the Emirates have already committed to investing $4Bn into an aluminium smelting plant, with fully integrated power & logistics last year, with the relaxation of the rules governing mining concessions, the country could well benefit from China’s projected expansion.