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Vale, Newmont Retain Appetite on Indonesia Amid Stake Cut

An aerial view shows an open pit at the Batu Hijau copper and gold mine operated by PT Newmont Nusa Tenggara in Sumbawa, West Nusa Tenggara province, Indonesia. Photographer: Dadang Tri/Bloomberg
An aerial view shows an open pit at the Batu Hijau copper and gold mine operated by PT Newmont Nusa Tenggara in Sumbawa, West Nusa Tenggara province, Indonesia. Photographer: Dadang Tri/Bloomberg

March 16 (Bloomberg) -- Global companies led by Vale SA and Newmont Mining Corp. plan to invest in Indonesia’s mines, undeterred by a new regulation cutting foreign ownership, as they hunt for resources in the world’s biggest exporter of tin and thermal coal.

PT Vale Indonesia, a unit of the world’s second-biggest nickel producer, the Adani Group, controlled by Indian billionaire Gautam Adani, Hong Kong-based G-Resources Group Ltd. and Canadian explorer East Asia Minerals Corp. said this week they will boost output at their Indonesian operations even as they need to cut their holdings in local ventures.

The companies are awaiting rules on how to reduce their stakes to 49 percent after President Susilo Bambang Yudhoyono’s decree last month, aimed at increasing the participation of local investors in mining. South Africa and Mongolia are also weighing measures to gain a greater share of mining profits.

“Indonesia is, without a doubt, one of the top three places for current investment in mineral projects,” Edward Rochette, chairman of Vancouver-based East Asia Minerals, said at a conference in Bali on March 13. There’s a little concern about what’s happening, he said, adding that companies can’t dismiss the opportunity for mineralization in the country.

Southeast Asia’s biggest economy, also rich in minerals including nickel, copper and bauxite, relied on mining for about 12 percent of its gross domestic product last year, according to data from the statistics bureau.

South Africa, Mongolia

South Africa, the world’s biggest producer of platinum, chrome and manganese, is considering proposals from the ruling African National Congress party to increase mining tax and take over gold and platinum mines to boost employment.

Mongolia’s plan to develop part of the Tavan Tolgoi deposit, one of the world’s largest sources of coal, has stalled as a political debate over who should develop the project intensifies ahead of the June parliamentary elections.

“When you look at what’s happening globally, the resources sectors are being raped in some places or pushed into paying a fair proportion of the wealth that’s been generated back into the country,” said David Lennox, an analyst at Fat Prophets in Sydney. “This rule change won’t make a company go away from Indonesia, but it will obviously mean they will look over their shoulders if an opportunity pops out somewhere else.”

Local Ownership

The Indonesian regulation, signed in February and announced this month, requires overseas companies to reduce their stakes in local ventures to 49 percent within 10 years of starting production. It extends a 2009 law mandating local ownership of at least 20 percent in joint ventures by the sixth year of production.

Ores should be processed locally to boost state revenue, according to a separate decree by the Energy and Mineral Resources Ministry last month.

The new law applies to companies with mining business licenses. Miners, including Vale, Freeport-McMoRan Copper & Gold Inc. and Newmont, currently operate under contracts of work and need to apply for mining business licenses when their permits expire, according to the rule.

Vale Indonesia plans to boost output of nickel by 64 percent to 120,000 metric tons in eight years, Vice President Director Bernardus Irmanto said at the Clariden Global Indonesia Mining 2012 conference on March 12.

Spending Plans

The Adani Group, owner of India’s biggest coal importer, will maintain its investment in Indonesia and adjust its business accordingly with the new rule, Ganeshan Varadarajan, president director of local unit PT Adani Global, said March 13. The company has mines in South Sumatra, East Kalimantan and Central Kalimantan provinces, according to Varadarajan.

East Asia Minerals is developing two gold mines in Indonesia’s Aceh and North Sulawesi provinces under a mining business license and a contract-of-work permit, Rochette told the conference. It has uranium and phosphate assets in Mongolia.

G-Resources spent $464 million of a planned $576 million to develop the Martabe gold project in North Sumatra by the end of 2011, Chief Executive Officer Peter Albert told the conference.

“G-Resources is not really impacted as we are licensed under an existing contract of work,” Vice Chairman Owen Hegarty said in an e-mail. “We won’t be changing our business plan or our overall strategy of getting into production as soon as we can and looking to grow our business.”

Newcrest, Freeport

Newcrest Mining Ltd., Australia’s largest gold miner that owns an 82.5 percent stake in the Gosowong gold mine on Halmahera island, won’t be immediately affected by the new rule, spokeswoman Kerrina Watson said. Its existing contract of work expires in 2029, after the end of the mine’s life.

Freeport will cooperate with the Indonesian government in reviewing its contract as it seeks extension beyond 2021, the Phoenix-based company said in February.

Freeport operates the Grasberg mine in Papua province, which accounted for 19 percent of the company’s revenue last year and contains the world’s largest recoverable copper reserves, according to the company.

Jakarta-based unit PT Freeport Indonesia plans capital spending of $6 billion until 2021 to expand its mine and build power and cement plants, Bisnis Indonesia reported today, citing President Director Rozik B. Soetjipto.

Newmont and its foreign partners, including Sumitomo Corp., own a 56 percent stake in PT Newmont Nusa Tenggara and are selling 7 percent to the government. Newmont runs the Batu Hijau copper mine in West Nusa Tenggara province.

‘Pinch of Salt’

The investment trend will persist, especially for smelting and processing, which will now be done locally, Alberto Migliucci, head of mining, energy, oil and gas, Southeast Asia at Credit Suisse Group AG, told the Bali conference.

Still, the ownership regulation may deter new investors, especially Indian companies, which can invest in Australia, South Africa and the U.S., said Gurpreet Singh Chugh, head of natural resources at Crisil Risk & Infrastructure Solutions Ltd., a unit of Crisil Ltd., a Standard & Poor’s company. He didn’t identify the companies.

“We’ll have to take it with a pinch of salt as there are a lot of questions that need to be answered,” including whether the rule applies to new or existing investments, Chugh said.

Foreign and local investment in Indonesia rose 21 percent last year to 251.3 trillion rupiah ($27.3 billion), exceeding the target of 240 trillion rupiah, as the mining, metals and telecommunication industries expanded, the Investment Coordinating Board said in January.

“You go to where the commodity is,” Lennox of Fat Prophets said. “That’s why globally we’re seeing governments taking a far greater proportion of interest in the mining industry because they know that mining companies will go to where the resource is, otherwise where else do you go?”

To contact the reporters on this story: Yoga Rusmana in Jakarta at yrusmana@bloomberg.net; Fitri Wulandari in Jakarta at fwulandari@bloomberg.net

To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net; James Poole at jpoole4@bloomberg.net

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