Strong Mining CEO’s Still Pray for Permits.

The Association of Indonesian Economic Geologists (MGEI) held its annual forum in Jakarta on the 27 February 2019. About 80 people attended, of which about 10% were women, and included a dozen from the press. The event was attended by many of the mining industry business and association leaders. Much of the seminar was held in English. The following are some personal notes. Apologies for not recording all matters, or for any mistakes or errors.

Personal snapshot overview.

STRONG PLAYERS. There are a number of very strong and mature Indonesian and Foreign mining companies leading the industry. They are a key component of Indonesia’s GDP, regional development and employment.

EXPLORATION. There was a generally strong message that exploration needs to be boosted, with the implication that the mining regulations need to be revised to encourage exploration. Exploration through including an Indonesian partner seems to be the way forward.

FORESTRY. Continued recognition that forestry is significantly inhibiting exploration and mining. The way to get borrow & use permits is by praying, and to alert the state audit institution that the state is losing income from not issuing permits.

Arcandra Tahar extended an invitation for writers to discuss points with ESDM before publishing related articles.

Pama showed maturity, focus and a cautious approach to improve their core business and grow through diversification.

Inalum reminded me of a new junior exploration company at the Canadian annual convention – boasting of its “blue sky” growth potential in taking on so many new projects.

Vale is a low-cost responsible nickel matt producer and symbolizes the positive role that international players can still operate in Indonesia. Vale is convincing shareholders and Government that it is plans to build 2 more smelters should be supported.

Freeport is getting on with working its mine. FI is a 100 year mine wherein the Mines Department is encouraged to consider tenement title in terms of deposit life rather than fixed 10-year periods.

Bumi Resources is emerging out of its past financial troubles and permit issues. Bumi Minerals is on the verge of starting construction of mines in Sumatra and Sulawesi.

  GENERAL NOTES.

Budi Sentoso (President of MGEI). Welcome speech.

The Indonesian Society of Economic Geologists has around 1,000 members in 12 chapters that include a number of university chapters. MGEI run a number of major events including the annual convention with guest speakers from around Indonesia and from other countries.

Arcandra Tahar (Vice Minister of Mines & Energy) Impromptu speech.

Challenge CEO’s to ask the question “why should anyone be led by you?”. Then chatted about the difference between leadership and management.

Adi Waryono (J. Resources) Moderator.

Indonesia now has a number of world class size of mining houses, but not yet players on the world stage.

Question / Answer; -

Indonesia’s exploration boom involved hundreds of juniors and some majors all spending billions of foreign capital understanding the risk is to find one big deposit every 10 years from a success ration of about 1%. The challenge today is “who will pay for exploration?”. Indonesia’s share of the global exploration budget is small compared to its prospectivity. The present regulations and policies make it unattractive & hard for FDI in the exploration / mining industry. The concept of partnering may be looked at further.

Common industry challenge to get more exploration and so more jobs and development.

Frans Kesuma (President Director of PT.Pama Persada Nusantara) Outlined Pama Growth Strategy.

Brief outline of Pama’s history and current activity along with size of company in terms of production (1 billM3/year OB) and manpower etc. Coal mines owned by the Pama group tend to be in a cluster in Central Kalimantan, and so provide some synergy and cost savings. Growth strategy includes diversification into gold mining (Sulawesi) and support the Kalimantan cement industry.

The mining business can better survive by reducing costs; -

·       Operational excellence, using better technology, automation, good mine planning, monitoring systems etc.

·       Extend life of equipment (typically 50% of production costs) that includes operator & maintenance training etc.

·       People readiness through improving competency and development of competency certification etc.

·       Instilling corporate value to all levels with incentives, management systems and integration of systems.

Growth through diversification into gold exploration & development. In order to overcome shareholders aversion to exploration risk, the strategy is to acquire 2 gold concessions – one with some resources defined and another just greenfield.

Question / Answer; -

Agincourt spent some $15 mill last year on exploration drilling and Pama hope to spend $15-20 mill on brownfields in 2019. Pama spends some $500-600 mill annually on equipment replacement (has over 4,000 units), wherein this exploration budget seems a reasonable level.

Exploration climate limited to existing concession holders. Government has no budget to spend on increasing national resources, therein has to open this exploration sector to private investment. Countries such as the USSR spent big amounts on exploration for national pride, but this option may not be open to Indonesia. Perhaps some form of cooperation may be considered whereby Indonesia makes it easier for companies to sustainably explore and so increase national resources and pride.

Improvements to the industry need to include discussion with the Mines Department. The industry is cyclic and commodity price sensitive, wherein miners need a 5-10 year steady operating environment to ride through the ups & downs. Success ratios of many minerals is in the order of 1-2%.  Miners need long periods for new developments that require long capital recovery and good profits to justify the inherent industry risks. The big international players (BHP/ RT etc) have left Indonesia and very few of the current players have the vision, apatite, patience or people to develop the industry.

Not all tenement holders are real miners with a real understanding or commitment to the industry. Some of these parties are effectively obstructing (excessive demands) the sincere explorers.

Foreign Investors should be looked upon not as a threat, but as a partner – the “enemy” is discovering the resource inside the ground.

Ratih Amri (Director Mining and Mineral Industry Institute - PT. Inalum) Moving Forward.

PT. Inalum has morphed into a new (Nov 2017) billion-dollar State company with diversified commodities. The ambition is to grow further and become a top Fortune 500 company. Pres Dir Budi Sadikn has a strong support for exploration and recognizes that “geologists are heroes who venture where others fear to go and build a new industry in remote areas”. There are diverse business cultures (business for profit, and building Indonesia) that need to be acknowledged and managed. Support mining for development of our industrialized culture. Inalum should; -

·       Manage strategic commodities and resources, including acquiring assets and sustaining exploration.

·       Develop down stream industries, including using low carbon emitting technology.

·       Become a global player from the financial and capabilities of human resources, knowledge, skill etc.

Growth to include operational excellence and partnerships with private enterprise. Inalum is now a $6.8 billion company with aims to have $22 billion (EBITA) by 2027. Each branch has its own exploration strategy. Growth includes a coal gasification plant for PLN, Bauxite smelter in W. Kalimanta, developing technology for low grade Nickel, processing rare earth elements from its tin sands, water energy along with Research and development with Indonesian institutions. “Our strength is how we learn from each other”. This think tank is expected to find new opportunities and provide feedback to recommend revisions / development of government regulations. Through Antam, Inalum has minority interest in a number of projects.

Question / Answer; -

Inalum has a special division to coordinate exploration. Being a SOE to long term vision is both short term profit and long term national resources. Have special Research & development to look for innovation, mining efficiency and new technology. Concern government regulations can be improved and are drafting proposals to submit to government. Government policy is to improve technical vocational schools along with Research & Development and hope these areas can become tax deductable.

Inalum interest in Freeport is limited to FI and block 1 under a new tenement system. Freeport Mc Moran of the USA retains various other exploration blocks under different tenement systems. Inalum strategy is to follow the agreed long-term work plan to 2041.

Inalum is open to exploration through partnership, as per the example of partnering with a China company to build a coal gasification plant.

Nicolas Kanter (President Director of PT. Vale Indonesia) Adaption to change.

Quick outline of Vale. Vale shareholders is a mix of foreign and IDX listed shares and holds several nickel laterite deposits along with smelters that produce nickel matt. They employ some 3,000 staff and engage some 2,000 contractors. Vale has contributed to Indonesia recently becoming a large player on the world nickel stage.

Smelter policy – 1) The recent issues over relaxing the raw nickel ore export ban is an undesirable policy, but Vale can live with it. 2) Few smelters make it an ore buyers-market, and force down the price to domestic miners. Encouraging more smelters may improve competition and so help the domestic price. 3) The royalty structure does not encourage value adding as the government can get more money from ore (5%) than smelted product, and the profit margin for smelting is very small. 4) Potential explorers are discouraged from starting, as they not only have to find the ore, but have to build an expensive smelter and wait longer for income.

Challenges – 1) The challenge behind exploration and smelting is the regulatory uncertainty. 2) Price volatility within each year are difficult to manage with the present regulation scheme (some months make losses, don’t know when going to make a profit). 3) the threat of resource nationalism makes it harder to invest in growth. 4) Provincial and District government have own agenda that is not synchronized and aligned with central – so districts want smelters built in each district rather than project optimized and centralized smelter. 5) Law enforcement can be a big issue, and permits can be an OMG factor. Forestry permits need much praying over many years, and so block progress. Finally, the State Audit Agency (BPKB) obliged forestry to issue the permit as the state was losing annual forestry permit fees (and development) from the state budget through years of not issuing the permit. 6) there are concerns that Chinese investors are not on the same compliance level playing field.

Vale strategy to survive; -

·       Be a responsible miner, including sustainability principals and contribute to national resource development goals.

·       Low cost producer (built 3 hydro electric dams).

·       Not run away like other big players, but to convince government of the need to attract FDI, and tell shareholders to stay the path.

·       Acknowledge thing change over time, and so some aspects of the underlying COW may need to be updated from time to time. One example is the proposed relinquishment will now cover 25,000 Ha of “ore zone”.

·       Plan to build 2 more smelters related to other tenements. These may include strategic partners for technology and investment, with certain options for the Government to participate.

·       The attitude is one of mutual benefit with the Government.

Question / Answer: -

One of the biggest issues for international (and national) shareholders is the importance of resisting local corruption. The challenge for management is to deal with the local culture that often too readily accepts corruption.

In developing Feasibility Studies for the planned 2 new smelters, it become apparent that the projects Return on Investment is sensitive to cost of capital and operation cost. These costs are not so easy to define with the changing regulatory habit of the Ministry of Mines and other government agencies. Would encourage the Government to make a level playing field – for example it would seem some can have under sea tailings, while others not.

Tony Wenas (President Director of PT. Freeport Indonesia) Getting on with it.

Quick outline of PT. Freeport Indonesia (FI) history of tenement renewals culminating in the recent cumulative 51.23% share divestment. More than $ 8 billion has been spent in underground exploration and development. Brief mention on reserves (Cu & Au) and production rates to decline over next few years till new underground comes into full production around 2021. Production at 150,000 tpd should last for 32 years (2051).

Question / Answer

Below the reserve cut off level of 2,500m asl there are some 2.1 billion tons of resources, making this a 100 year mine. To date some 3 million meters have been drilled at costs ranging from $300-400/m, plus operational overheads. Therein there is NO short-term plan to conduct further infill drilling to upgrade these resources. The mine plan has been discussed with Inalum wherein the mine plan is based on the time limit of the tenement. FI suggests the Mines Department could consider permit time frames based on life of resource rather than arbitrary number of years.

Various environmental and forestry permits were finally issued upon closing the share deal with Inalum.

Question / Answer: -

The FI concession is separate from other Freeport McMorran blocks that could be further explored, along with options in other provinces.  

Suseno Kramadibrata (Director of PT. Bumi Resources Mineral Tbk) Getting Started.

North Sumatra - The Dairi lead-zinc deposit has recently closed its deal with China (China 51%). Various permits to operate were started in 2008, and some have recently been issued, and the environmental report near completed. Thus, site work starting with refurbishing the camp is about to start.

North Sulawesi - Palu gold trial mining and small CIP plant are being put in place, with trial mining to start at the end of 2019. See public web site. Another 5 gold exploration blocks in North Sulawesi have various issues with forestry or illegal miners. Looking at heap leaching Cu oxides. Hoping that the new Freeport smelter can take some of their primary ores. Gorontalo gold deposit are completing marine biology studies for underwater tailings disposal (250m trench), as there are onshore topography, seismicity, environment and urban restrictions.

Question / Answer: -

Getting forestry permits takes “blood, sweat and tears”. The approach was to hire PHD environmental consultants from local universities and belonging to a similar “old boys” faculty club as those in the Forestry department in order to get a sympathetic hearing. Combine this with a legal team, convince the ESDM and Local Government that such permits would bring investment, and also PRAY a lot.