Can Copper Producers Weather Indonesia's Mine Ownership And Tax Changes?

By Shihoko Goto — Exclusive to Copper Investing News

Can Copper Producers Weather Indonesia's Mine Ownership and Tax Changes?The Indonesian government is mulling the possibility of imposing a mining export tax to cash in on the country's resource wealth, but the policy may backfire in the longer term if revenue is reduced by foreign companies shying away from doing business in Indonesia. Still, many analysts are taking the possibility of a mining tax in stride, at least for the near term. However, another concern is the impact of a recent law that caps foreign ownership of Indonesian mines.

Beginning in June, the Indonesian government is expected to impose a 25 percent export tax on copper and other base metals, as well as coal, in an attempt to profit from the country's natural resources. The tax could rise to 50 percent by 2013. According to Finance Minister Agus Martowardojo, the question is now which commodities will be taxed to what extent and when, rather than whether an export tax will be imposed at all. It appears, however, that a ban on raw mineral exports is unlikely to go through, at least this time around.

In addition, Indonesia introduced a law last month that will force foreign companies to divest at least 51 percent of their shares to Indonesian investors over a ten-year period, backtracking on the 2009 mining law that allowed foreigners to fully own mining licenses.

There is no doubt that Indonesia is rich with the red metal, and as the sixth-largest copper producer in the world, it could certainly benefit from the price increase the metal has seen on international markets over the past few years. Mining in general accounted for about eleven percent of Indonesia's gross domestic product last year, and the question on the minds of international investors is whether the country's latest assertion of resource nationalism will help or hinder growth in the long run. Foreign direct investment to Indonesia reached a record $20 billion in 2011, with $3.6 billion of that going into the mining sector.

Industry insiders are worried that the policy changes will hurt Indonesia's allure to foreign investors.

The change in mine ownership law “will threaten Indonesia's mining investment climate,” said the Indonesian Mining Association's Executive Director, Syahrir Abubakar.

Yet some analysts expect the government to be able to balance profiting from its resource wealth with ensuring continued investment from foreign producers. In addition, companies expect that they will be able to negotiate terms with the government on existing mines. Mining Minister Jero Wacik stated that, “the aim is the state has to get more. For new investment it will be simple, but for existing investment there must be renegotiation.”

Certainly, there is cautious optimism amongst investors.

"The high economic importance of the mining sector to Indonesia's central and regional governments provides a strong incentive for the government to adopt reasonable regulations that do not materially dent the sector's performance or its attractiveness to investors," said Xavier Jean, an analyst at Standard & Poor's. In its latest report on the mining industry, released earlier this month, the credit rating agency stated that “our ratings on mining companies operating in Indonesia have long factored in the country's evolving regulations. Therefore, our credit outlook on the sector remains stable.” It added that “not a week has passed without government officials calling for additional royalties, a review of ownership rules or a more equal redistribution of mineral wealth."

Others have expressed concern about the negative impact any protectionist policy could have on international mining groups.

"It appears likely that the government will claim a larger share of domestic resource earnings going forward, through either higher taxes or increased ownership…[t]his could adversely impact production in the longer term if investment from foreign companies declines as a consequence," stated Deutsche Bank analysts Daniel Brebner, Xiao Fu, and Cherie Khoeng.

As for the major mining groups, they have by and large shied away from protesting about a possible tax policy change, at least publicly. The stakes are, however, clearly high.

The Grasberg mine in Papua province is the third-largest copper mine in the world, and is majority owned by the world's biggest publicly-traded copper group, Freeport-McMoRan (NYSE: FCX). Still, the Arizona-based company's share price and earnings projections have been more affected by labor unrest at the mine than by any possible shift in Indonesia's tax policy.

Indeed, even as final details of the mining tax have yet to be revealed, Citigroup has raised its outlook for Freeport as the latest dispute at Grasberg between miners and the company appears to have settled down. Citigroup has raised Freeport's earnings projection to 84 cents a share from 63 cents a share for the latest quarter, and raised its recommendation to “buy” from “neutral,” in addition to raising its price target to $45 a share from $43 a share.

Moreover, Freeport's Indonesia unit spokesman, Ramdani Sirait, stated that the company is “confident” the Indonesian government “will honour articles in the existing contract of work.”

Other major copper mining groups may not be as heavily invested in Indonesia as Freeport-McMoRan is, and may shift their interest to other regions down the line. Newmont Mining (NYSE: NEM), for instance, operates the Batu Hijau mine on the island of Sumbawa, but it is more heavily invested in Australia and New Zealand.

There is no doubt that any policy decision by the Indonesian government will be closely monitored, even by junior miners who have limited or no investments in the country, as it may impact tax policies in other resource-rich nations.

 

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.

Can Copper Producers Weather Indonesia's Mine Ownership and Tax Changes? from Copper Investing News

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