Nationalization to bite into miners’ revenues

Indonesia’s new indigenization legislation aimed at foreign mining companies opens another chapter in a resource-nationalization saga amongst developing countries. 

According to new regulations ratified by Indonesian President Susilo Bambang Yudhoyono on Feb. 21, foreign firms will be required to increase domestic ownership to a 51% minimum by the tenth year of production. 

The announcement comes during contract renegotiations between the Indonesian government and major mining players Freeport-McMoRan Copper & Gold (FCX-N) and Newmont Mining (NMC-T, NEM-N).

Freeport owns the rights to the Grasberg mining district in Indonesia’s Papua province, which holds the world’s largest single recoverable copper reserve and largest single gold reserve, based on December estimates. 

Grasberg has 825 million tonnes in reserves grading 1.09% copper and 1.03 grams gold per tonne, totalling 31.6 billion contained lbs. copper and 32.2 million contained oz. gold. The company owns 91% of the project, with 9% held by the Indonesian government.

Freeport’s work contract includes US$13.8 billion in royalty and tax payments since the agreement was signed in 1991. Indonesian production accounted for 19% of Freeport’s 2011 revenues, and last month the company said it was in negotiations with the government to run Grasberg beyond 2021.

Newmont is involved in the Indonesian joint-venture company, Newmont Nusa Tenggara, which includes Japanese partner Sumitomo. The companies have signed agreements over the past year to divest the required 51% ownership of the Batu Hijau copper-gold mine in the West Nusa Tenggara province. 

Indonesian government-owned consortium Bumi Resources already holds 24% of the project, and agreements with central governments will see another 7% stake change hands in the next few months. Batu Hijau is the second-largest copper mine in the country with reserves of 563 million tonnes grading 0.4% copper, or 4.5 billion contained lbs. copper. 

BHP Billiton (BHP-N) will also be pulled into the fray on account of its 75% position in the IndoMet Coal project on the Indonesian part of Borneo Island. Adaro Energy — an Indonesia-based integrated coal mining company — owns the remaining 25%. The joint-venture agreement was signed in May 2010, and BHP announced a US$1.34-billion mine development plan in November. The proposed Haju mine location is 220 km northwest of Balikpapan, and construction is slated to begin at the end of 2012. 

BHP reports it is reviewing the updated Indonesian ownership requirements, and has yet to respond to requests for comment.

Exploration outfits such as Intrepid Mines (IAU-T) were hit hard by the news. Intrepid’s share price has dropped 37% to a low of 82¢ since the Indonesian government’s announcement in early March. The company controls 80% of the Tujuh Bukit gold-silver-copper project located on the island of Java through a joint-venture agreement with Indonesian company Indo Multi Niaga. In an attempt to dissuade sell-offs and sooth shareholder anxiety, managing director Brad Gordon released a statement through the company website on March 26. 

“The implications are limited. The two clear messages from us are really that the most significant effects of these regulations won’t occur until well into the future, at least 10 years or more. Secondly, the divestment will be done at a fair, commercial value.” Gordon added that “we’re currently lobbying with high levels of government to explain the share market impact it’s had on us in both the Australian and Canadian markets where we are listed.”

Resource nationalization has become a hot-button topic in developing countries as rising metal prices and existing work contracts have central and regional governments calling for foreign mining firms to hand over tighter financial control to domestic interests. 

Zimbabwean Indigenization Minister Saviour Kasukuwere levied nationalization threats against 30 foreign-owned mines in late February under the nation’s new Indigenization and Economic Empowerment Act, requiring that 51% ownership in all mining operations be held by local interests. 

According to reports from the country’s parliamentary development committee, 200 mining companies have submitted indigenization proposals, but only 54 have met the criteria imposed by the new government legislation. 

Caledonia Mining (CAL-T) reached a US$30-million agreement to divest 51% of its Blanket gold mine to Zimbabwean interests in late February. Blanket produced 10,500 oz. gold in fourth-quarter 2011 at average cash costs of US$582 per oz. Caledonia reported unaudited after-tax revenues of $19.2-million last year.

South Africa’s Impala Platinum finally succumbed to pressure from the Zimbabwean government in mid-March, and agreed to divest the remaining 30% of its subsidiary, Zimplats, to local investors. Zimplats’ Ngezi mine is 150 km southwest of Harare and, according to a June 2011 technical report, accounts for 80% of Zimbabwe’s platinum group metal (PGM) resources and 10% of Impala’s PGM output. The financial details of the arrangement are still unclear since it is unlikely the Zimbabwean government can come up with the cash capital necessary to pay fair market value for an asset as large as Zimplats. 

The move will apply significant pressure to other companies holding out on Zimbabwe’s asset seizures, including Rio Tinto (RIO-N), which owns 78% of the Murowa diamond mine. 

In a March 2statement, South African Trade and Industry director-general Lionel October said domestic interests operating in Zimbabwe were protected by a bilateral investment agreement that should trump any new requirements from local governments. October classified South African interests in Zimbabwe as “secure.”

Canadian companies are protected by similar bilateral investment treaties with 27 countries worldwide, according to the United Nations conference on trade and development. The majority of Canada’s treaties involve Europe, South America and Asia. The country maintains no such treaties with African nations.  

Industry veterans will remember increased taxation pushes by governments in the mid-2000s that narrowed exploration budgets and capital expenditures in a number of resource-rich areas, eventually compounding recessionary conditions that hit in 2008. With metal prices rising to start the year and production and revenue growth now common, it appears escalating taxation and royalty rates are still on the table for 2012.