Will Indonesia ignore the obvious again – The Fraser 2014 survey.[Coal Asia Vol.55]
Will Indonesia ignore the obvious again – The Fraser 2014 survey.
The Fraser Institute’s 2014 annual survey of mining companies was based on some 485 responses from top mining executives to evaluate the ranking of some 122 countries and states from around the world. Indonesia’s “Policy Perception” remained on equal bottom (122/122) and “Mineral Potential Index” declined from 66th in 2013 to 74th in 2014. The survey rated Indonesia as having the 4th best potential for improvement, principally through a more favorable government policy.
The Indonesian exploration and mining industry has lived with such sad facts for a number of years, and continues to lose ground in this struggle to have its government support a free enterprise exploration and mining industry. Let’s look on the bright side, that Indonesia cannot go further down on the Frasers policy index, as it is already at the bottom. But Indonesia’s decline on the mineral policy index is something that the exploration and mining professionals may be able to improve.
Exploration Potential.
The Fraser Institutes Mineral Potential Index is a reflection of the surveyed executive’s perception based solely on the geological potential. Unfortunately the Fraser Institute does not go into further detail, wherein the geological potential for original discovery through first pass exploration is not distinguished from geological potential from more advanced geological exploration, such as multiple phased exploration of a suitable target, or extending reserves from a known deposit. Indeed the lack of distinction between the different phases of exploration is also reflected in the Indonesian Stock Exchange that allows regular production activities to be included in its mandatory “exploration” reports.
But does the Fraser Institute survey of such executives from around the world reflect the exploration outlook of the experienced Indonesian exploration geologist? Many of the bulk commodities (coal, nickel, bauxite, iron sand, tin) need large deposits, with suitable haulage logistics. It would seem that many such deposits have been identified, thus reducing Indonesia’s original discovery potential. These deposits now require pre-feasibility or feasibility study style exploration programs. For example there are clear signs that the oil & gas industry feels there are fewer targets of significant size and prospectively, with the last surge in deep water euphoria fading. The recent boom in the coal industry undertook significant exploration in virtually all coal basins resulting in a number of good finds, but now there are relatively little remaining worthwhile first pass coal exploration targets. Similarly the nickel and bauxite booms triggered many exploration programs, wherein such regions prospectively is now better defined. The first pass tin exploration potential seems to be limited as reflected by the giant of PT. Timah now going off shore to Myanmar to look for tin. The big gold miners have reviewed, and often explored, some of the undeveloped exploration projects from the small players. The World Bank – Indonesian Economic Quarterly of March 2015 (World Bank report) states “From 2009 to 2013 there was a 14 fold increase in non-oil and gas mining foreign direct investment (FDI) from USD 330 million to USD 4.8 billion. However, much of this FDI was “brown field” investment to support operations of existing projects, such as investment for the Grasberg copper mine, rather than for the development of new “green-field” projects.” The crash of the bulk commodities has led some players to do some exploration for other commodities, from graphite to rare earth minerals etc. This extensive first pass exploration activity would seem to have significantly reduced Indonesia’s Mineral Potential Index.
Another approach is to look at how thoroughly past exploration has been undertaken to detect the mineral targets. I have reviewed hundreds of exploration reports by both small and large companies wherein it is a common feature that such first pass exploration leaves large gaps of under explored areas, and some explored areas are clearly inadequately covered. Indonesian geology is full of wonderful outcrops along with a very active erosion system that is constantly bringing forward new exposures. From an exploration perspective such “boots-on-the-ground” exploration potential is still very high. Smaller targets of high value minerals (gold, manganese etc) probably still have significant exploration discovery potential. Well hidden targets often retain their prospectively even after a first or second pass exploration program. There are many bulk commodities (coal, nickel laterite, bauxite) that have been outlined as Exploration Targets or Inferred Resources that could readily be advanced to Indicated Resources or better, wherein further investment in exploration is postponed for a number of reasons. There are some parallels for the present Indonesian exploration industry with the past gold boom in Western Australia, where there were many abandoned historic gold mines that sprang to life once new mining and process technology was supported by increased commodity prices. Thus, the recent boom has provided extensive first pass exploration that would seem to have improved Indonesia’s Mineral Potential Index for selective advanced exploration, provided the data is not lost.
Other Influences on Exploration Potential.
I have attended a number of industry seminars and presentations where it seems a government attitude is that all of Indonesia’s coal and mineral potential has been identified. This seems to be the bases for some of the spatial planning maps. Indonesia is changing from a rural to an urban society, wherein more areas are being excluded for coal and mineral exploration (forestry, urban boundaries etc). The reduced area available for exploration is another factor that may reduce Indonesia’s Mineral Potential Index.
The effective raw ore export ban would seem to have stimulated exploration in bauxite, nickel laterite and other minerals in neighboring countries, effectively raising their Mineral Potential Index and thereby lowering Indonesia’s Mineral Potential Index.
Exploration in several sectors, including Uranium, Coal Seam Gas, Oil Shale etc appears to be relatively stalled wherein their exploration potential is likely to be static.
Improve Mineral Potential Index.
The Government has recently stated clearly that it wishes the mining sector to contribute significantly more to the nation’s economy. In some sectors the government provides subsidies and direct industry support to stimulate trade and investment. The government can ultimately increase its revenue through stimulating the exploration and mining industry through improving the mineral index policy. This may be achieved through being more open about its geological data base, or to run regional geological, geophysical and geochemical studies that are freely available to the industry. General advancement in the industry through innovation in exploration (techniques & ore genesis), along with seminars and conferences to publish such findings can improve the mineral index policy. The best way to improve the mineral potential index is through the announcement from exploration companies of the discovery of great new deposits, but the general lack of exploration makes the chances of such an announcement less likely.
Policy Index.
Under the Suharto period no one dared to talked politics, not even at the family dinner table. But today politics is a close second to gossip about TV stars. The success and intrigue of the exploration and mining industry has seen the industry become a front line topic for a community that clearly does not adequately understand the industry. Unfortunately some of the politicians put forward short sighted views based on narrow focused national aspirations and lacking a practical understanding of the industry or the workings of a successful country. There are many commentators in the media and experts, (as is evident from the recent Constitutional Court decision on the apparent raw mineral ore export ban) that put forward their own political bias. The Fraser Institute survey indicates that roughly 40 percent of the executive’s investment decisions are determined by policy factors. Typically such executives take note of countries policies from a number of independent parties, including the recent World Bank report. Selected extracts from this report;
- “While time-series data on exploration expenditure for coal and other minerals are not available, the decline in existing mineral reserves suggests that exploration investment has also been low. Despite its high geological potential, Indonesia in 2012 attracted less than 1 percent of global mineral exploration expenditure.”
- “Policy uncertainty in the sector is cited by investors as one of the biggest concerns. This uncertainty can be reduced by involving industry in policy deliberations and process, and communicating decisions in a timely fashion. Building, taking into account of, and communicating, the evidence-bases for policy can also play a key role, particularly to clarify the trade-offs between different objectives (for example, export promotion versus domestic consumption, and reducing extraction rates verses meeting energy demands), so that there is consistency and complementarily among policies”.
The Investment Attractiveness Index.
The Fraser Institutes Investment Attractiveness Index is a combination of the Policy Index and the Mineral Potential Index. This index is important, as investment in the Indonesian exploration and mining industry will have direct and indirect benefits for the Indonesian people. Selected extracts from the World Bank report can provide Indonesian policy makers with an independent view;
- “Natural resource activities directly affect development outcomes, especially at the local level, through employment generation, backward and forward production linkages, and the environmental impact of operations. To increase net benefits, there needs to be effective policies on local benefit-sharing and stronger oversight of companies social, environmental and labor obligations.
- “To collect the full revenue potential (under the existing fiscal regime) of the mining sector requires strengthening the non-tax revenue administration system for mining and tackling illegal mining. Simply increasing rates, for example the royalty rate, to mobilize revenue may not be effective, due to lower prices in the medium term.” “A joint study conducted by the World Bank and the Ministry of Finance on mining non-tax revenue (NTR) administration, focusing on coal, estimated that 22 to 46 percent of potential NTR (IDR 16-51 trillion) from reported coal sales was not collected in the 2010 – 12 period due to weak compliance”.
And from the “Overview of Extractive Industries Transparency Indonesia 2012 State Revenue and Contextual Information (December 2014),
- “The contribution of extractive industries not only to increase taxes and other payments paid to the government, but also develop economy surrounding the area of operations. From the data extracted from Indonesian Statistic Bureau (BPS), work field created in Indonesia for oil, gas and mining is around 1.5 million people or around 1.2 % of total employment in Indonesia. From those 1.5 million employments, more than 900 thousand are working in the rural areas.”
Conclusion.
The Indonesian constitutional outlook is that God placed the minerals in the ground for the benefit of the Indonesian people, and it often seems that God is very good at hiding such treasures. The Government seems to be delivering a tremendous challenge to the investors that support the geologist’s God given responsibility towards the Indonesian people to seek out such minerals.