Exploration Outlook, a Mix of Policies and People [Coal Asia Vol. 30]

By Ian Wollff
The author is an expatriate principal geologist of about 28 years experience in the Indonesian exploration & mining industry, and has an association with an international consultant company.

Industry Groups.
The spectacular growth over the past few years of the exploration and mining industries in Indonesia is due to a beneficial mix of market demand, a supportive government and availability of areas for license application. The Indonesian Mining Association (IMA) was one of the early principal industry based stake holder groups that represented the private investors that held concessions under the Contract of Work (COW) system. IMA established lines of communication with the Mines Department that allowed for an easy two way flow of information that contributed to the building of confidence between the industry and the Government.

However we are now seeing a slowing in the rate of exploration, and an extended moratorium on the issuance of new exploration areas. The exploration industries present concern is now related to a growing lack of confidence between the industry and the Government, both for the international and domestic concession holders.

The Mines Department is now more driven by the Parliament and has less opportunity to reflect the industries outlook. This change in direction of the Mines Department is in part a social factor driving the development of private industry groups reaction to consolidate in industry and special interest groups for their own protection. In general, the smaller IUP holders do not find affiliation with the IMA suitable, and have formed various new bodies for industry based representation. The Mines Department no longer has one IMA body to engage, but now has many more focused and industry specific bodies that are sometimes more confrontational. Some of these new industry groups have wider social linkages across government, giving them more avenues to put their point across. It is no longer the Mines Department dealing with some powerful international mining companies, or embassy trade officials, but now the debate is being developed between different Indonesians on the various political levels.

The Mining Industry is also socially maturing in a diverse manner, with many professional groups becoming more active, industry seminars proliferating, more mining magazines being produced, mining clubs and networking activities growing, and newspaper coverage expanded. A part of this social development is the industry need for more communication amongst its members, and as a means of finding new paths to communicate with a more isolated and politicized Mines Department. We are now seeing a more open debate over government policy and industry trends between the industry players, rather than have one spokes person from IMA to represent a unified industry outlook. This is a win for transparency and a reflection of unity in diversity (Bhineka Tunggal Ika).

It would be interesting to see the Government’s commission on mining become more transparent.

Exploration.
The Forum for Exploration Mining Development Indonesia (EMD) is a typical small start up industry group that is largely focused on promoting exploration in Indonesia. This group seeks a dialog between industry players and Government on a range of areas to promote exploration. This dialog starts with explaining the nature of exploration as distinct from mining, the concern over government regulations and the practice of Government Departments that are seen to impede exploration, plus the willingness of investors to participate in the Indonesian exploration industry.

The Mines Department acknowledges that Exploration is significantly different to production, wherein there are distinctive permit phases, along with reporting commitments. The financial audit process recognizes exploration as distinct to production through its treatment of expenses, that are “ring fenced” and written off if mining does not start. The Indonesian Stock Exchange (IDX) recognizes the distinction through the requirement of such companies to provide a monthly exploration reports. Investors recognize exploration as a separate industry, with higher risk profile and expectation of higher returns. Indeed long term averages indicate less than 1 in 100 well targeted exploration programs may eventually become mines, and the lead time and risk capital do not match that of other business ventures. The recent Indonesian rush to issue 5,000 to 10,000 IUP’s was often based upon what land was available rather than based upon well targeted exploration concepts, and thus we may expect very few of the newer IUP’s to be developed into viable mines.

Exploration is generally about looking for something that is well hidden, and professional exploration goes about this business in a staged manner that often takes a long time. Mining enterprises are regulated about the funding ratio of equity to loan, however exploration is funded by equity alone. The sources for such exploration capital investment are sometimes large mining companies seeking to expand through exploration, requiring patient management and patient capital. However a significant source of funds is the small exploration companies raising funds on international stock markets and spending such Foreign Direct Investment into the high risk business of exploration. These small companies cannot afford to be so patient, and if obstructed in one country must seek another destination to survive and thrive. Many small exploration companies dream of becoming a large successful mining company, and this is the dream of many Indonesian IUP holders.

The Mines Department has recently been lobbied by the geothermal industry to be acknowledged as a separate industry to Mining, and thus may be excluded from many regulations that restricted its exploration and development, particularly in forest areas. EMD promotes the concept that the exploration industry is also significantly different to the mining industry, and Indonesia may similarly benefit by adjusting its regulations accordingly.

A recent misconception by some in government institutions is that all the mineral and coal wealth in Indonesia has essentially been identified or found. Indeed the mineral & coal spatial plan developed in support of the Mining Commission preparations for facilitating the Mining Areas map (WP) defines the regional rock types, existing mines and historic mineral occurrences etc. This is a sound bases for defining areas for further exploration potential. However exploration is constantly being reinvigorated by new geological concepts, new findings, and by exploration geologist with a different outlook. For example, most Indonesian coal exploration focuses on the Eocene & Miocene fresh water sediments, however coal is now also being found in similar aged marine sediments (fresh water incursions). Indonesians are not exploring the older sediments for coal, wherein Australia has found significant Permian aged coal. For minerals the complexities and geological concepts can be more dynamic. Thus an alternative industry outlook is that all of Indonesia should be open for exploration and, where latter mining permits are issued related to a suitable environmental permit (AMDAL).

The Indonesian government’s plan to develop inventories of existing resources and match those with planned industry future needs to develop Indonesia, is a good snapshot of today’s measures, but is doubly flawed when extended to the future. A stimulated exploration industry may find and develop more resources, whereas a slow down in the exploration industry will ultimately lead to less resources being developed, and thus a slow down of national growth, making predictions of consumption over stated.

Indonesia’s mineral and coal production will indeed eventually run out, unless constantly being replaced through an active exploration industry.

Who takes the exploration risk.
The new 2008 mining law [Article 7 (1)e.& Article 8 (1) d] assigns the Provincial / Regency or Municipal governments in managing mineral and coal mining to “inventory, investigation and research as well as exploration in the framework of acquiring data and information on mineral and coal according to its authority”. Furthermore Article 87 states “In order to support preparation of WP and development of science and mining technology, Minister or Governor in accordance with authority, can assign national research institution and/or regional to conduct search and research regarding mining.” At the time this law was issued there was a rush by Regencies to apply for funds to undertake such exploration and research. However it appears the central Government has not issue funds to cover this obligation, and as such Government sponsored exploration has been minimal or nonexistent.

The State Owned Enterprises of Pertamina and Tima have their own objectives, including a preference to spend their Indonesian profits in places like Yanmar, rather than in Indonesia. Aneka Tambang prefers to spend its profits on selective high value projects, rather than conduct exploration in all of its many diverse IUP’s.

It is clear that the Government wants to continue the practice of private companies using their own funds as being the principal explorers. This is consistent with most developed democracies around the world. Funding for the exploration industry is limited to equity, through large companies spending cash reserves, or small companies raising funds on the stock market. Bank loans are not available. Each exploration project is “ring fenced” where a loss in one prospect can not be transferred to the gain in another prospect. The Governments trend to raise fees from the exploration industry is seen as a “cost of doing business”, however when such costs become excessive, or that permit delays hinder “doing business’, then the exploration companies either close down, move somewhere else or reinvent themselves as something else, perhaps an internet company. Indonesia’s highly prospective geology has seen many waves of exploration companies come to Indonesia to “try their luck”. There are a few higher risk takers out there, wanting to “buy low” and later perhaps “sell high” when the industry picks up, but even such investors tend to limit their exploration expenditure until they can see the industry start to pick up.

One consequence of turning international exploration investors away from Indonesia, is that such investors may strike it rich in some other country, and thereby create new coal or mineral mines that are in direct competition to Indonesia’s exports, with Indonesia loosing market share and coming under commodity price pressure.

Moratorium.
The original divestment of authority to the Districts under the Regional Autonomy laws was accompanied by the Central Government Mines Department undertaking a socialization and training exercise for the Districts to manage their part of the exploration and mining industry. Since such “hand over”, it seems the successive District administrations have develop their own path towards the implementation and management of the exploration industry. In response to the Central Governments desire to introduce an element of national direction to the mining industry, the Ministry found that the Districts management of the IUP’s was such that the Central Government could not adequately monitor or measure the status of the mining industry. Therefore the Central Government introduced a moratorium on the issuance of new mining areas (IUP) in 2009, principally as it sought time to bring a more coordinated order into the industry. Despite many ongoing unresolved issues, this has been an outstanding success for both the administration and the industry. Issues on legal certainty, defining spatial relationships, establishing administrative procedures and other aspects are being redressed now, and should form the bases of a more substantial industry. With all government reforms there are aspects that parties that agree upon, and others that have other opinions, as reflected in recent court challengers and through the expressions of the numerous industry groups.

The moratorium is clearly taking much longer than the Government first intended. The Basic Law of Indonesia 1945 Clause 33 (3) states the “Earth and water and the natural riches contained therein shall be controlled by state and utilized for the welfare of the people”.
Thus any undue delay in allowing “the people” to derive benefit from such natural riches may be considered an infringement of the Indonesian people’s rights. It is apparent that Indonesians are generally patient with “their” government regarding this moratorium. However it would be wise to remember that the reformation that followed the downfall of Soeharto resulted with the placation of regional aspirations by granting the Regional Autonomy laws, a corner stone of which included the control over mineral rights (excluding oil & gas). The present moratorium has a side effect wherein regional aspirations and income is now being limited by the present Central Government!

At a recent EMD public seminar a number of mining division heads from District Governments indicated they had complied with all their administrative requirements that precede the lifting of the moratorium and begin the process to issue new exploration concessions. However, as representatives of the people, they are frustrated by the Central Government as it continues to delay the lifting of the moratorium. Past administrations of the Mines Department emphasized the “win win” outlook to resolve issues. Perhaps one such solution for ending the moratorium may be to allow each District that has demonstrated compliance and capacity to manage their exploration and mining industry to proceed. This may incentivize other Districts to resolve their outstanding issues and develop their management of the exploration and mining industry more promptly, such that they too may join the new era of issuance and management of exploration permits etc.

Work Together.
To get Indonesia’s recent mining industry started in the 1980’s and 90’s, a system of COW’s was introduced, wherein the Government recognized the difficulties exploration companies may have in dealing with a multitude of government agencies. So the government introduced the “one stop shop” management approach, wherein the Mines Department would coordinate with the other government departments to facilitate the exploration and development of mines. However under the latter KP and IUP systems, the Mines Department stepped back from this coordination role and exploration companies were left to deal directly with the growing number of government bodies that had some overlapping interest in the exploration and mining sector. Fortunately, the more recent national spatial plan released under Presidential Instruction (No. 3 of 2012 etc) clearly defines areas approved for mineral & coal exploration and development, so the exploration industry may hope that obtaining cooperation from Forestry and other Ministries to start exploration in such areas can at last be streamlined.

By looking back at what worked so well in the past to create Indonesia’s successful exploration industry, we can see where Indonesian may go forward again.
1. Government outlook, policy and laws to promote private exploration.
2. Various government bodies working together in coordinated effort to support exploration.
3. Government and industry having good communications to appreciate each other’s point of view.
4. Available new ground, with regular relinquishment’s to provide a mechanism for ensuring new ground is always becoming available.
5. Security of tenor and suitable investment terms.
6. Both Government and industry undertaking research and education activities to improve the technology and well being of the industry.
We are now in an exploration industry down turn, and it is the Governments social responsibility to look after the future of the exploration industry, and ensure it promptly acts to stimulate the exploration industry.