IEDC opens a path to encourage new exploration. Vol 129

1. Introduction.

There is considerable government spirit and effort to revive the high-risk business of greenfield exploration. In this light, the government calls for more feedback and constructive criticism on how to convince the private investors (juniors – seniors) to come and invest greenfields as well as brownfields. This reflects the government’s strategy to encourage explorers take on the higher risk business of exploration.

The Association of Indonesian Geologists (IAGI) and Association of Indonesian Economic Geologists (MGEI) supports this government strategy with a forum that brings explorers and investors together. The extended Covid induced lock down obliged this to be a virtual event, with some 500 attendees, 193 companies, 41 universities, 20 regulators, 19 associations supporting this event.

2. IEDC Webinar.

From the 27^th to the 29^th July 2021, the IAGI & MGEI undertook a 3-half day webinar series on the launching of the new “Indonesian Explorers Developer Collegium” (IEDC). This virtual program was held in English, emphasizing the desire to attract foreign investors. This article’s short notes are hoped to provide an outline of the event, though it is not possible to present the extensive and detailed information contained in the numerous presentations and discussions. I apologise for any omissions or errors that may appear in these notes and comments. Congratulations to the organizers of this event.

STJ. Budi Santoso, on behalf of the IAGI & MGEI welcomed about 200 virtual guests on zoom to the 3- half day webinars with the theme of; “Reviving Indonesia’s exploration & mining spirit; embracing commodities supercycle”.

Prof Dr Ir Irwandy Arif, distinguished staff (ESDM) delivered the Minister of Energy & Mineral presentation on “Readiness of the Indonesian mining sector to face the super-cycle; Learn from the past, embrace the future”. Some background of past mineral commodity cycles and analysis of some key exploration and mine development concluded that: In the last 10 years, there has been no discovery of world class mining reserves in Indonesia. Investors prefer to invest in exploration in other countries. This is in part due to uncertainty of mining policies in Indonesia. The government has a 5-point action plan to promote investment in mining, that includes improvement of certainty of law.

Indra Darmawan, distinguished staff of macro economy, ministry of investment (BKPM) spoke on “Positioning mining sector investment in accelerating and sustaining national economic resilience”. This presentation compared the covid reaction of the global economy to that of Indonesia’s overall economy performance. This included the role Indonesia’s leading mineral and coal commodities, along with some of Indonesia’s domestic and international investment trends. In 2021, domestic investment in mining is expected to be Rp. 11.1 Trillian (5.2%) while international investment in mining is targeted at US$ 1.5 Milyard (9.3%). Indonesia’s overall recovery is one of mixed messages, and there is a move towards more Value Added.

Dr Ir Ridwan Djamaluddin, Directorate general of mineral & coal, spoke on “New mining law: Restoring mineral exploration & mining investment”. The urgency for the enactment of the recent mining law 3/2020 is sought to support exploration. This includes exploration by assignment (with right to match & compensation payments), and that Junior explorer may transfer ownership on approval from minister. Investment incentives and opportunities in exploration, mining and smelting was outlined. The ESDM has identified 18 greenfield exploration and 6 refining project opportunities. Dr. Ridwan made reference to the earlier Luhut analogy that players in the mining industry should dance to the governments music, reminding us that policy is top down.

Greg Peacocke, McKinsey & Company, presented on “Reviving Indonesia’s exploration and mining spirit: What makes Indonesian attractive?”. Covid and other factors have reshaped the global mining sector to be more profitable, but also more volatile. Present commodity prices are higher than long term averages, suggesting some price corrections may come. Indonesia is set to profit from the new energy trend and its developed reserves for nickel, copper and aluminium. Major miners and government efforts continue to drive exploration. Despite Indonesia’s good reserve potential, Indonesia has limited exploration spend, being less than 2% of global exploration spend, and only 1-3% of Indonesia’s annual investment. This is leading to declining reserves in tin & gold. Greg concluded that Indonesian exploration attractiveness could be improved through 1) flexibility for market context, 2) lift international competitiveness, 3) make use of natural resources endowment, 4) enabling environment.

During discussions, it was mentioned that an improved exploration environment might include 1) very open data, 2) removal of right to match, 3) encourage majors back, 4) review partnership finance / tax arrangements, 5) low-cost pioneer greenfield exploration, 6) a mixture of private and public investment. However, the biggest influence may be the need for more exploration success stories.

Sceecharan Nagarkal, Chief transformation officer of PT. Petrosea Tbk, presented on “. Indonesian mining industry business, future trend and challenges; Mining overview and opportunities”. Challenges faced by the mining industry include a reduced exploration investment climate, low productivity and declining grades, scarcity of good talent, and cost of financing. The life cycle from entering the exploration industry to production is very long, and needs many diverse permits, subject to new regulatory and financial pressures, including increasing emphases on non-core factors such as ESG. Banks and financial institutions are more stringent in examining investment for mining, as it can be high risk (technical & non-technical) and take a long time to recover the investment. Investment in exploration and mining should be justified by a high return on investment.

Dr. Eko Budi Lelono, Geological agency, ESDM spoke freely without slides. The role of the geological agency is to record geological data, to stimulate exploration, look for prospective areas for new discoveries (depending on finding), engage with social media as so directed. The focus is largely on the principal minerals of coal [Resource 144 bill ton / Reserve 39 bill ton], gold [17,000t / 3,700 t], bauxite, [metal 1.8 bill t / 946 mill t] tin [metal 2.8 mill t / 2.7 mill t] copper [ metal 66 mill t / 24 mill t] and lateritic nickel [ore 13.7 bill t / 4.56 bill t]. Also, to look for new discoveries in critical raw materials, including REE & Pt. 

I Gede Nyoman Yetna, of the Indonesian Stock Exchange (IDX) presented on “Brief on the mining investment in the IDX current status, opportunities and challenges ahead”. Mining stocks now come under the new classification category of “Energy” (67 companies) that make up 9.3% of the listed companies with 18.8% of the exchanges fund raising. Two recent Energy companies using E-IPO were PT.Ulima Nitra Tbk ( Rp 35.4 bill) and PT. Archi Indonesia Tbk (rp 2.79 trillion). Challenges include competing for investors against new economy business.

James Rowe, state manager of the Australian Stock Exchange (ASX) Perth. The ASX is a highly active market with one of the largest pools of capital from superannuation funds, private & institutional investors, and has the global highest number of secondary offerings. There are about 2,000 listed companies (40% resources) with total market capital of A$ 2.7 trillion (27% resources) with over 750 companies operating in the world. The regulatory framework includes disclosures compliant with JORC, ASIC (financial authority) and ASX requirements.

Tony Manini executive director of EMR Capital presented on “Mining and Exploration project financing; what makes your project trustworthy – worth $B”. Several of Indonesia’s established mines were outlined. Key attributes of very large projects include scale, proven process, long life, stable jurisdiction, grade, low cost, upside and scarcity value. Building trust to attract finance includes high quality studies on resources and financial studies, ESG, strong legal compliance, growth opportunities and team track record. EMR recommend strong exploration funding to develop sound project before seeking EMR development funding. EMR typically have $ 50 – 60 million to invest each year on suitable large mature projects around the world.

Hamzah Syawaludin of PT. Bank Mandiri (Persero) Tbk presented “Banking role in mining projects development in Indonesia”. The banks corporate financing sector will evaluate a loan based on the sponsors reputation and the commodity. Operational loans can be developed for any part of the mining business activity, and funding may be directed at working capital, refinancing, expansion with funds drawn from the capital or non-capital market. The principals of determining credit worthiness include character, collateral, capacity, capital, condition. The bank evaluates the risk and develops mitigation strategy around regulation, commodity price, operational risk, life of mine risk, contractors engaged and environmental risk.  Basic criteria for company seeking bank funding includes business group support, reliable feasibility study, contractor reputation, supply & demand plus permits. Banks tend not to provide finance for exploration.

Keith Whitchurch President director of PT. SMG Consultants Indonesia presented on “Valuation of exploration targets”. Valuation is a complex and onerous task that applies to various national best practice valuation codes, such as IMVAL & VALMIN, and requires demonstrated independent experts. There is a difference between the technical value and market value, and different valuation approaches wherein exploration projects may use a “Market” or “Cost” approach. Impediments to closing a deal may come from perceived value by either party, fixation on control, unrealistic views of operational budget. Farm in agreements is more common for the exploration industry. The IDX allows start-ups, wherein there may be a case for expanding this approach to allow explorers to list on the IDX.

Dr. Dany Amrul Ichdan, director of institutional relations for Mining Industry Indonesia (MIND ID). The overview of MIND ID outlined, with their mining business including bauxite, coal, nickel, gold, copper, aluminium and tin, with their scope of operations from exploration to marketing finished goods. Strategic projects include acquisition of international potash, phosphate & salt mines along with several downstream projects and power plants in Indonesia. MIND ID is open to various business to business project investors.

Tyas Rabudianto of PT. Vale Indonesia Tbk presented on “Improve and transfer the future of nickel industry through sustainable mining practices”. Indonesia’s Nickel Pig Iron (NPI) and ferro nickel industries continue to grow, though the availability of saprolite ore reserves to support RKEF smelters is limited. The High-Pressure Acid Leach (HPAL) process looks promising.  Much media and industry attention are directed to nickel for batteries, wherein good mining practices will be emphasized. Green image is supported by having some grid power, plus future gas-powered electricity plants to compliment the hydro power plants.

Tony Wenas of PT. Freeport Indonesia presented on “Long term commitment of PT. Freeport Indonesia: a success story”. Freeport has a long history of mining in Indonesia and recently went through a mutually beneficial share divestment program with the government. Freeport has long term reserves to 2042 and beyond, with 1.724 billion ton of ore running at 1.04% copper and 0.77 g/t gold and 4.13 g/t silver, containing 33,435 million pounds of copper, 28,335 thousand oz of gold and 130,640 thousand oz of silver (as at 31 dec 2020) with a further 2 billion ton of resources beyond 2041. The question is if Freeport should undertake about 10 years of effort (reserve exploration and development works) to upgrade such resources to reserves. The present financial rewards to the shareholders, government and community are significant. Operational challenges are ongoing, including underground wet ore and seismic disturbances from this active tectonic area. Investment in smelters is a significant billion-dollar commitment.

Paul Walker, chairman of Far East Gold, president commissioner of PT. Far East Minerals Indonesia. Far East Gold has a number of projects in Australia, and is presently in the process of acquiring the Wonogiri, Trenggalek and Woyla Au-Cu projects in Indonesia. Far East Minerals is comfortable in doing business in Indonesia, though feel business could be improved by speeding up the issuance of new regulations, and overcome the covid impacts of reduced manpower at government offices to facilitate permits etc. Operational issues around land use, environmental studies etc are being tended to through competent local experts in law, finance and technical fields. It would seem some small issues, within and between government offices, can take a long time to resolve. Clarity around the transition to the new law on centralization is taking its time to work through the various layers of government. Far East Gold is continuing to invest in field programs, as a reflection of their confidence that permits and processes will be completed in good faith. It is planned that JORC reserves will be developed for the Trenggalek project for ASX fund raising, and Far East gold is open to a JV on this project.

Faud I Z Fachroeddin of PT. Bukit Asam Tbk presented on “PT. BA’s strategy to accelerate greener business”. An outline of PT. BA business is supported by their 8.28 billion ton of coal resources and 3. 23 billion ton of reserves, long mining history and considerable infrastructure. Their 2020 – 2050 strategy is to become a world class integrated sustainable energy and chemical business. The present development focus is to expend the coal rail transportation system, complete mine mouth power plants and develop coal downstream industries. PT. BA is open to potential strategic partners for business opportunities in Indonesia.

Hendra Susanto William director of PT. Kapuas Prima Coal Tbk (ZINC) presented on “How the strategy of a national junior mining company could earn public trust in IDX: a preparation stage to go public”. KPC started out intending to be a coal company, but switched to become a small underground metal mining company. Public road-shows resulted in a successful IDX listing. Challenges encountered included obligations to build a smelter, impositions by climate and covid, plus the ability to maintain production through the period of a volatile price for zinc and lead. The smelters are small, and not planned to take in outside ore. The recent reopening of iron ore sales to local smelters has helped, and a recent bank Mandiri credit facility has been undertaken as a secondary fund raising.

Tony Manini chairman of Asiamet Resources presented on “Building a leading Asian copper mining business”. Asiamet has 2 projects in Indonesia, the Beutong IUP in Aceh with JORC compliant resources of 2.4 Mt (5.38 bill lb) Cu, 2.1 mill oz Au and 20.9 mill oz Ag, plus the KSK COW in Central Kalimantan with JORC compliant resources & reserves of 452 kt Cu, 60kt Zn, 26kt Pb, 1.7 mill oz Ag, 8k oz Au with further upside. Significant exploration on the KSK project indicates it is a shallow VMS deposit. Feasibility studies and further exploration is ongoing. A strategic partner is sought for the Beutong project, to target exploration towards a deeper porphyry system.

Edi Permadi President director of PT. J Resources Asia Pacific Tbk presentation on “Winning and securing public and lenders funding trust through healthy project pipelines / portfolios”. The company started out with two small heap leach gold projects and has organically grown from there into a meaningful medium scale company with expanding upside, and a demonstrated track record of success. The present projects were outlined, including the Bakan mine, Doup development project, and the exploration projects of PT. GSM Bolangitang (BLT), PT. GSM Bulagidun. Management encourages good mining practices and good resource management.

3. Personal Conclusions;

A driver for this EIDC event is that many potential investors have already looked over, and declined, a number of possible projects. Investors may not be aware of the great number of available projects. Also, a number of project owners are not well placed to seek out new investors, or understand how to promote their projects.  

The IEDC is a great initiative. Congratulations to the MGEI volunteers who put this together, and to the many webinar participants. Some selected conclusions from the webinar include;

• There are a handful of private companies openly investing in mineral exploration within Indonesia. What we do not see from this webinar is if there are companies that take a more traditional path towards investing, in maintaining secrecy to reduce competitors’ activity, and to reduce the potential overinflated land acquisition / local permit issues.
• There are a number of private & SOE companies looking for investors to jointly undertake greenfield / brown field exploration projects. It seems they find it takes considerable effort and insight to find the right partner and cut a satisfactory deal.
• Many companies, including SOE’s, prefer to invest in off-shore brownfield projects, rather than undertake greenfield exploration in Indonesia.
• The Government continues to promote its incremental regulatory changes to encourage investment in exploration, while potential investors continue to see significant regulatory obstructions towards committing to invest in exploration.
• Sources of exploration funding are very limited, but more options appear once a project can demonstrate viability, and once profit lines have been demonstrated.
• This webinar implies that investors prefer existing permitted exploration projects over new applications for exploration areas. Investors seek trust in the project outline, management and ownership.
• The Mines Department retains a narrow focus on promoting a limited number of commodities. Indonesia is missing out on its diverse potential to participate in the current global commodities rush.
• There are a number of successful exploration and mining enterprises that are a great encouragement for the exploration industry.

One presenter referred to an earlier quote from Luhut regarding the mining industry; in that only those who want to dance to the music of the Government will be engaged, and those who do not can leave the dance floor. It would seem that after a few years of this slow line-dance music, there may be wallflower investors waiting to embrace a future of more-lively dangdut music.