Valid Exploration Reporting in Indonesia. [Coal Asia magazine Vol. 48]
Valid Exploration Reporting in Indonesia.
The Issue of Poor Reporting.
During the recent PEMA (Provincial Energy and Mining Association) & EMD (Mineral Exploration Development association) seminar the Indonesian regional government officers highlighted their concerns that the reporting of exploration results by the concession holders is sometimes false or incorrect. The IDX (Indonesian stock exchange) does not have an adequate system to effectively control the quality of exploration and production reports published by the listed companies through the IDX public web site. The Government and IDX have adequate regulations specifying that reports should be true and valid, but implementation over the years has not been adequate. Some PEMA members indicate that the failure for good implementation by the regional governments is largely attributed to the lack of professional manpower, and lack of budget for training / monitoring etc. A report on the PEMA – EMD meeting is available at www.emdindonesia.com
A common factor behind insufficient reporting to the Government is that the concession company is not operating its exploration activities in a professional way.
Confidentiality and Past Reporting Practices.
One significant aspect behind insufficient reporting of exploration results to the government is the industry perceived lack of confidentiality from within the government. This “porous” government confidentiality is driven by third parties wishing to benefit through further concession application or stimulus of illegal mining. Unfortunately such third parties can now include the officials in regional government, with the police, local mines department or government being tempted to breach the confidentiality of such reports. This apparent lack of confidentiality is a disincentive for concession holders to report fully.
During the Indonesian gold exploration boom of the 1980’s to 90’s the industries concern of poor confidentiality was met by adjusting the reporting format. One quarterly report may give a map showing stream sediment sample sites, while a latter quarterly report may give the assay values, however the sample number linking the sample site to the assay would be presented in a confusing manner. Another approach was to submit the reports to the mines department on a computer diskette with a password key, and give the key separately to only one official at the mines department, wherein any data leakage could then be directly attributed to the one responsible official.
In the same period, exploration companies listed on the Canadian and Australian stock exchanges were bound by such stock exchange rules to promptly report any significant exploration results (both positive and negative news). This often resulted in exploration companies making public announcements before the regular reporting period to the mines department, making an apparent conflict with the confidentiality between the company and the government.
The Competent Person.
The Indonesian mining law [UU 4/2009] recognizes the importance of having suitably qualified geologist / miner (minimum 3 years experience) to submit reports. Furthermore the government has recently passed a new law [UU 14/2014] for the Minister of Education to have all professionals (including geology & mining) to register with the government, with administrative and criminal sanctions attached to negligent performance. It is clear some of these regulations will take a long time to become effectively implemented [Coal Asia Vol. 43 – New School for Engineers by IW]. The Jakarta Post reported (4 Sep 2014) that the Government wants more engineers with ASEAN certification. “As part of preparations for the ASEAN Economic Community (AEC), ASEAN member states have signed a Mutual Recognition Agreement (MRA), which includes ASEAN Chartered Professional Engineers (APEC) and ASEAN Architects (AA) certificates, among others.” “Indonesia has only 176 ACEP and AA certified engineers and architects out of 120,000 construction professionals with local level Competency Certificates (SKA) and Work Skill Certificates (SKT).” It can be assumed that geologists and miners shall soon be required to comply with the APEC registration system.
The Indonesian exploration and mining professional associations, including IAGI (Ikatan Ahli Geologi Indonesia) and PERHAPI (Perhimpulan Ahli Pertambang Indonesia / Association of Indonesian Mining Professionals) and EMD are supporting the KCMI -2011 (Komite Cadangan Mineral Indonesia) registration. This KCMI registration follows the international trend to recommend that a “Competent Person” be responsible for making and authorizing company reports for submission to Government and the IDX. The KCMI process to approve a Competent Person relies in part on a group of professional peers to review suitable applicants and formally acknowledge such persons and their area of competence. The JORC (Joint Ore Reserve Committee) code determination of Competent Person is different in that each person is a self declared Competent Person, following the professional guidelines.
Mining is not Exploration.
Mining needs to be a continuous process to maintain cash flow. Exploration is often undertaken as an intermittent process, where the results of one phase of activity are interpreted before embarking on a subsequent work program. Exploration does not generate income but is a high risk expense for the company. Exploration activity typically has little impact on the environment, has a lower safety risk profile, thus the level of reporting for non mining divisions of the government should be much lower. Typically exploration does not require a KTT (Kepala Teknik Tambang).
The IDX listed companies in the mining group are required to report exploration activity directly to their public shareholders through the IDX monthly, quarterly and annual reports. However unlike Australian, Singapore and most other stock exchange companies that have strong reporting standards, the IDX have very minimal reporting standards that are weakly enforced. Fortunately a number of mining companies listed on the IDX independently apply good international standards to their management, including responsible exploration reporting.
Different Reporting Codes.
The mining industry has an established reporting system developed through the KTT for the government. At the recent pre-IAGI convention workshop 2014, Ir Iwan Munajat indicated that KEPMEN ESDM No. 1453 provides a set format for reporting of mining activity through the KTT that is different to the other reporting codes. This KEPMEN (Ministerial Regulation) reporting system includes requirements for the General Study & Exploration Report, the Final Exploration Report, Appendix 13a for reporting of General Survey & Exploration, plus Appendix 13b for reporting Feasibility Study, Exploration and Production. The district mines department insists on this reporting format for compliance.
The National Government is trending towards emphasizing the Indonesian National Standards SNI 4726 (2011) for minerals and SNI 5015 (2011) for coal. Ir Iwan Munajat pointed out some of the difference to the widely accepted commercial industry JORC 2012 standard, including aspects related to the Competent Person and the Points of Observation.
The professional associations of IAGI, MGEI (Masyarakat Geologi Ekonomi Indonesia) and EMD are supportive of the Indonesian developed KCMI code, that is largely based on the JORC 2004 code, though there are some subtle differences largely brought about by translation and cultural nuances.
The international and local investors generally adopt the JORC 2012 (Australian), or NI 43-101 (National Instrument – Canadian) codes as an acceptable standard of reliable exploration reporting. The legal jurisdiction of JORC and NI is strong in the originating countries, but essentially untested in Indonesia. In some cases the investors shall submit such JORC / NI reports for further independent review before acting on such reports.
End Users of Reports.
The users of company exploration reports to the Government or IDX rely upon such reports to be true and correct, in order to plan ongoing investment decisions. Although the credibility of a Competent Person may be good, it is difficult for the investor or government to maintain their trust and confidence in an individual Competent Person. From time to time a Competent Person may be enticed or come under pressure to report incorrectly, or may simply make mistakes or inadequate reporting through lack of experience. If such an individual Competent Person is found to be acting inappropriately, then the consequences suffered by the Competent Person is inconsequential compared to the potential liability that the investor / government may suffer in relying upon that report. The investors or government are seeking greater assurances in a system to provide reliable exploration reporting.
Budi Santoso (IAGI) has rightly pointed out that as the government formally “approves” a company’s Feasibility Study (FS) report, therein the Government takes on an element of the project liability risk. In some cases the IUP’s have poor FS reports approved simply as a way on extending the life of the tenement, or putting the tenement in a saleable state, reflecting the local governments lack of suitable professional skills. Under Law 14/2014 the government officers charged with accepting the company reports may be interpreted as being potentially criminally liable in certain situations, and as they are acting on behalf of the local government, then such liability could be extended to the local government. Clearly there is a need for local governments to actively demonstrate they have taken “due care” in accepting such exploration reports.
It may be possible for improper administrators to receive a good exploration report, but then find some excuse to not accept the report, until some favor is shown by the company. There is little recourse for companies in such a position, wherein the ombudsman may call upon an independent geological umpire for technical assistance.
Another aspect behind insufficient reporting of exploration results to the IDX is a public perception that the companies are concerned that such reports may affect the share volatility as opposed to full management control. Negative results may lower share prices when the company may be seeking further fund raising activities, or positive results may increase share price when some parties associated with the company may be seeking to buy up more shares. The public shareholders of such listed companies may be better protected against insider trading through a more transparent and independent review of exploration reports.
Resolution of Similar Reporting Concerns.
With the export of coal & minerals, a government recognized laboratory is engaged by the concession holder to undertake cargo superintending, whereupon the company/government/ stock exchange have faith in the credibility of the results, as the laboratories professionalism is under-pinned by regulations that can impose meaningful penalties upon the cargo superintending company. The company may lose its reputation, license and business. By authorizing only large cargo superintending companies who fear that the loss of their operation is of greater concern than the loss of a client, do we see a meaningful tool to provide greater certainty to the industry and Government.
Proposed Resolution of Exploration Reporting.
It is proposed that the Government / IDX may formally recognize a select number of independent geological consulting companies to undertake a peer review of exploration reports for the company to submit to the government or the IDX. The independent geological consulting companies that receive authorization for such exploration reviewing should comply with a number of considerations, including having suitable Competent Persons plus suitable professional reputation and business profile that will be seen by the Government / IDX as insurance towards reliability. Typically such companies shall be Indonesian branches of international companies or nationwide local companies with significant assets.
The engagement of such independent consultants should be undertaken in a free market environment, to reduce the financial burden to the exploration companies. There are a number of suitable geological consulting companies operating in Indonesia, wherein such a scheme could be implemented quickly. The consulting companies could grow organically instead of some 350 Government officers / IDX slow development and costly training programs to upgrade their Competent Persons. PEMA pointed out that as government officers receive training to administer the exploration reports, they are often then promoted to some other department, leaving the original manpower gap.
The exploration activity should be undertaken by the concession holding company that retains full responsibility for such exploration activity and report. The approved geological consulting companies roll is to provide an independent peer review on the validation and verification of the data in the report, such that the Government / IDX can better manage their report receivable process.
The format of the exploration report can include an appendix in a format to allow easy review by the IDX or government monitoring purposes, for example the Table 1 associated with JORC. The format of the report should be digital only, with a secure password that is provided only to authorized receiving persons, wherein if the confidentiality is shown to be breached, then the password holder may be liable.
In a football game between two teams, the Investors Vs the Administrators, there is a need to have a mutually recognized neutral umpire for the game to be played smoothly. We have the cargo superintending companies as umpire for a soccer game of mineral exports, and here in propose the geological consultants as umpires for the rugby game of exploration reporting.