Moody's stated export tax is credit negative for Antam

By Er Audy Zandri

Following Indonesia's announcement to impose, starting on May 6, a 20 percent tax on the export of certain unprocessed minerals including nickel, tin, gold, copper, silver, lead, zinc, chromium, platinum, bauxite, iron ore and manganese, Moody's investor service has recently stated that the tax will be credit negative for P.T. Aneka Tambang Tbk (Antam, Ba3 stable.

Moody's stated on May 10 that the tax derived approximately 70% of its revenue from export of nickel, gold and bauxite in 2011.

"Given that the metals Antam exports are sold at international prices, the company will not be able to fully pass through the export tax to its customers," says Vikas Halan, a Vice President - Senior Analyst at Moody's, and lead analyst for Antam.

"Although, the detailed regulation is yet to be published, if the government taxes all of Antam's exports and the company cannot pass along any of those taxes to its customers, its EBITDA margin would fall by nearly half from approximately 37% in 2011. The impact may be lower if the company, being 65%-owned by the government, either is able to get exemption or to reduce its proportion of exports" Halan adds.

The government also announced banning the export of unprocessed minerals by miners that have not yet finalized a plan to start constructing smelters to process their ores. Antam is well positioned on this aspect of the regulation as it is already working on a number of projects to process its ores and they will start coming online in the next two to three years.

The tax is the first step to a blanket ban on the export of raw minerals by 2014. The export tax's aim is to boost domestic investment and allow the government to take a bigger slice of mining revenue.

Moody's believed that in addition to being credit negative for Indonesia's mining industry, the export tax discourages foreign investments in the sector.

"The revised tax on raw mineral export excludes coal. However, even if it included coal, our rated Indonesian coal companies - Adaro (Ba1 Stable), Bumi Resources (Ba3 Stable), Indika Energy (B1 Positive) and Berau Coal Energy (B1 Positive) - would not be affected owing to their "lex specialis," or special law status, which exempts them from any changes in Indonesian general law, such as revisions to the general tax code, investment laws, and land use laws, that occur after the respective Coal Contract of Work (CCoW) was signed between each miners (in earlier years) and the government. Tax rates for first-generation CCoW miners are fixed for the duration of the contract (13.5% royalty and 45% corporate income tax)" he said.

Despite coal companies' exemption from the latest tax, Indonesia is mulling a ban on the export of low - calorific value thermal coal starting in 2014.

Currently, mining companies have no economically viable technology available to convert low-ranking coal into higher ranking coal. As a result, a ban may erode mining companies' revenues, if Indonesia's domestic power sector does not sufficiently grow in the next two years to absorb the huge domestic coal supply.

"These tax and export changes highlight the regulatory risks associated with operating in Indonesia, and will have a negative impact on foreign direct investment into the country's resources sector as investors seek more clarity on companies' business plans in light of these evolving regulations," says Halan.

Editing by David Mustakim