Release: PwC: Commodities boom drives strong financial results
New investment not reaching full potential
Wednesday, February 28 2007 - 05:10 AM WIB
However, PwC mining partner Sacha Winzenried notes that ?while the industry in Indonesia continues to be very profitable, new investment is needed to sustain it into the long term. Global mining companies still rate Indonesia?s investment conditions relatively poorly, and as such Indonesia is lagging behind some less geologically prospective countries in attracting investment dollars. Survey respondents indicated that regulatory uncertainties continue to hamper investment. Finalisation of an investor-friendly mining law would be a significant step in the right direction?.
Another booming year for commodities
For the Indonesian companies analysed in the PwC report, aggregate revenues have increased by 37% in 2005 and net profits increased by a substantial 71 %. Other profit measures also show that 2005 was a year of increasing returns. This is consistent with the global trend.
This increase in profits was overwhelmingly due to increased commodity prices, driven by emerging giants such as China and India. Mr. Winzenried notes that ?high prices for most minerals have continued in to 2006 and will underpin strong financial performance in 2006 and 2007. However, these improvements in profitability mask substantial increases in operating costs which have accompanied the surge in commodity prices. The industry will face a challenge to sustain margins should commodity prices fall?.
PwC?s report also notes that increased profitability did not extend across the entire mining industry. Despite higher prices, coal companies on aggregate showed a decrease in profits due to increased debt levels at some of the larger coal miners.
Improvement still needed in investment conditions
PwC?s report shows that there was an increase in total investment spending in the Indonesian mining industry in 2005, however this mostly related to existing mines. Mr. Winzenried highlighted that ?the survey data for Indonesia continues to show inconsequential investment in greenfields exploration. While there was some expansion of production at existing mines in 2005, particularly in coal, most other investment spending is primarily for replacement plant and equipment to maintain existing operations?.
Global mining companies are looking for new areas in which to invest to take advantage of the buoyant commodities market. Global exploration expenditure in 2005 was up 34% from 2004, however Indonesia?s share of the global total is only 2%. Mr. Winzenried stated that ?the real indication of whether Indonesia is viewed as an attractive investment destination, despite its very good mineral prospectivity, is the level of exploration spending undertaken in Indonesia?.
International surveys of mining companies continue to rank Indonesia highly in terms of mineral prospectivity, however investment conditions continue to be ranked poorly. Mr. Winzenried notes that ?this indicates global mining companies are willing to invest, but only under the right conditions. Global investment spending is at its highest point in the last decade, but Indonesia is not capturing its fair share of this increased activity given its geological potential?.
The PwC report shows that survey respondents stilt see some significant impediments to increased investment in the Indonesian mining sector. The Top 5 issues highlighted were:
? Conflict between mining and forestry regulations
? Taxation issues (including the aborted coal export levy; VAT on coal; slow VAT refunds; and high corporate tax rate)
? Regional autonomy (including conflicting grants of mining rights by local governments in areas already covered by a Contract of Work with the central government)
? Illegal mining
? Lack of coordination between government departments.
These issues are consistent with those that have been raised in previous years, and the PwC report notes that survey respondents consider that only limited progress has been made in resolving these matters. Mr. Winzenried notes that ?whilst some improvement in investment conditions has been noted and there is more confidence that the government is committed to continue improving the investment climate, the concern is whether this is occurring quickly enough, and addressing investors? specific concerns, to ensure Indonesia benefits from the current wave of global exploration spending?.
?It is hoped that the new mining law will provide legal certainty with respect to licensing, land acquisition and security, as well as improved coordination between the different arms of government? he continued. However, Mr. Winzenried noted that ?some sectors of the mining industry are not fully supportive of the new mining law in its current draft, which would see the end of the popular Contract of Work system, so the government may still have some work to do in getting the buy-in of all stakeholders in the industry. This would be necessary to see a significant increase in investment in new projects, particularly from foreign investors?.
The mining industry is an important contributor to the Indonesian economy
The PwC report states that the impact of the mining industry on the Indonesian economy continues to be significant, representing approximately 2% of Indonesian GDP.
Total government revenue from royalties and taxes reached US$2.7 billion, a staggering 62% increase over 2004, and a record for the last decade. This equated to an effective tax and royalty rate of 44%.
The industry also continues to make significant contributions to community development, increasing 65% to Rp771 billion in 2005 for survey respondents. The industry continues to be a major employer, with a total of 35,951 employees reported by survey respondents.
The PwC report notes that the total economic benefit to Indonesia is significantly greater than the direct benefits captured by the survey. This is because of the indirect multiplier effect that the mining industry?s direct contribution has on other economic activity, which is particularly noteworthy in the regional and remote areas where the industry operates.
Outlook
?The global mining boom has continued into 2006 and looks set to continue for some time yet. The Indonesian mining industry?s financial results are therefore likely to remain robust because of continued high mineral prices and global demand. The concern is the longevity of a lucrative mining industry if significant new investment is not made in Indonesia? Mr. Winzenried said.
Mr. Winzenried also noted that ?Indonesia continues to be recognised by mining companies as being highly prospective and mining companies would be willing to increase their exploration activities if the investment conditions are improved. These improvements need to be significant and swift, if Indonesia is not to miss out on the investment dollars being generated in the current boom?.
?The slow pace of finalising the new mining law is of particular concern. Due to the significant changes to the regulatory environment proposed in the current draft of the law, investors appear to be reluctant to commit significant funds to new projects, until the landscape is more certain? he continued.
?It is important that all stakeholders in the Indonesian mining industry are consulted on the contents of this new law, to ensure it is consistent with the government?s drive to increase investment in the industry?, Mr. Winzenried stated. (end of release)