RI's mining prospects good, but investments low: PWC

The Indonesian mining sector is perceived to be highly prospective, but global mining companies deem the country's investment conditions to be poor relative to other countries, the Dow Jones Newswires reported on Friday citing PriceWaterHouseCoopers as saying.

Although there has been a significant increase in global exploration spending, exploration spending in Indonesia remains at low levels, PWC said in its latest publication on the Indonesian mining industry.

In 2004, exploration spending in Indonesia accounted for less than 1.5% of the global budgeted spending of $3.8 billion, which was up 58% from 2003, PWC said, citing data from Canada's Metal Economics Group.

"In Indonesia, the low level of exploration activity is a cause for concern as the long term success of the industry...depends on continued exploration," said Ray Headifen, one of the editors of the report.

"If positive changes are not made, then Indonesia's mining industry may be smaller in 15 years' time as reserves are depleted and not replaced," Headifen added.

The recent downtrend in exploration activity can be attributed to the country's lack of legal certainty, security concerns in some remote parts with good mining prospects, and rampant illegal mining, mining companies and analysts said.

These negative factors outweigh the allure of the country's rich mineral resources, analysts added.

The government and parliament have been engaged in a long discussion on a new mining law, and the draft of the mining bill hasn't been well received by foreign mining companies, PWC said.

These mining companies have withheld investments pending confirmation on the terms and date of implementation of the new law.

Of particular concern is the government's plan to abolish the current "contract of work" mining licensing system. If the system is abolished, new investments would have to be via joint-venture arrangements with state-owned mining companies instead, or via mining licenses obtained directly from the regional governments, it said.

Simon Sembiring, the Director General of Mines at the Mines and Energy Ministry said the government is "willing to listen" to investors' concerns in discussing the bill with parliament, but didn't elaborate.

However, the profitability of Indonesian mines compares favorably with other countries, PWC said.

In 2004, the average net profit margin of mining companies in Indonesia was 19.3%, compared with 15.2% for the top 40 companies globally. Similarly, returns on shareholders' funds was 27.3%, compared with 18.9% for the top 40 companies globally.

A handful of global mining companies have large investments in Indonesia, including Freeport-McMoRan Copper & Gold Inc. (FCX), and Newmont Mining Corp. (NEM). (*)