S&P: RI's approach to mining regulation execution likely pragmatic

(April 12, 2012) -- The Indonesian government's plans for more stringent mining regulations could increase the cost of doing business in the country's mining sector over the next two years. However, Standard & Poor's Ratings Services believes that, while mining regulations could become more onerous in Indonesia, the government is unlikely to implement some of its more extreme regulations.

In a report released today, titled "Indonesia's Mining Regulations: Will Official Rhetoric Tunnel Its Way To Implementation?", Standard & Poor's said it expects its credit outlook on the Indonesian mining sector to remain stable. This is because its ratings on mining companies operating in Indonesia have long factored in the country's evolving regulations.

"The high economic importance of the mining sector to Indonesia's central and regional governments provides a strong incentive for the government to adopt reasonable regulations that do not materially dent the sector's performance or its attractiveness to investors," said Standard & Poor's credit analyst Xavier Jean. "We also see Indonesia's willingness to attract and stimulate domestic and foreign investment as another incentive for the country to maintain a rational approach to regulation."

The report says that the government could hike royalty rates or impose additional tariffs for unprocessed ore and coal exports when the renegotiation of existing mining contracts is completed. Nevertheless, a ban on unprocessed ore exports or punitive taxes on the coal sector will likely be delayed or toned down. "While it's unlikely that the government will choke a healthy revenue stream, we expect taxation to go only one way--up," Mr. Jean said.

According to the report, miners in Indonesia can likely absorb royalty rate increases of five to 10 percentage points without a material weakening in their credit profile. Moderate levels of debt of most large coal companies and high diversification of international mining companies should offset lower profitability and cash flows from higher royalties. (ends)