1 Miner That Stands to Benefit as Indonesia Ups Its Game

Indonesia has been benefiting from increased demand for natural resources, but the country wants to do more than just send raw materials abroad -- and that could help big miners like Vale and Freeport-McMoRan.

Jan 30, 2014 at 9:16AM

Indonesia is right next to China, which has had a voracious appetite for natural resources. That's helped drive the country's growth, but it wants to do more than just send raw materials to neighboring China, so the country's government is taking steps to shift more toward processing what it mines. That could limit supply in the near term and help boost demand for diversified miner Vale (NYSE:VALE).

Raw vs. processed
Digging up rocks and putting them on a boat isn't too high up on the economic scale. And while Indonesia has benefited from this simple process with regard to its natural-resource riches, including coal, copper, and nickle, it clearly wants more. That's why the government recently put in place a ban on raw-mineral exports targeted at nickel ore and bauxite. These materials must now be refined before being sent abroad.

Taking this additional step moves Indonesia up a notch on the technology front. It may not seem like a big deal, but small steps like this will help the country become a more important global player. Interestingly, Vale has a head start on the competition here.

Vale operates a nickle mine and processing plant on the Indonesian island of Sulawesi. This, along with the company's other nickel assets, makes Vale one of the world's largest nickle producers. So it has processing capacity in Indonesia already. And, even if it faces problems in Indonesia, it will benefit from rising prices if nickle supplies wane. That's a big risk since Goldman Sachs estimates that Indonesia accounts for around 20% of the global supply of nickle.

A brief reprieve
Copper, which is another big Indonesian export, was given a reprieve -- for now. That will allow big copper miners in the country like Freeport-McMoRan Copper & Gold (NYSE:FCX) and Newmont Mining (NYSE:NEM) to keep exporting. But the rules may force some changes down the road.

For example, Newmont Mining runs a copper mine at Batu Hijau that produces around 70 million pounds of copper a year (about 70% of the gold-focused company's copper output). It processes its materials, but it only sells around 5% of its output to Indonesian smelters. It could be forced to increase that.

Freeport-McMoRan operates multiple mines in the Grasberg minerals district. Of the two, Freeport is probably most relieved because its mine in the region is the second largest in the world and accounts for nearly a quarter of its copper output, producing nearly a billion pounds of copper a year. It only sends about 40% of the mine's output to local processors. 

Unfortunately, Freeport and Newmont only have a three-year grace period, so keep an eye on both companies to make sure they start making the changes needed, like building additional processing infrastructure or contracting with someone who can process their ore before export. If not, the pair's results could suffer. As for the bigger picture, Indonesia is much less important in the world's copper market than it is in nickle. That might help explain why the government took a softer stance on copper.

Change is coming
These aren't the only Indonesian exports facing change, however. China's recently initiated 3% tax on low-grade coal imports appears to specifically target Indonesia's coal since the country is the source of more than 90% of the imported coal that will be affected. A 3% levy seems small, but it could mark an important shift in a relationship that allowed Indonesia to surpass Australia as the world's largest coal exporter in 2011.

The interesting thing is that the country's coal industry has taken on the task of shifting demand by building coal-fired power plants. That should help increase demand for coal, but more importantly, it will aid Indonesia's economic advance. That's basically what the new nickle rule is all about as well.

On the same team
Indonesia is one of the world's largest countries (technically an archipelago or collection of islands), but it lives in the shadow of China and India. Like those two nations, however, it is quickly moving up the economic ladder. The recent nickle rule will be an adjustment, but Vale is clearly of the same mind as the country's leaders and stands to be a beneficiary of the rule. In the future, look for Newmont Mining and Freeport-McMoRan to get aboard when copper is targeted in a few years.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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