No Breakthrough Yet in Indonesian Mining Logjam

Two miners capitulate in demands to pay export tax but the bigger have yet to fold

Jul 23, 2014 at 4:20PM

Continuing to hold miners hostage to its demands they pay a king's ransom for the right to ship unprocessed ore out of the country, Indonesia announced late last week that two companies agreed to pay the tax it imposed and were allowed to export shipments of iron ore, lead, and zinc. Notably, Freeport-McMoRan (NYSE:FCX) and Newmont Mining (NYSE:NEM) continue to refuse to pay and their shipments of unprocessed copper concentrates remain at a standstill.

According to the World Bank, Indonesia's economy relies on minerals for about 5% of its exports, and Goldman Sachs says the country contributes some 3% to the global copper supply. It's also the world's largest exporter of nickel ore, thermal coal, and refined tin, and a major exporter of iron ore and bauxite. The new tax has stopped about $500 million of monthly mineral ore and concentrate exports.

In an effort to boost its domestic smelting industry, the government banned the export of the minerals unless they were first processed in-country. To continue shipping unprocessed ore, companies would have to pay an escalating tax. This year it is set at 20% and is set to rise to 60% in the second half of 2016, except for copper, which had a base rate set at 25%.

Yet miners were in a quandary because there aren't enough smelters in the country to handle the ore produced, or didn't have any at all for the type of ores being produced. Some miners like Vale (NYSE:VALE) haven't found the tax a hardship because its nickel mining operations process ore at a smelter it operates in Soroako, and it plans to increase capacity further. It would be uneconomical to build new smelters for certain ores, let alone take years to do so, and miners like Freeport and Newmont, which are responsible for 97% of Indonesia's copper production and which halted shipments when the export tax kicked in in January, already have long-term contracts with smelters in other countries that they cannot break.

The government says there are more than 175 smelter projects in the works in the country at various stages of completion, and though a few have advanced further along the timeline, the number of those that are almost finished hasn't budged. Simply it's those that have gone through the initial phase of development that moved the most meaning there's little hope for relief coming.

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Source: Indonesia data as reported by Reuters

Recently Freeport reached an understanding with the government that could see it permitted to restart shipments soon, but Newmont has taken a hardline stance and filed a grievance with international arbiters opposing the tax. That caused the government to threaten the miner with the loss of its license if it doesn't withdraw the complaint and return to the negotiating table, but Newmont may be trying to run out the clock as a new government just won the presidential elections and has offered conciliatory words that suggests it will be more accommodating than the previous administration.

Unlike Freeport and Newmont, however, smaller miners perhaps don't have the luxury of taking a wait-and-see attitude and are likely financially threatened if they don't submit to the current administration's demand. Two firms, Sebuku Iron Lateritic Ores and Lumbung Mineral Sentosa, paid the tax and were allowed to ship their unprocessed ore concentrates. Sebuku Iron sent two shipments or around 100,000 tonnes of iron ore while Lambing shipped around 8,000 tonnes of lead and zinc.

Indonesia is trumpeting the first payments of its tax, but coming nearly seven months after they were imposed and not from the country's major miners, highlights just how backward the administration's thinning is and underscores that recovery won't come until the new government is seated.

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Rich Duprey 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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