The Tipping Point For Indonesia Mining?

A lot of news this week about political issues in the world’s largest mining nations. With ongoing issues in South Africa — evidenced by the country’s controversial new mining charter — giving us a look at what could result from the problems now emerging in Indonesia.

To review, South Africa said this week it will further toughen its Black Economic Empowerment (BEE) requirements. Marking the latest salvo in a long series of developments around this critical mining issue — dating back to 2001, when the term BEE was first defined by the South African government.

Things really kicked off around this issue in 2003, when BEE programs were first implemented. And as the chart below shows, that year marked the beginning of a significant slide in South Africa’s gold production.

Indonesia Mining

Source: U.S. Geological Survey

Since 2003, South Africa’s gold output has slumped 69% — to 140 tonnes last year, from 450 tonnes in the year BEE laws were introduced. Back then, South Africa was by far the world’s largest gold-producing nation. Today, it ranks a distant number seven.

To be sure, not all of this decline is due to regulatory reasons. There are also significant technical challenges to ongoing development at South Africa’s gold mines — many of which are aging, and push the depth limits for development globally.

But there’s no doubt that politics have played a role in companies holding off on expanding capacity here. You simply don’t fall that far, that fast by chance circumstances.

The thing is, BEE rules are in spirit a worthy pursuit. With very few players in industry objecting to the principle of empowering South Africa’s civil society.

But the problem has been the implementation. With this week’s new mining charter representing the latest surprise turn — of the kind that has led to a sense of uncertainty around South Africa’s minerals business.

And uncertainty isn’t good for investment. Especially on the massive scale that’s required for modern mining operations.

The flagging state of South Africa’s mining business may be a cautionary example for Indonesia. Where the government seems to be doing its best recently to throw a lot of uncertainty into the future of the mining industry.

The news that BHP is pulling out of Indonesian coal — just six months after the firm had apparently been moving full-steam on projects here — shows how the world’s miners are reconsidering investment here. Likely speeded by news from the President’s office last week that it will suspend issuing any new mining licenses in the country. For an indefinite period of time.

Surprise announcements like that are not encouraging for companies considering spending millions on exploration or billions on mine construction. And this latest announcement may represent a tipping point for mining investment in Indonesia.

New copper projects in the country had already been looking somewhat dubious the last few years. Particularly because of new rules requiring base metals miners to build smelters in country for upgrading of minerals prior to export.

But there was a sense that other metals — most notably gold — might still be a go in Indonesia. A sense that now seems much more doubtful in the wake of the licensing moratorium.

And these new issues come on top of other notorious problems in Indonesia. Such as the country’s large and nebulous array of protected areas. As I mentioned a few weeks ago, I’ve been looking at gold potential in country’s Bird’s Head Peninsula region. But here’s what the protected areas network (green and purple) looks like in that part of the country:

Indonesia Mining
Indonesia Mining

There’s a lot of area off limits to mining in Indonesia’s eastern Bird’s Head region

Up until now, mining companies have grudgingly worked through these challenges. But BHP’s big exit signals that the industry may now be reaching the end of its rope.

That makes right now a pivotal time for Indonesia. Indonesia Mining is a significant contributor to national GDP, at about 5%, but not a dominant one. Meaning it’s uncertain if a loss of investment in this sector will sway legislators to try and bring miners back.

If it turns out that the government does have a long-term vision for mining, we should expect to see positive changes coming if and when investment wanes. Which could make now a great time to consolidate projects when sentiment is low.

But it’s also possible we could see a situation like the Philippines. Where mining stagnates for an extended period of time.

Right now, it’s just not clear what direction Indonesia will go. It’s going to take months — even years — for that to become clearer. Keep watching for signals on the coming fall, or rise, of this high-potential terrain.

Here’s to letting ’em know,

Indonesia Mining

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