EDITORIAL AND COMMENTARY — One-Two punch for Indonesian explorers — Apocalypse CoW

For companies exploring mineral projects in Indonesia, 1997 will be remembered as the Year of Living Dangerously.

In April, junior companies holding ground near Bre-X Minerals’ Busang project were hammered by news that the only gold at Busang was the yellow fairy dust introduced into the samples by Michael de Guzman’s infamous salting crew.

Instead of having ground near, or adjacent to, “the world’s largest gold deposit,” the juniors were perceived as having little more than an empty lot in a bad neighborhood. Property values plummeted, along with the share price of those companies, despite the fact that Indonesia remains highly prospective for a variety of deposit types.

The juniors also bore the brunt of a change in public sentiment brought about by the attempt of the Indonesian government, late last year, to grab a large stake in Busang. The government’s role in the Battle for Busang provided an unappealing demonstration of what mining companies could expect in the way of political interference should they make a major discovery in the country.

This negative sentiment was reinforced this past week when the Indonesians released details of their seventh-generation Contract of Work. Article 16, entitled “Special Rights of the Government,” says foreign companies with projects at the feasibility stage must allow the government to obtain 10% of the project “on a free carried basis, or a higher percentage depending on the economic viability of the project, for the whole life of the project,” except in those cases where more than 10% of shares were already owned by government or a state-owned company. “Such government share reflects implementation of the state’s ownership of the nation’s mineral resources.”

The request for a 10% stake in mineral projects is not unheard of, as several other countries have similar restrictions. But the Indonesian requirements are open-ended and allow the government to exact an even higher percentage, if it so desires. Juniors know full well that nothing turns investors off more than this kind of uncertainty.

The bad news does not stop there. Article 18, “Promotion of the National Interest,” says companies not only have to offer shares to a local co-operative or to a company owned by the government; they must also ensure that those shares are treated in the same manner as those held by other parties.

Specifically, it states that should the company’s shareholders obtain “capital gain” as a consequence of publishing information on a stock exchange outside Indonesia, “then this capital gain will be allocated to the shareholders in proportion to their percentage holding in the company.” And should additional minable reserves be found or production increased to a level higher than that approved by the government in the feasibility study, companies will be required to give the government an increased share in the economic benefits of the additional reserves or production.

The new rules do little to encourage foreign companies to explore in Indonesia, and perhaps this is the intent. The government may want to give preference to domestic and state-owned companies. Or it may still be smarting from the Busang fiasco and indifferent to foreign companies seeking a more reasonable working environment.

Perhaps the architects of the new rules took a cue from Rhett Butler, who fended off Scarlett O’Hara’s pleas in Gone with the Wind with the disdainful send-off, “Frankly my dear, I don’t give a damn.”

Fortunately, there are plenty of other places to explore, including our own backyard.