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    • Needs for the Government to Revive Exploration – EMDI Seminar
      (Published in Linkedin on July 25, 2017)

      By Ian Wollff, Principal Geologist, Independent Director. Independent Consultant

      The Exploration and Mining Development Indonesia (EMDI) held a seminar on the 21 July 2017 with the title “Stepping stones to a successful Indonesian exploration and mining industry”. This was a very interesting seminar wherein key industry leaders from business, geology, mining, banking and legal presented diverse views of areas that need to be address in order to stimulate primary mineral exploration in Indonesia.

      Each speaker presented a different perspective and list of what is needed to reinvigorate mineral exploration. Private enterprise needs real and perceived business confidence through suitable financial and legal structures to start the long-term investment process in exploration.

      The Government needs to further develop human resources and coordination to manage the industry at the different government levels, and various impacted ministries. These needs have been outstanding for several years, and to realize them before the next election cycle is a challenging task. The development of a government – industry working group would be one way to promote the resolution of regulatory issues and so restart the exploration industry. Without an active primary exploration industry, Indonesian professionals will be unemployed, and Indonesian growth will certainly shrink.

      UNOFFICIAL DETAIL NOTES. Please note I apologize for any errors or omissions that may be contained in the following unofficial notes.

      Mr Myke Jones – Micromine Indonesia / Chairman of EMD Indonesia started off with outlining past efforts to present the EMD white paper to the ESDM and parliamentary authorities.

      One side issue is that the present trend to rotate senior Mines Department staff, and even ministers, over a short period is counter active to developing stability for the industry. It seems each new appointee needs time to learn about the real nature of the industry, but is then moved on before they can become effective.

      The current failing of the exploration industry has left some 8,000 students in various universities with little hope of a job upon their graduation. There appears to be little government concern for his impending human resources catastrophe.

      Malcolm Baillie – Advisor to EMD, former president director of Weda Bay nickel.

      It is now 18 months since EMD prepared its White Paper on Exploration Policy and socialised it within ESDM and other relevant bodies. This process reached its high point when ESDM was invited to make a presentation to the National Exploration Committee (KEN) in mid to late 2016. This Committee was very supportive and, at the time, had direct access to the Minister and the President. Unfortunately, it was disbanded in early 2017 and has never been replaced. This was a serious setback to EMD’s initiatives. Since the disbandment of KEN, there has been no effective progress by the government in stimulating exploration, and actual grass roots exploration has diminished to near zero. Similar approaches and responses have been experienced by PERHAPI and IAGI, wherein the lack of progress has brought these professional bodies closer together to make a more concerted effort to stimulate the government to adjust policy and completes SOP regulations to allow exploration to restart.

      The EMD white paper outlined 5 main areas of concern to contribute to reviving the greenfield exploration industry. These included 1) open new areas for exploration, 2) acknowledge exploration is not mining, and thus needs different regulatory terms, 3) recommend ease of financing, including modifying the Jakarta Stock Exchange to allow for exploration companies, 4) separate mines department structure to focus only on exploration. 5) consolidate and make available past exploration data.

      EMD makes a clear distinction between primary / greenfield exploration (looking for an ore body) and that of secondary /brown fields exploration (looking to expand or better define a known ore body). The present stalled primary exploration activities throughout Indonesia means there is no “pipeline” of projects for development. Traditionally foreign explorers have been more active in greenfield exploration in Indonesia, wherein Indonesian players are more interested in lower risk brownfields projects.

      Nathaniel Adams – Senior extractives specialist of World bank.

      The World bank has been in Indonesia for many years, but only recently includes the extractive industries as part of its development fields. Its focus is on “governance issues” as relates to high level policy outlook and associated economic aspects.

      The Bank recognizes that exploration is “vital” for a sustainable industry and the continued well-being of Indonesia. The Bank recognizes that Indonesia cannot wait until the next upturn in commodity prices to drive exploration. There is a long lag time (10 years or more) between starting exploration, and developing mines, wherein other countries may be better positioned to take advantage of the next commodity price upturn. Much of Indonesia’s policies are influenced by the short-term view, wherein the mining industry relies upon the long term ongoing of green-fields exploration.

      The Frazer Institute reports should not be overlooked. They are a representation of perception for would be investors (both foreign and domestic). The Frazer survey continues to give encouragement for geological potential, but very poor position of Indonesia’s regulatory environment. Breaking down some of these negative indicators highlights clarity of the law, regulation overlap (Central / Provincial), divestment, and downstream processing.

      There is insufficient domestic capital to undertake the level of green-fields exploration that may be necessary to replace the currently consumed reserves. It is unreasonable to expect Indonesian companies to take on significant debt to undertake such exploration. Foreign capital is needed to sustain the industry., along with ongoing foreign expertise in exploration.

      The divestment and downstream processing requirements are worthy policy objectives. However, they are also a “disincentive” for foreign & domestic investors in green-field exploration. These policies have the actual effect of shrinking the exploration industry. Other industry advisors have suggested the present interpretation of Article 33 of the Constitution may need to be revised, however this is not a World bank issue.

      The World bank can be asked to help the government in such matters as capacity building, development of fiscal models to provide guidance for investment policy decisions.

      The longer Indonesia extends the moratorium on allocating new areas for exploration, then Indonesian competitors can advance preparations to take advantage of the next boom.

      The provinces appear to still have limitations on their human capacity to manage the provincial responsibilities for exploration and mining. In conjunction, the World bank is planning to assist the government to conduct selected trials to ascertain the current capacity of the provinces.

      The Bank is concerned that Indonesia’s data on past exploration and geological surveys is properly managed and made available to stimulate exploration. The Bank is in a position to support selected data acquisition programs, as it has supported aerial surveys in other countries.

      The bank would welcome the government to further develop its “strategy” in developing a national mining policy. Such policy may include greater consultation with local communities etc.

      Tino Ardhyanto – Chairman of PERHAPI (Perhimpunan Ahli Pertambang Indonesia).

      PERHAPI has about 3,000 members from a diverse background.

      They are currently preparing a report to be presented in the 4th quarter of 2017 to the Mines Department and parliamentary commission 7 on further developing the exploration and mining industry. This report will include such concerns as; –

      • Recognition that exploration has a much lower environmental impact on the land, and that not all explored land will be mined. Accordingly exploration programs should be free of many overlapping ministry current restrictions.
      • Discuss the concept of National Wealth, including reliability and preservation of exploration data.
      • The Government to be supportive of exploration, with the rational of government sponsored exploration verses private industry lead exploration.
      • To clarify and set limits of the private company’s zone of responsibilities from upstream (exploration) to downstream (producing metal products).
      • Exploration companies to be listed on the Indonesian Stock Exchange. This includes clarity over defining “value” of resources that is quite different to the present regulations.
      • All parties in the exploration, mining and processing industries are struggling with the present dynamic regulatory environment. There are new regulations coming out weekly from various ministries that impact on the industry.
      • The coordination between the Central and Provincial government is still not smooth, and highly variable between different Provinces.
      • The exploration and mining industry still has a negative “image” amongst some of the people and government administrators. Some people simply do not understand that our everyday existence is totally reliant upon products from mining. Indonesia has been mining and trading ore for more than 300 years.
      • The Governments respect for an exploration contract needs to be emphasized.
      • The development of a mining license should not be for a set period (say 10 years), but should consider “life of mine” such that the reserve & return on capital can be optimized. The area of the mining lease should be related to the geometry of the ore deposit and necessary infrastructure, not just “blocks’, or other surface features (plantations etc).
      • The EITI program is to be enhanced, as it encourages good mining business practices, with the transparency component that encourages good corporate conduct. Note that mining can increasingly be observed from satellite, so miners can be “watched”.
      • In moving forward, the mining regulations need to become more applicable with greater coordination between all stakeholders. Presently each company has to deal with several ministries at the central and local government levels, where each one can throw up new barriers to progress. One example is that smelters can be authorized under either the ESDM or Ministry of Industry. PERHAPI intends to build a matrix of the complex array of the permit process.
      • The proposed “investment stability assurance” is of great interest to PERHAPI. Once a project is started it is difficult and costly to stop or adjust to some new regulation or change of fee bases.

      Sukmandaru Prihatmoko – chairman of IAGI (Ikatan Ahli Geologi Indonesia).

      The IAGI has around 5,500 members.

      IAGI see the industry needs to promote the exploration industry as being no change from previous analyses and lists of wants. The IAGI strategy is to focus on 2 or 3 main points to be taken up by the Mines Department and Commission 7.

      IAGI recognize that the Badan Geologi Department’s list of national resources and reserves is very unreliable, though reserves of gold, silver and copper are more realistic than other minerals.

      The government’s policy is to have sufficient exploration to replace each ton of ore mined with a new ton of reserves. [APBN 2017] and thus significant exploration effort is required. The challenges are; –

      • Technical – similar to other countries where deposits are becoming harder to find under cover or in different geological settings.
      • Non-technical – Previously the KEN (committee for national mineral development) could serve as a link between government policy and industry. A new vehicle is needed to address the new issues arising between government and industry.

      The IAGI summary is that; –

      1. Indonesia’s geology is still very attractive and needs ongoing promotion
      2. Exploration is the key to Indonesia’s further development.
      3. There needs to be a road map to recovery that is acceptable to both government and industry.
      4. Tackle short term, medium and long-term issues.
      5. Some short-term issues include fixing the IUP auction, forestry, security, illegal miners etc.
      6. Opening up finance, such as the IDX for exploration companies.

      Bill Sullivan – senior foreign counsel of Christian Teo & Partners.

      The resolution of the Freeport issue is being closely watched by investors around the world, and within Indonesia. This issue is seen as a reflection of the investment climate of Indonesia, not just for miners, but for many other industries that rely upon long term assurances.

      There is the actual reality of doing business in Indonesia, as reflected by the regulations, financial models and such. However, the perception of business in Indonesia is possibly more meaningful for future investors, and thus Indonesia’s capability to grow.

      There is little time for the government to resolve the issues surrounding the mining industry. It is expected that the preparations / politics for the 2019 national elections will start in 2018. It is expected these political manoeuvres will include promoting “Resource Nationalism” retorik that will not be inductive to foreign investors.

      There is some encouragement that the Freeport issue may be resolved with mutual satisfaction, and that a formal court process will be avoided. This encouragement is reflected by the “calming down” of the press over the freeport issue. Indeed, investment stability is good for all parties. We might expect to see some “in principal” agreement reached, with fine details to follow.

      There are some ongoing concerns; –

      • The present dispute with the government has seen a significant drop in Freeport shareholder value, so the nature of a share value recovery upon a deal with the government may become a new marker for “perceived” investment climate in Indonesia.
      • Will a new investment guarantee document be honoured by the Government, given the present COW agreement is under pressure for the government not to be honoured with the regulations requiring a new IPUK.
      • How will the new IUPK document/ COW amendment differ to that of those who have already agreed to ament their COW, will they be allowed to modify their agreements accordingly, and will other outstanding COW holders agree to the same conditions?
      • The new regulation No. 34 may help some aspects of the investment climate, wherein there is some more certainty and clarity in replacing earlier regulations, and simplification of permits etc. One of the major advances is the recognition that the IUP can now “own” the minerals after mining and paying royalty. This has great potential impact on a reinterpretation for the Constitution Article 33, and for determining “fair market value” for mineral properties. (can include earnings based fair market value). The new regulation is also more unifying for mining service providers. The new regulation also now places recommendations for foreign workers at the Director General level, making the process less onerous.

      (IAGI was represented by Arif Zardi Dahlius in this panel – Chairman of the Indonesian Society of Economic Geologists/ MGEI)

      The new regulation 34 / 2017 will likely prompt further revision of some earlier regulations to bring these into harmony.

      There is well recognized disharmony between the Kabupatens, Provinces and National level over exploration & mining issues. EMDI and others recognize that lobbying needs to start at the top, and across various ministries (often ego driven) so the implementation can be top – down. Final decisions also need to be will socialized and incorporate local communities etc to ensure the policies and regulations can be implemented.

      PERHAPI is socializing its outlook needs to support exploration and mining through several main universities throughout Indonesia. Though they have limited funds.

      IAGI are concerned the proposed bidding program for new tenements is not fair – first option to government, local government, SOE’s (BUMD) and last for private enterprise. IAGI are meeting with department officials next week on this issue. The overall SOP for bidding on new tenements has not been finalized and approved by ESDM in conjunction with Ministry of national development and forestry ministry.

      The issues to get the IDX to accept listing of exploration companies is complex, and needs approval from the OJK (Financial Authority).

      There is an extensive list of “wants’ from the exploration and mining industry to reinvigorate the exploration industry, and greater coordination between EMDI, PERHAP & IAGI is required. PERHAPI wan the new proposals to be acted upon, not just another book-on-the-shelf.

      The ESDM realizes that Freeport’s underground block caving method cannot be Put-on-hold without the potential to causing serious loss of reserves due to stability issues.

      Summary by IW

      Panelists on the EMD Seminars (minus IAGI Chairman)