The decline in Indonesia’s Exploration Performance – and what can we do about it

Keynote paper for the Indonesian Society of Economic Geologists (MGEI) Annual Convention, Bandung, Indonesia, October 2016
  • Indonesia has a long history of exploration and mining which goes back over 1000 years. Notwithstanding this, half of all the country’s significant discoveries have been made since 1983.
  • Since 1965, over 119 significant deposits were found, including 19 in the last decade. The last known giant was Tujuh Bukit in 2007.
  • Over the last 30 years $5.2 billion (in constant 2015 US Dollars) was spent on mineral exploration in Indonesia (note: This figure excludes bulk minerals, such as coal). 80% of the spend was on gold and copper.
  • Over the last 20 years, Foreign Companies accounted for 88% of the spend, 50% of the discoveries and 64% of the value-created.
  • Junior Companies accounted for ~52% of exploration spend, found 72% of the deposits and 45% of the value.
  • Of serious concern is the fact that over the last decade, exploration expenditures rise, but the number of discoveries fell.
  • The average cost per discovery rose from $24m in 2005 to $267m in 2014. The rate of increase was much faster than the World average.
  • General factors behind the decline in performance include: Higher input costs, shift towards deeper cover, reduced focus on greenfield targets, decline in target quality and (more recently) lower exploration budgets … which limit the amount drilling done
  • Specific issues facing Indonesia include: The Moratorium on new exploration licences (IUPs), problems with overlapping titles, restricted access to Forests, the need for foreign companies to divest, and (most recently) a ban on exporting unprocessed ore
  • As a result, Indonesia’s share of global exploration spend has halved in the last three years
  • Based on data from the Fraser Institute, foreign investment in Indonesia is being held back by concerns over: The legal system, regulatory duplication, administration of regulations and disputes over land.
  • If not reversed, the current decline in the discovery will have serious consequences to the mining industry in the longer term. Based on current reserves or resources, the number of gold mines in Indonesia will halve in the next 10-17 years. Furthermore, if the ban on export of unprocessed metal is not lifted, most of the current copper mines may close down within the next 5 years. At the very least, it will adversely impact on investment decisions.

Possible solutions to improving the discovery rate are obvious, but not easy to implement. These include:

  • Need to end the Moratorium on issuing new mining licenses
  • Resolve the issue of overlapping titles
  • Introduce clear and sensible rules regarding access to forest reserves
  • Reduce regulatory duplication and provide transparency in decision-making
  • Allow foreign companies to sell their equity onto the open market
  • Encourage local companies to be more active in greenfield exploration
  • Unwind the ban on exporting unprocessed minerals

With regard the last point, to encourage downstream processing in the country, I recommend that the Government use the “carrot, not the stick” … and offer lower Royalty rates to those companies that process material in-country.

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