SSUMY Sumitomo Corp (PK)

By Sara Schonhardt 

JAKARTA--When Newmont Mining Corp. began exploring for gold in Indonesia in the 1980s, the country's wealth of untapped resources was seen as the Colorado-based miner's ticket to the big leagues.

The Batu Hijau copper and gold mine in eastern Indonesia was one of the largest undeveloped deposits in the world, and Newmont's billion-dollar investment put it on the path to becoming the world's No. 2 gold miner by output.

More than three decades later, Newmont's exit from Indonesia illustrates that the country has become a more difficult place for foreign miners to operate, say analysts. Newmont in June agreed to sell its 48.5% economic interest in the local unit that runs the mine, PT Newmont Nusa Tenggara , to a group of local investors led by Indonesian-listed oil-and-gas company PT Medco Energi Internasional Tbk. Japan's Sumitomo Corp., with which Newmont operates the mine, is selling its stake to the group as well.

This came a few weeks after BHP Billiton's sale of its coal interests in Indonesia to a unit of local energy group PT Adaro Energy Tbk.

Heavier regulation was a factor in the decision to leave, Newmont Chief Executive Gary Goldberg told The Wall Street Journal earlier this month.

In recent years Indonesia has required foreign miners to gradually reduce their stakes to less than half, raised the taxes and royalties they pay and mandated they process ore locally--requiring a major investment in smelters at a time when commodity-price uncertainty has miners around the world tightening their belts.

Newmont has had "good success" with the Batu Hijau deposit over the years, Mr. Goldberg said, but the company had an investment decision to make: The next phase of mining would require an additional $2 billion over the next five years, he said, and company executives were concerned about how long it would take to get a return.

Newmont, which has mines across the globe including in the U.S., Australia, Ghana and Peru, has spent the past few years overhauling its business--cutting production costs, buying and selling mines and paying down debt, which at roughly $2.7 billion is about half what it was three years ago.

During a conference call to discuss the sale, Mr. Goldberg said the company is consolidating assets around high-margin projects in lower-risk areas and turning its focus back to gold.

A Sumitomo spokesman cited concerns in Indonesia including "changes in regulations or laws, restrictions to foreign investment and weak rupiah currency." It agreed to sell along with Newmont "to maximize the asset value of Batu Hijau," the spokesman said, adding that the "Indonesian market is still promising and we continue to expand our business field there."

Vast deposits of copper, nickel and coal have drawn foreign miners to Indonesia for decades, and mining has contributed greatly to the country's economic growth. But growing nationalism, policy uncertainty and some officials' desire for the state to take control of natural resources has raised risks for foreign miners, analysts say.

By law, miners are required to eventually shift from long-term contracts of work to a licensing system in which they say their rights are more limited. Analysts say the rules have made Indonesia an increasingly difficult place to do business and have deterred exploration investment.

"Major multinational mining companies increasingly just see Indonesia as too hard for them," said Bill Sullivan, a Jakarta-based legal adviser to mining-related companies.

Earlier this year, mining giant BHP Billiton Ltd. said it agreed to sell its 75% interest in IndoMet Coal to PT Alam Tri Abadi to pursue other options that BHP said were more attractive for future investment.

The government says foreign miners are still willing to invest in Indonesia. Bambang Gatot Ariyono, director-general of minerals and coal at the energy ministry, said several companies have signed amended contracts, and the government is working with miners to revise and clarify rules.

A spokeswoman for Medco said that as a domestic company it sees long-term value in investing in Indonesia and is confident it will secure the licenses needed to keep the mine operating.

Some major miners, such as U.S. gold and copper producer Freeport McMoRan, are sitting on resources too valuable to abandon, say industry players. A spokesman for PT Freeport Indonesia said that the company intends to continue to cooperate with the government.

However, many smaller miners have suspended operations and some large-scale operations have reduced mining activities and exports due to uncertainty over contract extensions, say analysts.

Indonesia's ban on the export of unrefined ores--meant to increase the value of the country's exports--hit some companies particularly hard. To receive an export permit, companies had to demonstrate progress on refining. After the ban took effect in 2014, Newmont's local unit ceased exports for more than eight months and declared force majeure on existing contracts.

Newmont's exit sends a signal to other miners that Indonesian mining projects are no longer competitive, said Ian Wollff, a longtime geologist and independent consultant to the mining industry. "They [Newmont] are saying...'We've got money, but why should we spend it there? Maybe we're better off spending it somewhere else.'"

Rhiannon Hoyle in Sydney contributed to this article.

Write to Sara Schonhardt at Sara.Schonhardt@wsj.com

(END) Dow Jones Newswires

August 30, 2016 08:18 ET (12:18 GMT)

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