Indonesia: model + new EITI data = answers on how mining regime is applied

No single issue dominates the third model in OpenOil’s collaborative series with partners, that of the Batu Hijau copper and gold mine in Indonesia (model and project documents), with Maryati Abdullah (interview) and Rizki Ananda (interview) of Publish What You Pay Indonesia. But, like all of the models, there were a number of interesting findings and features in the build.

  • New EITI data can clear up a major government revenue issue: could help clarify a key issue in the model going forward: has a new royalty regime for copper and gold production and exports, nominally introduced in 2014, been fully applied yet? The model estimates royalties under both the old and the new system against known production and prices. A new EITI reconciliation is due in January 2017, which will cover the 2014 period. That should shed light on if and how the new regime is working at Batu Hijau.
  • Is $1.3 billion the right price for Newmont’s share of the mine? The international investor Newmont has completed the sale of its interest in the mine to Medco Energi International, a private Indonesian company, within the last month (October 2016). A reported $1.3 billion has been agreed for Newmont’s 82% stake in NNT, the holding company running the Batu Hijau mine. Expect a new version of the model soon which develops specifically a view on this question. A lot will depend on the assumed discount rate both investors are using, and potentially on financing terms, and how they are accounted for in the fiscal regime. If this deal is liable for Capital Gains Tax (to be seen), the model will also be able to estimate what kind of assessment could be reached for that.
  • How much did past hedging losses cost Indonesia? Early in the history of the mine the company declared hedging losses of $931 million. The model is able to translate that into lost tax revenue if, as the base scenario assumes, these losses were tax deductible. The answer is: $388 million. The deductibility of those losses is a key question in the Informtion Gap Analysis of course. The model cannot say whether this or any other fiscal rule should be changed. It can and has however put a number on what the cost of maintaining it has been in this case.
  • Ongoing profitability despite the 2014 hiccup. The mine’s profitability appears to be recovering from a sharp short-term drop off in production and revenues in 2014-15. The narrative covers the details of that: extension work in the mine and adaptation to a new exports regime. What is significant however is that the model established operating profit levels for the mine in the future. And yet Newmont have just sold their share. It could be that several outstanding questions in the Information Gap Analysis make a material difference to a view of the future profitability of Batu Hijau, or that Newmont has increased its perception of country risk, or both.
  • The complexity of long-term projects. Batu Hijau is 17 years in, with perhaps another 11 to 12 years to go. Inbetween Indonesia changed its mining code (in 2009), with some implications for the mine. So there are already two separate fiscal regimes to model to get to actual historical predictions of revenue, let alone future forecasting. The model is therefore one more proof of the need to understand project-level specificity.
  • Integration into other initiatives: The Batu Hijau model establishes PWYP Indonesia as capable and responsible actors in the financial analysis of the sector, in a huge country. As well as EITI, for example, UNDP have recently conducted extended analysis of governance in the mining sector, and the World Bank has constant engagement with the government in terms of financial analysis.

EDIT: Corrected Newmont’s asset sale figure to $1.3 billion, as reported by the company.

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