31/07/2014 - 13:16

Indonesian pickle for nickel?

31/07/2014 - 13:16

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Indonesian pickle for nickel?
BHP Billiton's Nickel West.

Copper today, nickel tomorrow? That’s one of the interesting questions for delegates to consider at next week’s Diggers & Dealers forum in Kalgoorlie, given an apparent willingness of the new Indonesian government to relax its hard-line treatment of mineral exporters.

On one level, what happened in Jakarta late last week has nothing to do with the Australian mining industry because it involved an agreement between a US-based copper producer and the government of Indonesia over royalty rates and export taxes.

On another level, there is the potential for a deal over copper to spread to a deal over nickel; and that really would set the cat among the pigeons at Diggers, where nickel companies constitute the second biggest grouping after gold companies.

There are six reasons why the Indonesian government’s deal with Freeport McMoran over the export of copper in a partly processed state (as a mineral concentrate) is important.

  • Watering down its hard-line stance on royalties and taxes as applied to the export of partly-processed copper by the Indonesian government could open the way for a loosening on the total ban on the export of nickel-bearing ore.
  • The copper deal with Freeport over the giant Grasberg mine in Papua has been announced shortly after confirmation of the election of Indonesia’s new president, Joko Widodo (widely known as Jokowi).
  • The new man in charge of Australia’s near neighbour (and world’s 10th biggest economy) is a pragmatist and self-made businessman who knows the value of a deal in which both sides win.
  • The deal with Freeport over taxes and royalties must have had Jokowi’s blessing.
  • It appears to have had an immediate, albeit modest, effect on the global copper price with the renewed flow of Grasberg’s copper, trimming the price by around US3 cents per pound.
  • A lower copper price is a warning for Australian nickel producers that a similar deal by the Indonesian government on nickel exports could have a significant effect on the nickel price.

There are a number of dots to be connected to draw a complete picture of what the tax and royalty deal between Freeport and Indonesia means for the rest of that country’s mining sector, and the knock-on effect in Australia.

However, it is significant that the price of nickel has risen by around 40 per cent since Indonesia slapped a blanket ban on the export on unprocessed ore as an attempt to force greater internal processing of the country’s minerals.

Popular in Indonesia because of a view that natural resources were being sold too cheaply, the reality is that the only winners from the ban so far are other nickel exporters, especially those in Australia such as BHP Billiton, Mincor Resources, Panoramic Resources, Western Areas, Independence Group, First Quantum Minerals, and Clive Palmer, who owns the Greenvale nickel refinery in Queensland.

In some cases the Indonesian export ban has flipped loss-making Australian nickel businesses into profit, with the reverse effect likely should a nickel deal be negotiated between ore exporters and the Indonesian government.

WA nickel miners are confident that no deal will be struck over the export of unprocessed ore because of the deep commitment by the Indonesian government to add greater value to mineral exports.

But a variation of that view existed within Freeport until a few days ago, and persists inside another US company with Indonesian copper assets – Newmont Mining.

What the Freeport copper deal signals is a more sensible approach to achieving a business win for both sides in the standoff. Freeport gets to re-start the export of copper concentrate and Indonesia gets to resume the collection of taxes and royalties, at a slightly higher rate.

Nickel is a different matter because the complete ban on the export of unprocessed ore means the government isn’t collecting any taxes or royalties, and once-profitable export businesses that employed thousands of Indonesians have been closed.

Jokowi, as a man who built his own furniture business from the ground up, will understand that it’s better to have a small slice of something that a large slice of nothing, and he will also understand that if he wants a nickel processing industry developed in Indonesia the companies likely to build the smelters must have the cash flow to invest.

Right now, cash flow (and taxes) have dried up. The government gets nothing, and the miners do not have the cash flow to invest in the smelters the government is demanding.

In the wake of the Grasberg copper deal there is the potential for the businessman now running Indonesia, as opposed to the outgoing former army general, Susilo Bambang Yudhoyono, to strike a deal with the nickel miners to produce an Indonesian win-win situation – with Australian nickel producers the likely losers.

 

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