Golden promise: More transparent governance may encourage gold and copper activity

Home to the world’s second-most productive copper mine, and the largest gold mine in terms of reserves, Indonesia has positioned itself strongly among the world’s largest precious mineral producers. Although gold production across the archipelago has traditionally been extracted as a by-product from large-scale copper mines, the revenues generated from gold sales are far from an afterthought. Almost one-third to half of the country’s gold production, along with nearly one-third of copper output, is sourced from Freeport Indonesia’s Grasberg mine in any given year, with Batu Hijau copper/gold mine and Gosowong gold/silver mine, in addition to the recent acceleration of production at the Martabe gold/silver mine, also contributing to the segment’s current performance.


After a strong performance in 2009 and 2010, driven by higher commodity prices and steady production, output of gold and copper in 2011 tailed off for the year. By and large, this was a result of weaker global demand for copper, as well as start up delays and production problems for the country’s two major gold and copper producers.

Gold output in 2012 reached 66 tonnes, down from 78 tonnes in 2011, according to data from the Ministry of Energy and Mineral Resources (MEMR). However, estimates from the US Geological Survey (USGS) puts the 2013 figure at 60 tonnes, up marginally on 59 tonnes recorded in 2012. Data from Thomson Reuters GFMS, meanwhile, indicate that output dropped from 120.1 tonnes to 89 tonnes from 2011 to 2012, with a further 7% decrease in the first half of 2013 to 42.6 tonnes. In terms of global gold production, the slowdown saw Indonesia fall from seventh to 10th in 2012, with Canada, Ghana and Mexico all moving ahead, according to Thomson Reuters GFMS.

As per MEMR data, copper rebounded from 618,000 tonnes produced in 2011, to 804,000 tonnes in 2012, an increase of 30.1%. This compares to 999,000 tonnes in 2009 and 878,000 tonnes in 2010. Data from the USGS, however, shows a continued decline from about 543,000 tonnes in 2011 to approximately 430,000 tonnes in 2012, a trend which aligns with the falling output of the country’s largest copper producers. Preliminary figures for 2013 published by the USGS show production of 380,000 tonnes, with export restrictions as well as other challenges including work stoppages and working with lower quality material. All in all, Indonesia has sufficient quantities of gold and copper to continue production at a high level for decades to come.

Despite mineral production tailing off in recent years, data from the USGA indicates healthy reserves of 3000 tonnes for gold and 28,000 tonnes for copper.

An Old Hand

Containing one of the largest copper and gold reserves in the world, the Grasberg minerals district located in Papua and operated by Freeport Indonesia (PTFI) continues to make up the bulk of copper and gold production in the country, in spite of declining output in recent years.

In operation since 1967, the mine is now shifting its focus away from the Grasberg open pit mine, which currently accounts for the majority of production, towards developing other large-scale, high-grade underground ore bodies, as laid out under the Common Infrastructure Project (CIP).

Between 2012 and 2017, development of the CIP, Grasberg Block Cave underground mine and the Deep Mill Level Zone, will require average annual investments of around $715m and is expected to yield a combined 240,000 tonnes of ore per day by 2017. While the mine still possesses high quality reserves – estimated by the company at 14.06bn kg of copper and 30.9m ounces of gold in 2012 – production has slowed in recent years following frequent shutdowns at the mining site as well as the recent processing of lower grade ore. As a result, copper production declined annually between 2009 and 2012, dropping from some 743.9m recoverable kg in 2009 to 315.2m kg three years later, according to company reports. Gold output has been similarly affected, falling each year over the same period from 2.98m ounces in 2009 to around 862,000 ounces in 2012.

The site’s most recent work stoppage, which lasted from May to July 2013 was due to a tunnel cave-in that killed 28 people. Prior to the accident, a string of security issues including protests and several incidents of violence targeting Grasberg operations and employees resulted in a number of stoppages to operations. This was in spite of increased security both from the Indonesian government and the company itself. Between July 2009 and mid-February 2013, there were a total of 37 shooting incidents, which resulted in 15 fatalities and 57 injuries in and around the Grasberg minerals district, many of them occurring along the access road leading to the mining and milling operations.


As of 2013, PTFI was 90.64% owned by Arizona-based Freeport-McMoRan Copper & Gold, including a 9.36% stake in subsidiary Indocopper Investama. Although the current Contract of Works regime for the mine inked in 1991 runs through 2021, with an option to extend the contract another 20 years, the future of the mine and its ownership composition is unclear beyond that timeframe, due to the majority divestment provisions included in the new Mining Law of 2009. The new regulations require foreign companies such as Freeport-McMoRan to divest a majority 51% stake in any mining venture in addition to other new obligations, including raw ore export restrictions and limits on the size of mines.

As these new laws are in conflict with the parameters outlined under the pre-existing contracts, the government and Freeport are currently in negotiations to reach a compromise satisfactory to both parties prior to the expiration of the current contract.

Freeport indicated in 2012 it would consider selling its stake in Indocopper Investama to move closer to its divestment requirements, as well as stating in July 2013 that it would list 5% of its shares on the Indonesian Stock Exchange, specifically through an initial public offering, and sell another 10.64% stake to the Indonesian government (which already holds a 9.36% share).

Rounding Out The Field

The second-largest copper and gold operation in the country is Batu Hijau open pit mine located on the island of Sumbawa, which has primarily been producing copper concentrate with a gold by-product since commencing operations in 1999. Run by Newmont Nusa Tengarra (PTNNT), a subsidiary of Newmont, the world’s second-largest gold producer, the mine is a joint venture between PTNNT, Japanese corporation Sumitomo and the Indonesian government. Copper production decreased by 42% in 2012 to 71,200 tonnes along with a 78% dip in gold output to 68,000 ounces on the year, with the decline for both attributed primarily to processing lower grade stockpiled material, according to company reports. Reserves are estimated by PTNNT at 1.59m attributable tonnes of copper and 3.5m attributable ounces of gold as of December 2012, giving the mine a projected lifespan of at least 20 more years.

Like the Grasberg project, PTNNT has also been moving forward with divestment plans in order to comply with the revised regulatory regime. Prior to 2013, the Batu Hijau mine ownership was made up of the Nusa Tenggara Partnership BV (NTPBV) partnership between NPC and the Sumitomo Corporation with a 56% controlling interest along with domestic minority partners Multi Daerah Bersaing with a 24% stake, Pukuafu Indah (PTPI) with 17.8%, and Indonesia Masbaga Investama holding the remaining 2.2%.

After agreeing in 2011 to sell a 7% stake of NTPBV to the government and reduce the company’s holding to the required 49%, government wrangling as to which government vehicle would take control of the stake dragged the deal out until local government interests won out over the central government in July 2013.

Located on Halmahera Island, the Gosowong mine is another significant gold producer, and is operated by Nusa Halmahera Minerals as part of a 75/25 partnership between PTNNT and Aneka Tambang, as since 1999. Unlike other major gold operations in Indonesia, Gosowong contains gold and silver deposits rather than copper, of which it produced 312,711 ounces of gold and 342,835 ounces of silver through the year ending June 2013, according to PTNNT.

The mine is estimated to hold 2m ounces of gold and another 3.1m ounces of silver. The new Martabe mine located in Batang Toru of the North Sumatra province added more than 200,000 ounces of gold and almost 1m ounces of silver to Indonesia’s tally since beginning operations in July 2012.

Operated by Hong Kong-based G-Resources Group, the project has forecast annual output of approximately 250,000 ounces of gold and between 2m and 3m ounces of silver once operations are accelerated.

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The Report: Indonesia 2014

Mining chapter from The Report: Indonesia 2014

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