Presentation Outline OVERVIEW OF THE INDONESIAN MINING INDUSTRY

Presented to

CGI-Private Sector Forum

Bali, Indonesia January 20, 2003

Why Indonesia ? Current Contributions The Indonesian Policy Environment Specific Issues Possible Solutions Path Forward

Utilizing Indonesias Mineral Resource Potential

Mineral resources are sunken treasures that only occur in particular specific places. Like sunken treasure, which most likely is found on trade routes, there are places where minerals are more likely to be found, based on geology. Indonesia is one of these places. Without mineral exploration, the treasures remain unfound. Without mining, the treasure chest remains unopened. Mining represents the finding and opening of the treasure so that the contents can be shared with: the mining company (profits), government (taxes) and people (jobs, public facilities bought with taxes, social/charitable contributions.)

Why Indonesia? Nation With the Longest Arc Along the Ring of Fire

Why Indonesia? In the Top Third of Nations With Mineral Potential*

Legal Mining Contributes to Economic Prosperity

The mining industry uses less than 0.1% of Indonesias landmass, but contributes as follows to the Indonesian economy (2000): 2.4% of GDP, or Rp 31.4 trillion
14.1% of total non-oil and gas exports Direct and indirect employment for about 0.6% of the population Rp 6.8 trillion in government revenue Regional and community development projects in the areas of operation Development in Eastern Indonesia

Source : Fraser Institute Survey of Mining Companies 2002/2003

Direct Mining Employment: 33,000 Indonesians

Direct Employment Plus Contractors: 163,000 Indonesians

For every person working in the Mine, there are four people working in support industry ~

an additional 130,000 people

1400 1200 1000

Down Stream Employment

800

600

400

200 0

Direct Employment

Aviation Contractors

Drilling Contractors

People ( thousand)

Suppliers

*) PWC (Survey 2001

Direct Employment, Contractors, Downstream Industries and Families: 1.3 Million Indonesians
1200

Indonesia can not be Viewed in Isolation

Externally, the world of mining has dramatically changed since the 1967 Mining Law:
Globalization of the industry Commodity pricing has not kept place with inflation Mining companies are merging to remain competitive Over 110 nations have updated their mining policy

Direct Employment Down Stream Employment

1000

800

People supported by Mining $

People ( thousand)

600

400

200

Internally, a new democracy emerges with regional areas that are more autonomous Mining investment within Indonesia under the old mining investment regulations is no longer competitive in the world marketplace

Indonesia Mining
Indonesia is among the most mineralrich countries on earth, yet it attracts less than 1% of the global mining exploration budget

Problem: How the World Views Indonesias Policies*

Overall mining policies rated worst in the world out of 47 high potential mining countries surveyed!
Regulatory Administration, Interpretation, Enforcement (40 out of 47) Regulatory duplication (42 out of 47) Taxation (42 out of 47) Labor regulation (37 out of 47) Political stability (3rd worst) Forced socioeconomic contributions outside of taxes (41 out of 47) Land use policy/Native land claims (42 out of 47)
* Source: Fraser Institute Survey 2002/2003

The Problem Is Policy . . .

Result of Bad Policy No Exploration

Global exploration expenditure vs. Indonesian exploration expenditure
4.00% 5

The Worlds View of Indonesian Mineral Policy

Mineral potential vs Policy potential

100 90
Mineral Potential

Australia Brazil Russia China South Africa Papua New Guinea Peru Chile

% of global spending in Indonesia

3.50% 3.00% 2.50%

$ billions spent globally

80 70 60 50 40 30 20 10 0 0 20

Indonesia

Mexico Argentina Bolivia

2.00% 1.50% 1.00%

Kazakhstan

Ghana Venezuela Zimbabwe Columbia Ecuador Philippines

1 0.50% 0 1995 1996 1997 1998 1999 2000 2001 0.00%

Global exploration spend

Indonesian exploration spend as % of global

Source : Global Expenditure - Metals Economics Group Indonesian Expenditure PwC, Mining Survey 1999, 2001

40 60 Policy potential

80

100

Source : Fraser Institute Survey of Mining Companies 2001/2002

World Wide Grassroots Exploration Expenditures Resource potential does not attract investment, policy does !
If your not in the top 10, your not in the game!
US$ Million
200 193 176

Result of Bad Policy Declining Reserves and Production

GOLD BULLION PRODUCTION GOLD PRODUCTION
(Kg Gold Bullion)
45,000 40,000 35,000

150

30,000

100 80 8 0 76 74

Total Worlwide Expenditure is US$1043 Million

25,000

Kg
10 8

20,000 15,000

4 9 5 0 40 40 30 18 12 0 1 1 11 11 1 1 10 10

10,000 5,000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Specific Issues: Law No. 41

Prohibits open pit mining in protected forests Is a violation of the terms of numerous COWs subject to international arbitration Is based on false premises that mining has the major impact on watersheds (mining areas under development account for less that .1% of Indonesias land area) Demonstrates that the Government is not unified, does not respect contracts with limit understanding of the facts Already has led to cancellation of a $1 billion investment

Declares Almost all of the Mineral Belt Off Limits to Exploration

(but yet illegal logging continues unabated)
Kalimantan: 1 9 % Sulawesi: 2 6 %

Sumatra: 44%

Irian Jaya: 68%

Maluku: 7 %

Java-Bali: 6%

Nusa Tenggara: 43%

Area Removed from Active Exploration

Mineral Belt

COWS Tenement

Specific Issues: Taxes

Tax office administration is unfair and non consistent, although new LTO has potential Major specific problems:
No VAT refunds VAT not zero rated on coal and gold exports making a 10% increase in inputs to production cost New Royalty is absurdly high Withholding taxes, final taxes and WAPU status and are disguised tax increases Forced social contributions are a disguised tax Regional taxes are multiplying

VAT ADMINISTRATION:
66% of Refundable VAT Paid by Mining Companies in 2001 & 2002 Remains Unrefunded Rp. Billions
700 600 500 400 300 200 100 0

VAT Paid

VAT Paid

As of 7/1

2001

2002

Outstanding
IMA survey of mining companies

New Royalty Rates have doubled! Combined With Other Taxation Measures Have Ranked Indonesia as the 5th Most Unfavorable Nation in Terms of Mining Taxation*
* Source : Fraser Institute Survey of Mining Companies 2002/2003

Overall Fiscal Impact: What a 5th (1991) Generation COW Mine Owner Would Pay in Different Countries
$1,200 $1,000 $800

Mineral

Rate Under Generation 4 COW

Rate under PP 13/2000, dated February 23, 2000 4% times copper revenues

Copper

$45 per ton < 80K tons; $55 per ton > 80K tons

$600 $400

Gold Silver

1.5% times gold revenues 3.75% times gold revenues 1.0% times silver revenues 3.25% times silver revenues

$200 $0
KK V Australia PNG US S. Afr. Canada Chile Peru

Calculated by a major accounting firm

Policy Will Dictate One of Two Futures for Indonesian Mining

Illegal mining is already big business Responsible investors are fleeing Indonesia because of poor policy Unless policies and attitudes change, mining will follow the path of illegal logging As Friends of the Earth puts it, there will be a Race to the Bottom

MINING WILL CONTINUE ONE WAY OR ANOTHER

As Regulated Mining Diminishes Non-Regulated Mining Expands

Indonesia Has a Choice:

Planned Land Use Unplanned Land Use

Indonesia Has a Choice:

Safe Practices Unsafe Practices

OR

OR

Indonesia Has a Choice:

An Environmentally Responsible Industry Mining Without Environmental control

Indonesia Has a Choice:

An Industry that Trains People An Industry that Exploits People

OR

OR

Indonesia Has a Choice:

Planned Communities Shanty Towns

Recommended Future Policy

Draft a new mining regime in partnership that stands by itself in conjunction with the international community Target Indonesia to be in Top Ten in mining policies Promote Indonesian mining internationally Overrule any policy that is in conflict with existing COWs

OR

The Partnership Approach

First Determine where Indonesia want to be in terms of global policy. Second Collectively review various options on how to achieve the goal Third Test those options by ranking the new policy framework Fourth ...Develop a white paper on the new policy and have it agreed to by the Ministries and DPR

The Partnership Approach

Fifth Draft the Mining Law based on the agreed upon white paper along with any other changes / amendments needed to existing legislation Sixth Mining law reviewed / approved by Parliament Seventh Implementing regulations developed in concert with Law

WORKING TOGETHER WE HAVE THE COLLECTIVE KNOWLEDGE TO POSITION INDONESIA FOR A SUSTAINABLE FUTURE !!
Thank you for your kind attention!