Indonesia's mining regulation to push up cost
The Indonesian government's stringent mining regulations could increase the cost of doing business in the country's mining sector over the next two years, said Standard & Poor's Ratings Services.
Thailand's coal miner Banpu Plc is one of the top five operators in Indonesia. Asia Green Energy Plc is another company seeking presence in the country.
Indonesia is reviewing - among other things - a ban on unprocessed mineral exports, renegotiation of mining contracts, and new rules on foreign ownership. But the rating agency believes that while mining regulations will become more onerous in Indonesia, the government is unlikely to implement some of its more extreme regulations.
In a report released today titled "Indonesia's Mining Regulations: Will Official Rhetoric Tunnel Its Way To Implementation?", Standard & Poor's said it expects its credit outlook on the Indonesian mining sector to remain stable. This is because its ratings on mining companies operating in Indonesia have long factored in the country's evolving regulations.
"The high economic importance of the mining sector to Indonesia's central and regional governments provides a strong incentive for the government to adopt reasonable regulations that do not materially dent the sector's performance or its attractiveness to investors," said Standard & Poor's credit analyst Xavier Jean. "We also see Indonesia's willingness to attract and stimulate domestic and foreign investment as another incentive for the country to maintain a rational approach to regulation."
The report said that the government could hike royalty rates or impose additional tariffs for unprocessed ore and coal exports when the renegotiation of existing mining contracts is completed. Nevertheless, a ban on unprocessed ore exports or punitive taxes on the coal sector will likely be delayed or toned down.
"While it's unlikely that the government will choke a healthy revenue stream, we expect taxation to go only one way--up," said Jean.
According to the report, miners in Indonesia can likely absorb royalty rate increases of five to 10 percentage points without a material weakening in their credit profile. Moderate levels of debt of most large coal companies and high diversification of international mining companies should offset lower profitability and cash flows from higher royalties.
