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OVERVIEW OF THEINDONESIAN MINING

INDUSTRYPresented to

CGI-Private Sector ForumBali, Indonesia

January 20, 2003

Presentation Outline

Why Indonesia ? Current Contributions

The Indonesian Policy Environment

Specific Issues

Possible Solutions

Path Forward

Utilizing Indonesias MineralResource Potential

Mineral resources are sunken treasures that only occurin particular specific places.

Like sunken treasure, which most likely is found on traderoutes, there are places where minerals are more likelyto be found, based on geology. Indonesia is one of theseplaces.

Without mineral exploration, the treasures remainunfound. Without mining, the treasure chest remainsunopened.

Mining represents the finding and opening of thetreasure so that the contents can be shared with: themining company (profits), government (taxes) andpeople (jobs, public facilities bought with taxes,social/charitable contributions.)

Why Indonesia? Nation With theWhy Indonesia? Nation With theLongest Arc Along the Ring of FireLongest Arc Along the Ring of Fire

Why Indonesia? In the Top Third ofNations With Mineral Potential*

Source : Fraser Institute Survey of Mining Companies 2002/2003

Legal Mining Contributes to EconomicProsperity

The mining industry uses less than 0.1% of Indonesiaslandmass, but contributes as follows to the Indonesianeconomy (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 ofoperation

Development in Eastern Indonesia

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*) PWC (Survey 2001

Direct Mining Employment:Direct Mining Employment:

33,000 Indonesians33,000 Indonesians

0

200

400

600

800

1000

1200

1400

Down

Stream

Emp

loymen

t

For every person working inthe Mine, there are four people

working in support industry ~

an additional 130,000

people

Dril ling ContractorsAviation Contractors

Suppliers

People(thousand)

People(thousand)

Dire

ctEmployment

Direct Employment Plus Contractors:Direct Employment Plus Contractors:

163,000 Indonesians163,000 Indonesians

0

200

400

600

800

1000

1200

Peop

lesupporte

dby

Mining

$

Peop

lesupporte

dby

Mining

$

Down

Stream

Emp

loymen

t

Down

Stream

Emp

loymen

t

D

irectEm

ploymen

t

D

irectEm

ploymen

t

People(thousand)

People(thousand)

Direct Employment,Direct Employment,Contractors, Downstream IndustriesContractors, Downstream Industriesand Families: 1.3 Million Indonesiansand Families: 1.3 Million Indonesians

Indonesia can not be Viewed in

Isolation

Externally, the world of mining has dramaticallychanged 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

Internally, a new democracy emerges with regional

areas that are more autonomous

Mining investment within Indonesia under the oldmining investment regulations is no longer

competitive in the world marketplace

I ndonesia MiningI ndonesia is among the most mineral-

rich countries on earth, yet it att racts

less than 1% of t he global mining

exploration budget

The Problem Is

Policy . . .

Problem: How the WorldViews Indonesias Policies*

Overall mining policies rated worst in theworld out of 47 high potential miningcountries 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 oftaxes (41 out of 47)

Land use policy/Native land claims (42 out of 47)

* Source: Fraser Institute Survey 2002/2003

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Result of Bad Policy No Exploration

Source : Global Expenditure -Metals Economics Group

Indonesian Expenditure PwC, Mining Survey 1999, 2001

Global exploration expenditure vs. Indonesian exploration expenditure

0

1

2

3

4

5

1995 1996 1997 1998 1999 2000 2001

$

billions

spentglobally

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

Global exploration spend Indonesian exploration spend as % of global

% of global spending in Indonesia

The Worlds View

of Indonesian Mineral PolicyMineral potential vs Policy potential

Bolivia

ArgentinaMexico

Peru

BrazilChile

Columbia

GhanaVenezuela

Ecuador

Philippines

Zimbabwe

Kazakhstan

RussiaChina

Indonesia Papua NewGuinea

South Africa

Australia

0

10

20

30

40

50

60

70

80

90

100

0 2 0 40 60 8 0 100

Policy potential

MineralPotential

Source : Fraser Institute Survey of MiningCompanies 2001/2002

World Wide Grassroots Exploration ExpendituresResource potential does not attract investment,

policy does!If your not in the top 10, your not in the game!

US$ Million

193

176

8 0 8076 74

49

40 40

30

1812 11 11 11 11 10 10 10 8

0

50

100

150

200

Total WorlwideExpenditure

isUS$1043Million

Result of Bad Policy DecliningReserves and Production

GOLD PRODUCTION(Kg Gold Bullion)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Kg

GOLD BULLION PRODUCTION

Specific Issues: Law No. 41 Prohibits open pit mining in protected forests

Is a violation of the terms of numerous COWssubject 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% ofIndonesias land area)

Demonstrates that the Government is notunified, does not respect contracts with limitunderstanding of the facts

Already has led to cancellation of a $1 billioninvestment

Mineral Belt COWS Tenement

Area Removedfrom ActiveExploration

Irian Jaya: 68%

Nusa Tenggara: 43%

Maluku: 7%

Kalimantan: 19%

Sulawesi: 26%

Java-Bali: 6%

Sumatra: 44%

Declares Almost all of the MineralDeclares Almost all of the Mineral

Belt Off Limits to ExplorationBelt Off Limits to Exploration(but yet illegal loggin g continu es unabated)(but yet illegal loggin g continu es unabated)

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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 Royal ty is absurdly high

Withholding taxes, f inal taxes and WAPU sta tusand 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 RemainsUnrefunded

0

100

200

300

400

500

600

700

2001 2002 Outstanding

Rp. Billions

VATPaid VAT

Paid

As of7/1

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*

3.25% times silverrevenues

1.0% times silverrevenues

Silver

3.75% times goldrevenues

1.5% times gold revenuesGold

4% times copperrevenues

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

Copper

Rate under PP13/2000, dated

February 23, 2000

Rate Under Generation 4COW

* Source : Fraser Institute Survey of Mining Companies 2002/2003

Mineral

Overall Fiscal Impact: What a 5th (1991)Generation COW Mine Owner Would

Pay in Different Countries

$0

$200

$400

$600

$800

$1,000

$1,200

K K V A ustralia P NG US S. Af r. Ca nad a Chile Peru

Calculated by a major accounting firm

Policy Will Dictate One of TwoFutures for Indonesian Mining

Illegal mining is already big business

Responsible investors are fleeingIndonesia 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 willbe a Race to the Bottom

MINING WILL CONTINUEONE WAY OR ANOTHER

As Regulated Mining Diminishes

Non-Regulated Mining Expands

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Indonesia Has a Choice:

Planned Land Use Unplanned Land Use

OR

Safe Practices Unsafe Practices

OR

Indonesia Has a Choice:

An EnvironmentallyResponsible Industry

Mining WithoutEnvironmental control

OR

Indonesia Has a Choice: An Industry that

Trains People An Industry that

Exploits People

OR

Indonesia Has a Choice:

Planned Communities Shanty Towns

OR

Indonesia Has a Choice:Recommended Future Policy

Draft a new mining regime inpartnership that stands by itself inconjunction with the internationalcommunity

Target Indonesia to be in Top

Ten in mining policies Promote Indonesian mining

internationally Overrule any policy that is in

conflict with existing COWs

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The Partnership Approach

First Determine where Indonesia wantto 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 theMinistries and DPR

The Partnership Approach

Fifth Draft the Mining Law based on theagreed upon white paper along with anyother changes / amendments needed toexisting legislation

Sixth Mining law reviewed / approvedby Parliament

Seventh Implementing regulationsdeveloped in concert with Law

WORKING TOGETHER WEHAVE THE COLLECTIVE

KNOWLEDGE TO POSITIONINDONESIA FOR A

SUSTAINABLE FUTURE !!

Thank you for your kind attention!