COAL & MINERAL EXPLORATION INDONESIA

FUTURE PROSPECTS FOR THE INDONESIAN MINING INDUSTRY

WHERE IS THE INDONESIAN COAL & MINERALS INDUSTRY HEADED

• In the last 30 years the Indonesian coal and minerals industry has

developed into a significant player in the global commodity market

• From almost no mining industry in 1980 Indonesia now has some of the

world’s biggest mining operations in commodities ranging from coal, tin, gold

and copper

• Despite this significant achievement, the reality is, Indonesia’s mineral and

coal potential is still not well explored and huge potential still awaits

discovery

• To predict what is the likely next phase of the Indonesian coal and mineral

industry will be like its best to look at how the coal & minerals exploration

industry has developed in the past.

INDONESIAN TECTONIC MAP

Source: R.McCaffery (2009)

Source: R.McCaffery (2009)

MAJOR TECTONIC ENVIRONMENTS

CONTROL THE DISTRIBUTION

OF COAL AND MINERAL DEPOSITS

Source: Steve Garwin (2011)

EARLY STAGES OF COAL & MINERAL EXPLORATIONUP TO 1990

• Ertsberg was recorded in a ships log in the 16th century by a Dutch vessel sailing through the

Torres Strait towards Jakarta

• Dutch colonial work recognized the potential for coal and minerals throughout the country and

until 1980 mining focused in Ombilin, Lebong Tandai, Bangka, Ketapang, Samarinda and

Cikotok

• Raffles documented the potential for coal in Bengkulu while Governor in the British colony there

• Initial information regarding Indonesia’s coal and mineral resources was generated in the

colonial era and probably culminated in the publishing of “The Geology of Indonesia” by van

Bemmelen in 1947

• After oil was discovered (by the Japanese) in South Sumatra, during WWII, having drilled a hole

on rig that was abandoned on location by the Dutch

• Indonesia’s geological potential was largely investigated by oil companies in regional studies for

oil exploration

• Coal was identified as a secondary consequence of oil exploration in;

– South Sumatra

– East Kalimantan – Sanga Sanga, Bontang, Berau, Tarakan

– South Kalimantan – Tanjung

• Most obvious coal and mineral prospects were the targets for development

COAL MINING AT OMBILIN WEST SUMATRA

THE START OF THE MODERN INDONESIAN COAL INDUSTRY CONTRACT OF WORK (CCoW) ERA 1985 - 2000

• During the early 80’s large areas of Indonesia were contracted to foreign and local

mining companies to develop the coal and mineral potential

• CoW’s were granted in 3 generations but it was the 1st generation CoW’s that had

the biggest impact. Until today they are the source of most of Indonesia’s coal and

mineral production ;

– Freeport, KPC, Arutmin, Newmont, Adaro, Kideco, Berau & BHP

• The CoW system resulted in a very high success rate for projects reaching

production, some of the reasons for this were;

• Companies were given large areas to investigate

• Relinquishment schedules forced explorers to work quickly to identify the

best areas

• Centralized control of licensing permits, providing clear and stable

investment environment

• Operators were experienced technically and financially capable

• Foreign expertise was used on a transfer of technology basis

CONCESSION MAPOF

KALIMANTAN

CONCESSION MAPOF

SUMATRA

RESULTS OFTHE CONTRACT OF WORK SYSTEM

• Large coal & mineral resources were discovered for which investment in dedicated infrastructure was justified

• Indonesia became a major force in the coal and minerals export market

• Projects were built with long term planning and are able to endure price fluctuations

• Provide significant revenue to the government and the people of Indonesia

• Indonesia gained a work force of talented and experienced technical professionals

• Indonesia changed from a underdeveloped country to and emerging economy

• Truly a great era of discovery of natural resources ranging from ; KPC, Adaro, Minahasa, Cempaka Diamonds, Wetar, Kelian, Kideco, Batu Hijauand more

Examples of wellplanned pit design andexecution in CoWprojects in Indonesia

DISTRIBUTION OF COAL AND PEAT RESOURCES IN INDONESIA

Coal deposits in Indonesia are in 2 basic sedimentary

age groups;

•Neogene approx 25myo – present

•Paleogene approx 65myo – 25myoSource: Directorate of Mineral Resources (1990)

METALLURGENIC MAP

TROUBLED TIMESINDONESIAN MINING INDUSTRY 1995-

2005

• Busang gold scam

• President Suharto resigns

• Indonesian economic meltdown

• Invasion of East Timor

• Low commodity prices

• Forestry

REGIONAL AUTONOMYAND

THE INDONESIAN MINING INDUSTRY 2000 - 2005

• New government

• East Timor is allowed to vote for independence

• Promises are made for regional autonomy

• Regencies start to manage there own mininginterests (KP)

• The CoW system is abandoned

• Foreign investment dries up

• Many forestry operators become miners

INDONESIAN MINING INDUSTRY RECOVERY

• By 2003 coal and other commodity prices beginto recover

• Regional autonomy is in full swing

• Proliferation of KP’s for coal mainly owned bydomestic investors

• KP’s are generally small from 100 - 2,000ha size

• Opportunistic investors abound

INVESTMENT BUBBLE2007-2011

• Demand for coal and minerals, mainly driven byChina, grows rapidly

• Commodity prices spike

• New coal and mineral projects are everywhere

• Mad rush to develop coal and mineral projects totake advantage of high prices

• Efficiency and good planning largely ignored

RESULTS THE REGIONAL AUTONOMY FOR THE

COAL INDUSTRY

• Around 10,000 IUP permits issued

• Very few significant new discoveries of coal or minerals

• Minimal new infrastructure development

• Environmental mismanagement and damage

• Coal & mineral resources wasted by bad planning and management of mining operations

• Illegal coal and mineral exports causes significant losses in Government royalty payments

“mine till it fills with water” pit design

no drainage plan and no rehabilitation

CRASH OF THE COMMODITY CYCLEINDONESIAN COAL INDUSTRY 2012 -2015

• commodity markets are over supplied

• investment hangover period starts

• new mining law adds to uncertainty

• inefficient mines cannot survive

• exploration stops

• reserves of coal & minerals get smaller

• a moratorium on new mining licenses starts

• cleaning up the non-conforming licenses (CNC)

HISTORIC CHANGE

In Indonesia, the election of

President Joko Widodo in

2014, was the beginning of a

new era of democracy and

social change.

With the popular support of the

people the Government is

determined to play an

important role in facilitating

national development to

ensure economic growth for

the long term future benefit of

the country.

THE GRAND PLAN

• provide Indonesia with infrastructure to fuel the economy and

create the foundations for a sustained and prosperous future

• provide 35,000MW of additional power generating capacity, is

fundamental to the Governments strategy

• most of these power plants will be coal fired and built, owned

and operated by private consortiums (IPP) to sell power to PLN

WORK IN PROGRESS

• Recentralization IUP (mining lease)management to the Provincial Government

• Finalization of the IUP Clean & Clear list

• The domestic market for coal and minerals isset to grow substantially

• Professional lobby groups such as EMD,Aspindo, Perhapi, IAGI and others influencingGovernment policy

COMMODITY PRICE RECOVERYIndonesian coal price index (HBA)

ARE WE PREPARED ??

• When commodity prices started falling in 2012 exploration budgetswere slashed

• During the downturn many mining operations focused on thecheapest production possible which meant minimizing strip ratios

• Now as commodity prices recover mine operators are attempting tore-optimize their pit designs but may find years of low strip mininghas left high strip ratio remaining

• This is particularly evident in the coal market as supplies of somegrades of coal have already experienced shortages and this could befurther exacerbated by miners unable to expand production easily

• This means EXPLORATION

WHAT’S NEXT• The moratorium on new mining leases will end

• A new era of systematic exploration will start

• New mining developments will have robust economics, dedicatedinfrastructure and will require significant capital investments justifiedby the project economics and feasibility studies

• Large capital investments will require the support of financialinstitutions

• Financial institutions will insist that miners comply with internationaland or Indonesian standards and best work practice

• Opportunistic investors looking for a fast return will be replaced byinvestors with long term strategies

CONCLUSION

• commodity prices have stabilized and are likely to recover

• the mining industry in Indonesia will also recover but it will not

be like it was before

• the new era of coal and mineral exploration, which is now

dawning, will be on a more stayed and controlled trajectory

• new technology and innovation will drive the Indonesian

exploration industry to new heights

• a new era of coal and mineral discoveries will most likely

deliver surprising results

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