Commodity: Less stringent than expected - Mandiri

The Government of Indonesia last week issued two crucial regulations for commodities sector: (1) President Instruction (Inpres) No 10 Year 2011 which prohibits new permit issuance on forest conversion valid for 2 years and (2) Presidential Decree No 28 Year 2011 that allows the use of protected forest area for underground mining. Several exemptions in the Inpres 10/2011, such as permit already given and permit extension, are less stringent than expected. The regulation relatively does not have any impacts of the coal, metal, and plantation companies with large existing land bank, such as SGRO and LSIP; however, it may be detrimental to AALI’s short term expansion.

New regulation is less stringent than expected. The Government of Indonesia last week issued two crucial regulations for commodities sector: (1) President Instruction (Inpres) No 10 Year 2011 about forestry moratorium regulation, which prohibits new permit issuance on forest conversion until the next 2 years, and (2) Presidential Decree No 28 Year 2011 that allows the use of protected forest area for underground mining, which valid for 20 years and subject to renewal. Some exemptions in Inpres 10/2011 include permits already given (location permit), permits extension, and permits relating to geothermal, oil & gas, rice and sugar industry. The regulation disappointed environmentalists as such exemptions cover wider sector than expected after pressure from companies worried about their expansion.

The moratorium may adversely impact AALI. In plantation sector, AALI may receive the biggest blow from the moratorium regulation because AALI has the smallest land permit for new planting. The moratorium increases land acquisition cost as the people who already have location permits, HGU, and planted plantation, may exorbitantly increase their land prices. For this reason, AALI does not set new planting target for this year onwards. SGRO and LSIP are not impacted by this regulation as they have secured enough location permits for expansion.

No significant impact in our coal or metal coverage. The Presidential Decree no 41/2004 allows 13 companies affected by the Forestry Law 41/1999 (restriction open pit mining in protected forest area) to continue their mining operations despite the provisions. In addition to the Government Regulation No 2/2008 and No 10/2010, all companies that have activities in a production or protected forest must pay forestry fee ranging from Rp1.2mn – Rp3.0mn per hectare and recovered land with ratio 1:2. Since 2008 the Forestry Department requests companies to apply for a borrow-use permit for their activities in those areas. Therefore there is no significant impact in the coal companies under our coverage since their existing agreements (mostly Contract of Work holders) are respected. This only applies to new licenses or permits.

This is positive for BRMS. The signing of the PP 28/2011 will positively impact the currently Bumi Minerals’ (BRMS) proposal for obtaining its exploitation borrow-and use-permit for the underground mining activities of Dairi Prima Mineral, BRMS’s high grade zinc asset that it 80% effectively owns. Dairi Prima will commence its production in 2H 2012, with expected steady production of 115k tons of Zinc and 60k tons of lead. Based on the current price, the revenue contribution is significant of about US$380mn. Based on the current projected total cash cost/ton, EBITDA in 2013 is estimated to reach US$285mn.