Realist, not conformist analysis of the latest financial, business and political news

Both Indonesia And Nigeria Are Getting Their Mining Law Wrong

It’s a simple business, really

The big victim here is the Indonesian economy – the victim of an incorrect understanding of how mining and mineral processing works. The government thinks that if more processing is done within the country then the country will be gaining more value. Because processed minerals are, obviously enough, worth more than raw. But this only works if the processing being done is at least as efficient when done domestically as when in foreign. If it’s less efficient – as it is – then it can even be true that less value is being added.

The House of Representatives passed a revision of the 2009 Coal and Mineral Mining Law on Tuesday in a move criticized by some experts and NGOs over a lack of transparency and alignment with business interests.

OK, yes, super, some of the people who own coal mining companies have significant political influence. So, we know how that’s going to turn out. But it’s this that is wrong:

“Reserves are the soul of our mining industry. No reserves means no activity,” said Irwandy.

The revised law “obligates” miners to explore new reserves every year (Article 36A), whereas the law previously only “allowed” such activity. It even requires miners to allocate an exploration fund (Article 112A) that is subject to further regulation.

Perhaps not so much wrong as not quite grasping the details. The way the mining industry works is that companies who do actual mineral extraction do actual mineral extraction. The search for, hunt for, new deposits than can be exploited in the future is done over in an entirely separate set of companies. Because the skills required are different, the capital structure, the incentives, it’s just a different business. As different as making airplanes and flying them.

It’s also true that the company currently extracting might not actually want to increase reserves. Or even that there are no resources even vaguely associated with the current deposit that can be turned in to reserves.

But then there’s this:

Lawmakers also enable the government to set coal and mineral selling prices (Article 5). The principle is to balance prices between small metal ore miners and smelting companies as Indonesia bans metal ore exports.

Lordy be, government price setting, like that’s going to work well, right? And then the ban on the export of ores. Which is where there could be loss of value added. I worked with some Russians. They could make money exporting scrap but they weren’t allowed to export scrap. They were allowed to export scrap processed into ingot. But they couldn’t make a profit doing that. Because their process for making the ingot cost so much and produced such terrible ingot.

It is possible to end up doing this. The tin ores in Indonesia are so rich that making tin is fine. But the nickel mines, they’ve got a problem. Because you need lots and lots of electricity to refine nickel and that’s not cheap in Indonesia. Further, you might well be extracting a bit of cobalt, maybe platinum group metals. You probably don’t want to refine the first in situ – a US based scrap recycler might be a better place – and you definitely, absolutely, don’t want to try and process the second anywhere but one of about 4 plants globally. Vastly too expensive to do it on anything but that global sort of scale.

Sure, there’s this idea that if you add value by processing then you’re adding value in country. But it’s not actually – necessarily – true that you do add value by doing so. Magafuli is making the same mistake in Tanzania.

And Nigeria is making much the same mistake. The complaint is that Chinese buyers are going out into the bush to buy gold from artisanal miners. They then smuggle to the UAE.

So, why? Well, because there’s no useful market in Nigeria for the artisanal miners to sell to, obviously enough. And in Nigeria we can probably work out why too. Because even if the Chinese are paying a pittance you do actually get to keep it. The suggested solution isn’t going to work either:

Meanwhile, the FG is planning to address the problems posed by the absence of a market for artisanal gold miners by implementing an arrangement whereby the Central Bank of Nigeria buys off gold from the miners at the official market rates of the product.

Jeez, seriously? Anyone think that the central bank of Nigeria is actually going to pay some few peasants off in the bush? Perhaps more importantly, does anyone think that peasants off in the bush believe they’ll get paid by the central bank of Nigeria?

What both sets of rules are missing is that the best solution is emergent from the market structure. If you’ve not got processing plants there’s a reason for that – they’re not economic. Building non-economic plants is known as making you poorer. That your gold is being smuggled over the border is evidence that you’ve not got that vital part of a free market, honesty. And in Nigeria the idea that the central bank will become the source of honesty is amusing.

Tax the resource rent, sure, then leave well alone, that’s the way to deal with mining. As it’s near impossible to tax artisanal miners that resource rent then don’t bother.

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Michael van der Riet
Michael van der Riet
4 years ago

The Nigerian artisanal miner bit is the funniest. Say that I am an artisanal miner. I can sell my stuff to a foreigner and get to keep all the money, or I can sell it to gubmint at slightly more but then they know who I am and where I live, Liam Neeson style, and they can tax me and do all those other good things to me, on top of the local warlord who I pay for the privilege of being allowed to do business. I’m trying my hardest and failing to avoid saying that this will drive artisanal… Read more »

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