RECENT ECONOMIC REPORTS

MARCH  MINING UPDATE: NICKEL AND ALUMINUM

March 2002

Summary: Indonesian state-owned enterprises and private companies struggled to deal with low nickel prices in 2001, while aluminum ore production and export revenues remained fairly stable. PT Aneka Tambang (Antam) plans to start the construction of its third ferronickel plant in North Sulawesi in the first quarter of 2003. The Energy and Mineral Resources Ministry and the Forestry Ministry will allow continued development of the Gag Island nickel mine. Antam continues efforts to develop its Tayan bauxite concession in West Kalimantan, an area estimated to contain 117 million tons of ore. (We provide 2001 production figures for PT International Nickel Indonesia and Antam bauxite production in tables below.) End summary.

PT International Nickel Indonesia (Inco) announced its audited results for 2001, with net sales revenue dropping sharply to US $296.4 million from $401.6 million in 2000 due to the significant decline in the nickel price. The company's net earnings declined to only US $9.3 million in 2001 from US $80.5 million in 2000. A record 2001 production of 138.1 million pounds, a result of expanded capacity, buoyed earnings however. The company's processing facilities operated above the planned throughput rate, compensating for lower-than-expected ore grades but not enough to meet the 140-million pound target. Output in 2000 was 130.5 million.

Despite lower earnings, Inco earned more than enough cash to fully meet its debt servicing requirements of $104.9 million. The company's realized price averaged $4,836 per ton ($2.19 per pound) in 2001 compared with $6,744 per ton ($3.06 per pound) in 2000. Capital expenditures for 2001 were $28.6 million, down from 2000’s $32.7 million. After financing debt repayment and capital expenditures, net cash flow was $6.8 million in the year 2001, compared with $34.8 million in 2000. On December 31, 2001, Inco's inventories of nickel in matte were 3,512 tons (7.7 million pounds), significantly more than the 1,365 tons (3.0 million pounds) at the end of 2000. The company's production of nickel in matte, an intermediate product, is sold under long-term U.S. dollar denominated contracts to Inco Limited and Sumitomo Metal Mining Co., Ltd.

The Company's summarized results were as follows:

PT Aneka Tambang (Antam), a mining company owned 65 percent by the GOI and 35 percent by the public, reported that its 2001 ferronickel production rose to 10,300 metric tons (MT) from 10,111 MT in 2000. Antam produces both high-carbon ferronickel (21% carbon) and low-carbon ferronickel (19% carbon) in the form of both shots and ingots at two smelters located in Pomala’a, North Sulawesi. Antam plans to increase exports of nickel ore to Japan to 2 million MT a year from the current 1.5 million tons. The increase will offset a decline in profit margins following a recent drop in the price of ferronickel to US $2.35 from US $2.40 per pound. One of its buyers Pacific Metals Ltd, with which Antam signed a sales agreement in the fourth quarter of 2001, agreed to increase imports of high grade nickel from Antam. The company also reported 2001 gold production remained unchanged at 4.0 MT, slightly below the 4.1 MT target.

New Ferronickel Plant Planned

Anticipating a recovery in demand by 2004, Antam hopes to start the construction of its third ferronickel plant in Pomala'a, North Sulawesi, in the first quarter of 2003. The plant -- designated as FeNi III -- will cost $250 million. Antam plans to expand production capacity to 26,000 MT a year from current capacity of 10,300 MT from two existing ferronickel plants. Construction is expected to take about 28 months, with full commercial operations expected by 2005. The expansion plan has been pending since 1999 as Antam looked for foreign financing for the project.

Hermes Kreditversicherungs AG (G.HKV), a German export-credit agency, has given preliminary approval to PriceWaterhouseCoopers to evaluate the FeNi III project. Hermes is expected to guarantee insurance coverage for the major part of the foreign debt funding of the expansion and an attached power plant project. Antam's other long-term expansion plans include downstream diversification into stainless steel production and possible acquisition of a gold mine in Papua New Guinea.

Director General for Geology and Mining Wimpy Tjetjep announced that the Energy and Mineral Resources Ministry (MEMR) and the Forestry Ministry had reached an agreement allowing development of the Gag Island nickel mine. The GOI suspended exploration activity after the new Forestry Law forbid such activity in protected forests. As a result of its agreement, the Forestry Ministry decided to change Gag Island’s designation from "protected forest" to "production forest." The agreement allows PT Gag Nickel, 75%-owned by Australian mining company BHP Billiton Ltd. and 25 percent by Antam,to continue development of a resource estimated to contain 240 million tons of laterite nickel. The new mine could produce nickel valued at US $800 million and last for 100 years.

Meanwhile, Antam continues to experience difficulty securing financing to develop nickel ore reserves in East Pomala’a with Inco. Inco’s reserves are estimated to contain around 10 million tons of hi-grade nickel ores.

Indonesia's bauxite production continued to increase in 2001 to 1.24 million MT from 1.15 million MT in 2000 after significant declines in 1995-1997. Export volume, however, declined slightly to 1.22 million MT from 1.24 million MT in 2000, while export earnings dropped slightly to US $13.36 million from US $13.44 million in 2000. Antam, Indonesia’s sole producer of bauxite from its open pit mines in the Kijang area, Bintan Island, markets bauxite only to Japan and China.

SOURCE: PT Aneka Tambang.

Antam is continuing its efforts to develop its Tayan mining concession in West Kalimantan, an area estimated to contain 117 million tons of bauxite based on initial exploration results. (This compares to Antam’s existing bauxite mine on Bintan island, which produces one million tons annually.) Foreign investors in the Tayan aluminum project are awaiting the establishment of a joint-venture company with Antam. In the proposed arrangement, Antam would own 51 percent, with the remainder to the private-sector partners, reportedly from Japan. Besides partial ownership of the project, the prospective foreign investors also desire local government assurances of support and non-interference, following their increased authority to manage their own natural resources. If Tayan produce up to 5 million tons of bauxite annually, the mining project would operate for 25 years.

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