Freeport Indonesia, subsidiary of US-based natural resources company Freeport McMoRan Copper & Gold Inc, is optimistic that the Indonesian government will extend the company’s contract to operate the Grasberg mine in Papua (eastern Indonesia). This mine is the world’s largest gold mine and third-largest copper mine. The current contract between the Indonesian government and Freeport Indonesia expires in 2021. However, Freeport is currently in need of some certainty before investing a large amount on mining operations and smelting facilities.
Grasberg Mine Contract
Recently, Freeport Indonesia Chief Executive Rozik Soetjipto said that the company intends to invest USD $7.1 billion in the Grasberg mine provided that the current contract can be extended by 20 years. This investment amount is on top of the USD $9.8 billion it plans to spend between the years 2012 and 2021 (particularly for the development of underground mining facilities). However, the problem is that the current Indonesian government is not allowed to decide about an extension of the contract. Based on earlier agreements, two years before expiration of the contract in 2021 there can be held negotiations about an extension (thus from 2019) between both sides. Nevertheless, Soetjipto said that the government has given a signal that extension of the contract is likely (what Soetjipto means by signal is unclear).
New Mining Law & Resumption of Freeport Indonesia's Copper Exports
With Law 4/2009 on Mineral and Coal Mining (Minerba), also known as the new Mining Law, the government of Indonesia decided to take a more protectionist approach in the country’s mining sector. This law includes limits to concession areas for miners, stipulates an increase in government royalties, and foresees larger domestic ownership through share divestment. The new law also stipulates a ban on the export of unprocessed minerals, forcing miners to process the material domestically first (thereby boosting the establishment of domestic processing facilities to produce mining products with added-value). This ban was introduced in January 2014 and caused a storm in Indonesia’s mining sector as it mostly depends on raw commodity exports. Moreover, due to a lack of domestic processing facilities there was no way to process all raw materials, resulting in saturated stockpiles of raw minerals. Although the ban had already been announced in 2009, miners in Indonesia were unwilling to construct processing facilities (downstream industries) as they expected the government would scale back from implementation. Moreover, a lack of power and infrastructure in remote areas (where most mines are located) were a reason not to invest huge funds on smelting facilities. The government only scaled back slightly by easing some restrictions.
In late July 2014, Freeport Indonesia was allowed to resume copper concentrate exports after a six-month standstill as it had signed a new deal with the Indonesian government. Under this deal, Freeport is allowed to export copper concentrates up to 2017 but in return has to pay higher royalties (3.75 percent for gold, 4 percent for copper and 3.25 percent for silver), construct a smelter and pay a 7.5 percent tax on copper concentrate exports (this tax will be phased out when Freeport’s smelter is for 30 percent completed). Potential locations for the smelting facilities are Gresik (East Java) and Papua. The government emphasized that these smelting facilities should be completed by 2017. Groundbreaking for the smelter construction is expected at end-2014 and will require total investments of about USD $2.5 billion.
Although Freeport Indonesia did not provide a forecast for exports in the remainder of 2014, Indonesia’s Ministry of Energy and Mineral Resources as well as the central bank (Bank Indonesia) predict that the company will export between 750,000 and 756,000 tons of copper concentrate in the second half of 2014, worth approximately USD $1.5 billion. This will have a good impact on the country’s troubled trade and current account balances.
Regarding share divestment, the Indonesian government requested that 30 percent of Freeport Indonesia’s total enlarged share capital will go to either the central government (which already owns a 9.36 percent stake in the company), the local Papua government or private Indonesian businesses. Freeport is also considering an initial public offering (IPO) on the Indonesia Stock Exchange.