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18 September 2020 (closed)
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The management of gold and copper miner Freeport Indonesia is optimistic that negotiations with the central government will be completed before the Idul Fitri celebrations in the last week of June 2017. If an agreement is reached, then the case will not require arbitration. Both parties are negotiating over a contract dispute that also prompted the subsidiary of the United States-based mining giant Freeport-McMoRan to wind down operations (and fire staff) at its Grasberg mine in Papua.
The source of all trouble is Indonesia's new mining law that was introduced in 2009. This law introduced a far more protectionist approach to Indonesia's mining sector. And while Freeport Indonesia has been active (for decades) in Indonesia through the long-standing Contract of Work (CoW), the government wants to converse it into a special mining license (IUPK). The IUPK is much less attractive as it requires the miner to establish a new smelter, pay higher taxes and contains the requirement for foreign miners to divest a 51 percent stake in its local operations.
Meanwhile, both sides also need to agree on the extension of Freeport Indonesia's contract to operate the Grasberg mine beyond 2021. Based on the existing CoW (which was signed in 1991), Freeport Indonesia can extend the contract. However, the current government seems unwilling to do that unless Freeport Indonesia complies to the new law.
The new mining law also includes the ban on exports of mineral ore. However, the ban has not been implemented in full force. Miners that obtained the IUPK are temporarily allowed to continue mineral ore exports provided they are committed to establish a local processing facility, pay higher export tariffs and royalties. In the case of a foreign miner, it needs to (gradually) sell shares to an Indonesian party until at least 51 percent of the shares are in the hands of one, or more, Indonesian parties (the latest a decade after operations started).
Indonesia's Energy and Mineral Resources Ministry has already granted Freeport Indonesia a IUPK that allows the miner to export 1.11 million wet metric tons of copper concentrate for one year. However, both parties have a six-month period to settle various issues, including divestment, smelter development, and on investment stability. Earlier, Freeport Indonesia said these requirements violate its existing contract (CoW) and therefore threatened to seek international arbitration. Government officials were not amused by this statement and threatened it could mean the end of Freeport in Indonesia. Since then, both parties soften their tone and now say arbitration is the last option.
For Freeport Indonesia it is also important to obtain certainty whether it can continue operations after 2021 when its existing contract expires. To enhance infrastructure (especially underground facilities) it needs to invest heavily (up to USD $22 billion) but obviously will not do that if extension is not possible.
Currently, Freeport McMoran Copper & Gold Inc. owns a 81.28 stake in Freeport Indonesia, directly, and a 9.36 percent stake, indirectly, through subsidiary Indocopper Investama. The Indonesian government owns the remaining 9.36 percent.