Freeport Indonesia, the local unit of US-based energy and mining giant Freeport-McMoRan Inc, will be allowed by the Indonesian government to operate the Grasberg mine in Papua (the world’s largest gold mine and third-largest copper mine) beyond 2021 (when the existing contract expires). Sudirman Said, Indonesian Minister of Energy and Mineral Resources, told reporters that the central government has provided assurances to Freeport. However, it will require a regulatory amendment first before Freeport Indonesia can submit a proposal for extension.
Starting from 2014 Freeport Indonesia has been requesting the Indonesian government to give clarity on whether it can extend the contract to operate the Grasberg mine beyond 2021. However, Indonesian law only allows the start of negotiations about an extension (in the mining sector) two years before the existing contract is due to end (which would be 2019). For Freeport Indonesia it is necessary to have an earlier answer as the company needs to invest heavily to develop underground mining activities at the Grasberg mine. This investment, which should transform the mining site from an open pit to underground mining before 2018, may require a total USD $18 billion. Delaying negotiations would backfire on both parties as production, sales and state revenue would be curbed.
Minister Said stated that the government has provided legal and fiscal assurance to extend Freeport Indonesia's existing mining contract beyond 2021. However, Freeport can only submit its proposal for the Grasberg mine-extension after regulatory amendments are completed. Bambang Gatot, Director General of Coal and Minerals at the Energy and Mineral Resources Ministry, said that the revision is currently being processed and should be completed before the end of the year. After the revision, companies will be allowed to discuss an extension ten years before existing contracts expire. This revision is also conducted in order to make Indonesia's investment climate more attractive after the country's gross domestic product (GDP) growth slowed to a six-year low in the second quarter of 2015.
Reportedly, when the central government and Freeport Indonesia negotiated, a total of 17 points were discussed and agreed upon. Eleven points involved aspirations of local communities and the regional government in Papua, while the six other points involved requests from the central government. These points included share divestment, the increased usage of local components in the company's operations, the development of a smelter to process output domestically, and higher royalties.
Several of these points are part of Law No. 4/2009 on Mineral and Coal Mining (New Mining Law) which was introduced by the Indonesian government in 2009 and caused a shock in Indonesia’s natural resources sector as it includes several new policies that are not in line with existing Contracts of Work and can be labeled 'resource nationalism'. The share divestment requirement means that within ten years from the start of commercial production, there should be majority Indonesian ownership in the mining company. The Indonesian government currently owns a 9.36 percent stake in Freeport Indonesia. However, a further 10.64 percent needs to be divested to the government before 14 October 2015. Another ten percent has to be divested before October 2019.
Secondly, effective per January 2014, Indonesia banned the export of unprocessed minerals. Before export is allowed, miners now have to process their output domestically. This new policy was designed in order to develop downstream industries in Indonesia and start exporting products higher up in the value-chain. However, as domestic smelting capacity was (and still is) underdeveloped, the government decided that some miners (including Freeport Indonesia and Newmont Nusa Tenggara) could resume the export of mineral ore, but only under strict conditions (including higher export taxes, higher royalty payments and the miner needs to show evidence that it is committed to establish domestic smelting facilities).
Shares of New York-listed Freeport McMoRan jumped to a two and a half month high on Thursday (08/10) after news spread that it will have control over the Grasberg mine beyond 2021. Freeport Indonesia currently produces about 220,000 tons of copper ore per per day. Last month, the company cut its forecast for copper concentrate sales in 2015 by 3 percent, primarily on the back of a (El Nino-inflicted) lack of water supply.