The dispute between Freeport Indonesia and the Indonesian government may escalate now the former said it considers to seek international arbitration over the government's alleged breaching and violation of the existing Contract of Work (CoW) between both sides. Ever since the passing of Law No. 4/2009 on Mineral and Coal Mining (New Mining Law) there has been a high degree of uncertainty in Indonesia's mining sector.
The New Mining Law introduced several protectionist policies such as a share divestment obligation for foreign companies (which basically means that after a ten-year period mining companies need to be majority-owned by a domestic party). Moreover, the New Mining Law introduced an export ban on mineral ore in order to reduce the nation's dependence on exports of raw commodities and seek more revenue by only allowing exports of processed mining products.
The main problem, however, is that these new policies conflict with the existing Contracts of Work between foreign miners and the government. Freeport Indonesia, the local unit of mining giant Freeport-McMoRan Inc that has been present in Indonesia since the 1960s, is one of the victims. Although initially Freeport Indonesia was willing to renegotiate several conditions in its CoW with the government to make the contract more in line with the New Mining Law, there occurred a problem after the government, again, revised regulations regarding the export of mineral ore.
Last month the Indonesian government announced that those companies that change their CoW into a special mining permit (IUPK) are allowed to resume exports of certain raw or semi-processed metals (including copper concentrate) for the next five years. Also several other requirements need to be fulfilled including the presentation of evidence of progress made with smelter development. Although the Indonesian government has already issued the IUPK to Freeport Indonesia in early February 2017, Freeport is yet to accept the permit as it demands the same fiscal and legal protection that was included in the preceding contract. Reportedly, the new IUPK implies Freeport Indonesia needs to pay higher taxes and royalties, as well as to divest a stake up to 51 percent.
In a message to Indonesia's Energy and Mineral Resources Ministry, Freeport Indonesia stated that "breaches and violations of its CoW by the government imply severe unfavorable consequences for all stakeholders" in case the issue is not resolved.
Freeport Indonesia said "the suspension of capital investments, a significant reduction in domestic purchases of goods and services, and job losses for contractors and workers" are a real possibility because the miner is forced to adjust its business costs to match constrained production. Last week, Freeport Indonesia already said it would need to terminate operations at the Grasberg mine in Papua and cease shipments of copper concentrate from the mine to the smelter in Gresik (East Java) as the company's storage facilities are full to the brim. Part of workers at the Grasberg mine have been sent home. Richard Adkerson, CEO and vice Chairman of Freeport-McMoRan Copper & Gold Inc, said about 10 percent of the expat workers have been laid off, while more contract workers will be released this week. There are about 32,000 workers at Freeport Indonesia. However, only 12,000 workers are employees (the remainder are contractors).
Another issue is uncertainty about renewal of contracts in 2021. After Freeport Indonesia and the government extended their CoW in 1991 for another 30-year period (with the option for an additional 30-year period hereafter), the miner has invested USD $12 billion in Indonesia. Freeport Indonesia now needs to invest heavily in underground facilities but considering the CoW expires in 2021 the miner wants to secure guarantees on its operations beyond 2021 before conducting huge investments.
Ignasius Jonan, Indonesia's Energy and Mineral Resources Minister, warned Freeport that arbitration could harm the relationship between both sides. He added, however, that it would be a better step than threatening to fire workers.
Meanwhile, Freeport Indonesia President Director Chappy Hakim resigned from his post over the weekend. It was not revealed what the exact reasons of his resignation were.