By Sara Schonhardt
JAKARTA -- Freeport-McMoRan Inc.'s standoff with Indonesia over
the giant Grasberg copper and gold mine is entering a new phase, as
the company scales back operations while trying to force a
resolution to the dispute.
Last month, the U.S. miner threatened to take Indonesia to
arbitration, saying new rules the country imposed on miners in
January violated the terms of an operating agreement struck in 1991
that runs through 2021.
The rules are part of a broad effort to gather more revenue from
the mining sector. Under the rules, Freeport is banned from
exporting a form of unrefined copper until it agrees to new
operating rights that would eventually force it to cede control of
Grasberg, the second-largest copper mine in the world, to
Indonesian entities.
With the two sides at loggerheads, the miner lowered its output
target for Grasberg, shelved investment plans and began laying off
workers.
The showdown has reached a critical juncture. A prolonged
standoff would be a financial blow to Freeport, which derives
roughly a third of its copper output from Indonesia. The mine is
readjusting its operations to 40% of its normal capacity.
Indonesia stands to lose hundreds of millions of dollars in
annual payments, and its demands for greater control could further
imperil already dwindling investment in its resources sector,
experts say. The dispute also could undercut Indonesian President
Joko Widodo's campaign to attract foreign investment for
infrastructure in a nation stretched across 18,000 islands. The
wrangling over Grasberg already has contributed to a rise in global
copper prices, which could experience even more upward pressure if
the conflict drags on.
"In this current controversy...we're either going to all win, or
we're all going to lose," said Freeport Chief Executive Richard
Adkerson. "And unfortunately we're on a path right now of where
we're all potentially going to lose."
As part of its push to earn more from the mining sector,
Indonesia banned ore exports and placed restrictions on exports of
mineral concentrates in 2014 to push companies to invest in
domestic smelting.
Now, Indonesian officials say the operating agreement for
Grasberg needs to be updated to reflect changes in the country's
legal landscape. Indonesia has asserted more control over foreign
investment with the aim of redistributing economic benefits in a
more equitable manner, an effort that began after the fall of
dictator Suharto.
Freeport has set a deadline of mid-June to start arbitration
proceedings and seek damages if it can't come to an agreement with
Jakarta. Indonesian officials are standing firm.
"Nobody wants to play hardball," said Luhut Pandjaitan,
coordinating minister for maritime affairs, which oversees the
ministry of energy and mineral resources. "But of course we also
feel that after 50 years we also have to consider the people of
Indonesia." Freeport has operated in Indonesia since the 1960s.
In a statement issued March 7, the ministry said it supports
foreign and domestic investment and respects the content of
existing agreements. It said the divestment obligation was meant to
"facilitate" mining companies to join with the government and
"bring justice" for the people of Indonesia as the "absolute"
owners of the country's resource wealth.
Sitting atop a mountain in western New Guinea island, Grasberg
has been a windfall for both Indonesia and Freeport. The company's
success at Grasberg allowed Freeport to grow to become the world's
largest publicly listed copper miner -- and Indonesia's largest
taxpayer.
Indonesia is requiring that Freeport agree to divest enough
shares so that the company has only a minority stake in its
Indonesian unit as part of new rules that will allow Freeport to
resume the export of copper concentrates. Freeport currently has a
90.64% stake and has agreed to divest up to 30%.
The new rules also would require Freeport to build a new smelter
by 2022 and pay higher taxes.
Indonesian officials have signaled some willingness to be
flexible about the terms and timing of the divestment. It can be
done in stages over several years, Mr. Pandjaitan said.
Freeport says the rules violate its operating contract and it
won't give up its rights to a mine in which it has invested $12
billion.
Freeport is holding on while other miners have left Indonesia.
Last year, Newmont Mining Corp. and BHP Billiton Ltd. sold off
interests in their Indonesian units to local companies and exited
the country, citing heavier regulation as a factor.
Mining revenue as a share of economic growth in Indonesia has
dropped since exports were restricted. Exploration expenditures
have declined globally in recent years, as well. Companies now are
more wary of investing in countries where the risks are perceived
to be high amid economic uncertainty and volatile commodity prices.
That has raised concerns about the prospects for Indonesia's mining
industry.
"The more these sort of stories come about and the more
political risk is created from arguments with Freeport, the less
new investment will come in," said David Manley, a senior analyst
at the National Resource Governance Institute, a not-for-profit
that monitors the global oil, natural-gas and mining sectors.
The effects of the standoff between Jakarta and Freeport already
have spilled over into global markets. The export halt in Indonesia
and a strike at the Escondida mine in Chile have tightened world
supplies. Copper prices are up more than 7% so far this year.
Freeport lowered its mining target for Grasberg to 95,000 tons
of ore a day for 2017 from its previous forecast of 140,000 tons
and shelved plans to invest $1 billion a year to move more mining
underground as the open pit at Grasberg reaches the end of its
production life. The company has started laying off some of the
contract workers who make up about two-thirds of its 32,000 workers
in Indonesia.
"Over the years -- and we've literally been negotiating this
situation on the contract for over five years now -- we've tried to
make concessions, and various times we'll get close to a resolution
but it has not happened," Mr. Adkerson said.
Write to Sara Schonhardt at Sara.Schonhardt@wsj.com
(END) Dow Jones Newswires
March 18, 2017 07:14 ET (11:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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