Although both Newmont Mining and Freeport-McMoRan Copper & Gold contend a new Indonesia export tax is in breach of their Contracts of Work with the Indonesian government, Freeport officials stressed they prefer to keep negotiating with the government, rather than seek international arbitration.
During a conference call with analysts Wednesday, FCX CEO Richard Adkerson expressed his concerns with a “new regulation that we did not anticipate that was a surprise to us that the Ministry of Finance of the government imposed a duty on exporting minerals including copper concentrates and there is a progressive duty that’s now in place.”
Adkerson explained that Freeport has historically been one of Indonesia’s largest income tax payers, “many years the largest. We would estimate that we pay $15 billion in taxes, royalties, income taxes royalties and other taxes to the government over the life of the contract and under the contract we would be paying very large amounts going forward.”
“The announcement and regulations that have been adopted today talk about a progressive royalty starting at 25% going to 60%, in steps through the middle part of 2016 and then it talks, beyond that, of a ban on exports,” he said. “…If you were to apply those rate to the gross value of our concentrate exports, it’s a very large amount that would be incremental to the very large payments we are already making to the government.”
“And that is what we are engaged in discussions about, the fact that it’s inconsistent with our contract of work and that the amounts would result in a very large amount going to the government,” Adkerson observed.
Adkerson also noted that there are only a limited amount of opportunities to produce copper concentrate in Indonesia. “We are currently processing about 40% of our output from the Grasberg operations of PTFI at the Indonesia smelter, so that 40% will not be subject to any export duty.” However, Freeport does not sell copper concentrate and gold concentrate separately at its Indonesia smelter, “but we are waiting to see how this regulation will work and then how we can reach an understanding with the Indonesian government about how to reconcile this regulation with our contracted work and what is the basis for us to go forward.”
Freeport executive, Jim Flores, observed that smelter construction cost has tripled, which makes the economics of Freeport building another new smelter in Indonesia “a challenge, and that’s what we have got to talk with the government about.”
If all else fails, Freeport’s contract with Indonesia provides for international arbitration “and that’s a protection that we consider important for our contract,” Adkerson stressed, adding “it’s not something we see as an attractive course of action. The much more attractive course of action would be to find a mutually agreeable resolution to it with the government.”