Freeport Indonesia Requests New Copper Concentrate Export Permit

Originally, Indonesia's ban on mineral ore exports was intended to be implemented in full force in January 2014; banning all exports of mineral ore from Southeast Asia's largest economy, and, instead, forcing local miners to process materials into higher-value products before exports were allowed (encouraging local miners to build domestic processing facilities).

This ban is part of Indonesia's new mining law that was introduced in 2009. The mining law caused a big shock in Indonesia's mining sector, particularly for foreign investors, as it introduced a much more protectionist approach (for example by limiting foreign ownership in mining companies), with the overall aim of raising revenue and income from the mining sector for the benefit of domestic players (including the government). Alarmingly, several key changes enforced by the new mining law were not in line with the content of existing contracts, a setback for legal certainty in Indonesia and the attractiveness of its investment climate. Miners had to comply with new rules, however, as refusal would imply heavier losses.

However, the ban on mineral ore exports could not be implemented in full force in January 2014 because existing smelting capacity in Indonesia was - and still is - insufficient, implying that a full ban would have resulted in severe losses, including missed state income. Therefore the government allowed the continuation of some mineral ore exports, including copper concentrate, through renewable six-month permits. However, these permits - that are expected to be renewable until 2017 when the full ban should be implemented - come at a price: exporters are forced to pay higher taxes and royalties for the resumption of shipments. Moreover, they need to show evidence of the progress that is made with the development of smelting facilities. Currently, given low commodity prices, miners are generally reluctant to engage in capital-intensive investment in the mining sector.

Regarding smelter development, Freeport Indonesia is currently building a USD $2.1 billion smelter - designed to have an annual capacity of 2 million tons of concentrate - in Gresik (East Java). The development of this smelter is done in cooperation with Newmont Nusa Tenggara (NNT). The recent acquisition of NNT by Indonesian oil & gas exploration and production firm Medco Energi Internasional will not change the partnership with Freeport, according to statements made by Indonesia's Energy Ministry in local newspapers. However, NNT's involvement in this smelter is small, contributing only USD $3 million to total investment. In local media it is reported that NNT will develop its own copper smelter after the take-over.

Read more: Newmont Mining Corp sells its 48.5% stake in Newmont Nusa Tenggara

An official at Indonesia's Energy Ministry said the official request from Freeport Indonesia to obtain another six-month permit has not been received yet. After this request has been received, the ministry will investigate progress made with the development of the smelting facilities in Gresik. In February 2016, progress was estimated at 14 percent only (still far from the 100 percent that means full completion of the facility). According to a Energy Ministry regulation, miners are required to pay 7.5 percent of export duties when progress with the construction of smelter facilities is estimated at between 0 - 7.5 percent. Export duties fall to 5 percent in case progress is estimated at 7.5 - 30 percent, while export duties are scrapped when progress is estimated at more than 30 percent of completion.

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