New Export Rules: Operations Freeport Indonesia in Jeopardy
Uncertainty about the continuation of the company's copper concentrate exports could imply that Freeport Indonesia needs to terminate operations at the Grasberg mine in Papua. Currently, shipments of copper concentrate from the mine to the smelter in Gresik (East Java) have ceased, while the company's storage facilities are full to the brim. Part of workers at the Grasberg mine have been sent home as the processing plant has not been producing any concentrate since Friday (10/02).
Freeport Indonesia spokesman Riza Pratama said the company has not been able to ship any copper concentrate since 12 January 2017, not to the Gresik smelter in East Java and not to nations abroad, after the Indonesian government revised its mineral ore export ban in January.
Per 12 January 2017 exports of nickel ore, bauxite and semi-processed metals such as copper concentrate are subject to specific conditions, ahead of a full ban on exports of raw minerals or semi-processed metals in January 2022. Miners that during the next five years want to export such materials need to show evidence of their efforts to build processing facilities (smelters), while only ore with nickel content less than 1.7 percent and certain grades of bauxite are permitted to be shipped. Meanwhile, companies that still work under the long-standing Contracts of Work (CoW), such as Freeport Indonesia, are required to convert their CoW into a special mining business license (IUPK), a license conform the 2009 Mining Law that has a far more protectionist character compared to the preceding types of mining licenses.
Through the 2009 Mining Law the government wants to reduce Indonesia's dependence on exports of raw commodities and instead generate long-term returns from its abundance of mineral resources. By becoming a manufacturer of high-grade mining products, such as aluminium and copper cathode, the government aims to boost earnings, while creating a more stable economy (that is less affected by sliding commodity prices). Initially, the date for a full mineral ore export ban was set on 12 January 2014. However, there was not enough smelting capacity in Indonesia to allow this move and therefore a three-year delay was announced. In January 2017 the government scaled back again by allowing the continuation of shipments under above-mentioned conditions.
Freeport Indonesia uses its smelter in Gresik, owned by PT Smelting, to process part of its copper concentrate. However, since 19 January 2017 operations have been halted at this smelter due to a labor strike. In March 2017 operations are targeted to resume at this smelter. PT Smelting is for 60.5 percent owned by Mitsubishi Materials, while Freeport Indonesia holds 25 percent.
Although the government of Indonesia has already issued the IUPK to Freeport Indonesia last week, the latter is yet to accept it 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.
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