Freeport Indonesia, a local unit of US mining giant Freeport McMoran, has sunk $4 billion to support its underground mining activities in Papua while it awaits certainty over its contract extension after its concession ends in 2021, a top executive at the company said.
Freeport has built a 500 kilometer long tunnel and other facilities for its underground mining to support its current activities and exploit the 10,000 hectares of its concession area in the Grasberg mine in Papua.
Freeport sealed its basic agreement with the government of Indonesia in 1967 under the regime of President Suharto, which was inked under the second generation of contract of works before renewing the deal in 1991.
The Indonesian Copper and gold miners new chief Maroef Sjamsuddin explained to chief editors invited to Tembagapura, Papua, that the US controlled miner has invested up to $11 billion since it began commercial operations.
The miner plans to invest more in Indonesia, about $17 billion to build a Copper smelter and develop its underground gold and Copper mines in the Grasberg mine complex, about 60 kilometers from Mimika, the capital of Mimika Regency of Papua.
"Only when there’s certainty, this new investment will be disbursed," said Maroef, a retired two starred general of the air force and former deputy to chief of the nation’s intelligence agency (BIN), in a discussion with chief editors on Saturday.
Previous news reports said-Freeport will build a smelter in East Java that would cost more than $2 billion and will spend another $15 billion in a multi-year investment plan to expand its underground mining operation at Grasberg.
However, due to the slow production from 2008 of its open pit in Grasberg, Freeport has developed its infrastructure to support its underground mining activities.
By September this year, two huge fans that needs 2,200 Kilowatts are expected to start operating to supply fresh air for underground mining workers, such as the stone breakers and those operating the conveyors.
In normal conditions, Freeport is capable of processing about 200,000 to 240,000 tons of ore per day on average. It saw its peak production in 2008, when the average production could reach 238,000 tons per day. However, production has declined after lawmakers approved mining laws in 2009 that prohibited the export of unprocessed mineral from Southeast Asias largest Economy after January 12 last year.
The government wanted to boost the value of commodities extracted from Indonesia. Additionally, the government also wanted miners to build smelters, renegotiate contracts and change their mining permit from a contract of work with equal standing between the government and miner to a special mining business permit CIUPK) which reduced some of the miners privileges and legal rights.
The biggest issue that arose from the implementation of the policy was that for a long time for miners in Indonesia like Freeport, there was a shortage of smelters in the country even if they wished to process all of their ore before exporting it Other problems were that it had been in long term contracts with other smelter operators and still had to honor its obligations under those contracts.
In response, Freeport argued that since the initial deal with Indonesia was to allow for an export of concentrates and that the deal with these international smelters were signed earlier, Freeport should therefore be allowed to honor their commitments until the end of their deals.
At the end of President Susilo Bambang Yudhoyono’s term, Indonesia saw an increasing economic nationalism sentiment, which resulted in policies that sought to strengthen the government’s position over miners.
After going through tough negotiations, Freeport was able to secure a six month extension of its export permit through a memorandum of understanding on contract re-negotiations in January after it settled on Gresik as the location of its new smelter which plans to produce up to 2 million tons of processed metal.
Racing with Time
However, Freeport remains anxious about the future of its investment since their current contract will end in 2021 and according to the current government regulations, a miner will only be eligible to request an extension in 2019.
In anticipation of this, Freeport is racing ahead of the 2017 depletion of surface resources at its Papua mine site, forcing it to go all out for activities in underground mining.
"We need certainty, otherwise, Freeport’s production falls by 70 percent by 2017," said Maroef.
Minister of Energy and mineral Resources Sudirman Said has been quoted saying "their output is already slowing, that is not what we want" He further added that the company should wait until 2019 to make a decision whether to invest or not as it might see a sharp decline in production.
In 2014, productions of Freeport Indonesia has declined to an average of 118,000 tons per day from 179,000 tons. These figures are startling compared to other contract of work holders who were unable to secure support and re-negotiate their contracts wherein Freeport has been allowed to export up to 580,000 tons of concentrate for January-July.
However, the government is still pushing for progress over Freeport’s commitment to build the Gresik smelter, promised by Freeport The Gresik smelter, which has a planned capacity of 2 million tons, will support Freeport capabilities to process ore concentrates to 3 million tons per year.
The production of the Gresik smelter adds to their existing pressure since Freeport’s production reports have been less than promising. Out of the average production of 179,000 tons of ore produced per day last year, only 50,000 tons of ore have been cultivated from the underground mining.
By plan, in order for investors to be convinced that a further massive investment will remain strong, Freeport is targeting that by 2017, it would be capable of producing 160,000 tons of concentrate per day from its four underground mining sites, which will be the biggest in the world.
Maroef said his company has sent a letter to the Energy and mineral Resources Minister to ask for support for a contract extension after 2021 In July, Freeport must also deal with the ministry again to extend its 6-month export permit.
The president director said uncertainty over a permit extension in the upstream sector would impact negatively on the company adding that the plan to build a smelter with a capacity of 2 million tons per year could be wasted.
Freeport Wants an Extension until 2041
Freeport has agreed on major changes on their part in its contract, as it seeks to ensure a contract extension until 2041. However at present, they are only permitted to extend the contract for a maximum of 20 years, which is divided into a two 10-year term.
However, Freeport seeks to improve their end of the bargain. For example, the company has agreed to increase their royalty fees to the government for Copper to 4 percent of total sales from 3.5 percent previously, for gold to 3.75 percent from 1 percent previously, for silver to 3 25 percent from 1 percent previously.
Freeport also seeks to improve their income tax levies which are at 35 percent, higher than 25 percent that companies in Indonesia typically pay.
The company has also agreed to divest more shares in Indonesian entities, where they have increased their obligations to only sell 9.36 percent to 30 percent. Additionally, the company has also agreed to increase local content use to 90 percent from 71 percent previously.
The US-controlled company also had said that within 42 years of its operations in Indonesia, it has contributed to the state up to $15.6 billion in direct contributions and $29.5 billion in indirect contributions.
Direct contributions include taxes, royalties, dividends and other liabilities, while their indirect contribution have included salaries to their workers, domestic purchases and other investments that have stimulated growth in the region.
Maroef said Freeport has created jobs for nearly 30,000 people in the country of which 97.4 percent are from Indonesia.
"The engineers working in underground mining are all from Indonesia," he said. Of the total Indonesian workforce, 27percent are native Papuan and more than 95 percent of the gross revenue of the Mimika regency comes from Freeport.
Maroef also revealed that from 1992-2014, the company’s total investment of $1.3 billion has also been enjoyed by the public in their projects to build roads, an airport schools and hospitals.
According to Muhammad Said Didu, the head of the energy ministry’s smelter development acceleration, the ministry is looking to have a legal breakthrough to ensure that Freeport attains certainty in the renewal of their upcoming permit.
State Secretary Pratikno said currently, under the new mining law, the standing position between the government and Freeport has changed "The position of the state is stronger," said Pratikno. Still, he acknowledged that "a one sided action, such as terminating the contract [towards Freeport] would not settle problems. It would only create new problems, and the Economy in Papua will suffer... Investment climate [will] get hurt and the geo-political position of Indonesia [will] get weakened," he said.
Maroef said the company has sent a complete proposal to the energy ministry to ensure it can be granted a concession until 2041, and has reported all of its activities to the minister, but says that it’s up to the president to decide Indonesia’s stance over the matter. "The minister will discuss this with the president" said the president director.
Sumber : JakartaGlobe, June 24, 2015