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Freeport Indonesia halts concentrates production; opposes tax scheme under IUPK

JAKARTA ( – PT Freeport Indonesia has halted the production of concentrates since February 10 as it is yet to receive export permit from the Indonesian government to export ores and concentrates as well as workers strike at PT Smelting Gresik in Gresik, East Java, in which Freeport holds 25% stakes.

Spokesperson of PT Freeport Indonesia Riza Pratama said Smelting processed concentrates produced by Freeport Indonesia. However, demonstration at the plant has prompted the management to stop receiving concentrates from Freeport.

“Since Friday (February), the processing plant has halted producing concentrates,” said Riza Tuesday (Feb. 14).

He said Smelting absorbs 40% of Freeport concentrates output, while 60% areexported. However, up until now, Freeport is yet to receive permit from the Indonesian government to export unprocessed minerals.

This situation forced Freeport Indonesia to halt production due to limited storages to store the concentrates. As a result, Freeport has sent home some its senior managers on the ground. Some mining contractors have also been sent home.

Riza hopes the Indonesian government grants export permit to Freeport as the existing Contract of Works will expire in 2021. Under the recent ruling, Freeport and other miners, will only be allowed to export unprocessed minerals should they change the CoW contract scheme to Special Mining Permit (IUPK).

Last week, the Energy and Mineral Resources Ministry has decided to change Freeport’s CoW into IUPK. However, Freeport Indonesia is yet to fully agree as the government does not assures long stability of Freeport’s investment.

The government also wants tax scheme is imposed in accordance with IUPK ruling, however, wants the tax scheme to be still in line with the CoWs.

Freeport has actually begun constructing a smelter plant with capacity of 2 million tons in Gresik, East Java. However, the construction has showed little progress.

Freeport’s stand point

The Indonesian government issued new regulations in January 2017 to address exports of unrefined metals, including copper concentrates and anode slimes, and other matters related to the mining sector. The new regulations permit the continuation of copper concentrate exports for a five year period through January 2022, subject to various conditions, including conversion from a contract of work to a special operating license (an IUPK), commitment to completion of smelter construction in five years and payment of export duties to be determined by the Ministry of Finance.

In addition, the new regulations enable application for extension of operating rights five years before expiration of the IUPK and require foreign IUPK holders to divest 51 percent to Indonesian interests no later than the tenth year of production. Export licenses would be valid for one-year periods, subject to review every six months, depending on smelter construction progress.

The January 2017 regulations permit the export of anode slimes, which is necessary for PT Smelting (PT-FI’s 25 percent owned copper smelter and refinery located in Gresik, Indonesia) to continue operating. PT Smelting is seeking to renew its anode slimes export license. Delays in obtaining this license could further impact PT-FI’s operations in a significantly negative fashion.

Following the issuance of the January 2017 regulations and discussions with the Government, PT-FI advised the Indonesian Government that it was prepared to convert its COW to an IUPK, subject to obtaining an investment stability agreement providing equivalent rights with the same level of legal and fiscal certainty enumerated under its COW.

Freeport McMoRan, the parent company of FI, said this is consistent with a letter to PT-FI dated Oct. 7, 2015, in which the Government warranted that, following the issuances of new regulations, it would promptly grant an extension of Freeport Indonesia’s contract with the same rights and same level of legal and fiscal certainty contained in the COW.

In addition, FI advised the government that it is committed to commence construction of a new smelter following approval of the extension of its long-term operating rights. PT-FI requested that concentrate exports be permitted without the imposition of a duty while the new license and stability agreement are negotiated. The COW would remain in effect until it is replaced by a mutually satisfactory alternative.

To date, the Indonesian government has not granted continuation of exports. The government has indicated that in order to export its concentrate production, Freeport would be required to immediately convert to an IUPK, forgo its current rights to fiscal and legal certainty and commit to a new smelter prior to completing a long-term investment stability agreement.

Freeport Indonesia has advised the Indonesian government that it cannot accept these conditions unless a mutually satisfactory replacement agreement is completed, it said.

Freeport warned that a continuing delay in obtaining rights to export its copper concentrates will require the company to undertake near-term actions to reduce production to match available domestic capacity at PT Smelting, which processes approximately 40 percent of FI’s concentrate production.

Under the reduced operating plans, FI will be required to significantly adjust its cost structure, reduce its work force and spending with local suppliers, and suspend investments on its underground development projects and new smelter.

For each month of delay in obtaining approval to export, FI’s share of production is projected to be reduced by approximately 70 million pounds of copper and 70 thousand ounces of gold.

Under its COW, FI has specified rights to export copper concentrate without restriction or payment of export duties. PT-FI is considering alternatives to enforce its contractual rights while it continues to work in good faith to reach a mutually satisfactory agreement with the Indonesian Government. (*)

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