Energy and Mineral Resources Minister Ignasius Jonan said it repeatedly at a recent briefing with foreign reporters on the Indonesian government’s recent changes to mining regulations: “What we are trying to do is add value to our minerals for the benefit of the people of Indonesia. The goal of the government is to process all our natural resources.”
Indonesia’s controversial value-added mineral policy, born with the passage of the 2009 Mining Law and now cemented in place by smelter requirements and export restrictions, is heartfelt and in many ways understandable from an economic perspective.
But the refusal of President Joko Widodo’s administration to bend on new divestment rules has many analysts wondering whether it spells the beginning of the end for US copper and gold mining giant Freeport McMoRan Inc’s nearly five-decade association with Indonesia.
With copper at least, the Indonesian government’s policy has never made a lot of sense given the fact that the 300,000-ton Mitsubishi-run smelter in Gresik, East Java, already provides enough refined copper to meet all of Indonesia’s needs and could supply most of the Association of Southeast Asian Nations as well.
Jonan and deputy minister Archandra Tahar lapse into silence when it is pointed out by reporters that while the smelter has been in operation for two decades, in its location north of the port city of Surabaya, no ancillary industries have developed around it.
Nor can either explain why the country’s two biggest miners, Freeport and PT Amann Mineral Nusa Tenggara, are required by the government to build new smelters to refine their remaining concentrate into cathodes when the process only adds 4%-5% to copper’s value – compared with 40% for nickel.
New mining regulations issued on January 12 also dictate that Freeport can only continue exporting concentrate if it converts its current Contract of Work into a special business license, under which it must divest 51% of its shares to local interests within 10 years.
That alone is a likely deal-breaker. Freeport’s 1991 contract does in fact establish a timetable under which the company should have handed over a 51% stake to Indonesian entities by 2011. But the provision was negated by a subsequent 1994 regulation allowing foreign invested firms to retain a controlling interest.
Freeport now says it won’t go beyond divesting a further 20.64%, on top of the 9.36% currently held by the government. Until that issue and an agreement to a contract extension beyond the current expiry date of 2021 are resolved, exports from its Grasberg mine in remote Papua province will remain suspended.
When a total ban on concentrate exports was introduced in January 2014, Freeport’s initial reluctance to build a US$2.7 billion smelter as a condition for having the suspension lifted cost Indonesia more than US$900 million in lost tax and other revenue.
This time, the government is ready to issue a six-month temporary export permit but officials say it will depend on whether Freeport is prepared to sign a letter agreeing to the change to a special license.
Freeport is working on the bottom of its two-kilometer-wide pit in Papua province, the sweetest spot of all for rich copper and gold grades, as it undergoes a US$17.2 billion conversion to a completely underground mine, which was originally timed for this year.
That likely won’t happen until the two sides can find a way around the current impasse. Since January 12, Freeport has been forced to scale back its operation to a point where it is only producing enough concentrate for the Gresik smelter and may eventually have to lay off as many as 9,000 workers.
Beyond a temporary export permit, the situation does not look hopeful. The government’s take-it-or-leave-it attitude suggests it is prepared to wait out the company, perhaps as far as 2021, when, as one senior economic minister said in an interview “the mine will be ours.”
Back in the mid-1990s, there were 150 junior mining companies in Indonesia. Today there are just five, with a few Indonesian-owned. The government’s onerous new processing rules give them little hope of progressing past the discovery phase of a new mining project or interesting a larger company to do so.
Compare that to the Democratic Republic of the Congo, a country still in the throes of civil war, much less prospective and with a much smaller pool of skilled labor, where 19 major mining companies are now actively exploring for copper and other minerals.
Another point of contention is international arbitration, which is provided for in Freeport’s current contract but not in the new licenses. That would leave the company with no legal recourse if Jakarta decides not to renew its contract in five years’ time.
The company is now trying to negotiate a separate stabilization agreement, to be signed at the same time as the conversion to the license regime, which would ensure the current provisions in the COW – including arbitration – remain in effect.
The 1991 contract says Freeport is entitled to apply for two successive 10-year extensions, adding that the government should not “unreasonably withhold or delay such approval” – a phrase that would likely be a central debating point at any arbitration hearing.
While company lawyers are now studying the arbitration option, it is probably the last thing Freeport wants to do considering it would irreversibly destroy any remaining goodwill between the company and government.
The situation could get heated fast. The Widodo government appears to be in no mood to make concessions on its new regulatory framework. That attitude is likely to harden the closer Indonesia gets to general elections in 2019, where Widodo is expected to run for re-election.
Yielding to a foreign mining company, particularly one regarded as Public Enemy No 1 in some circles because of its past association with former president Suharto, would be political suicide in a country where economic nationalism has never been in such full flower.
Jonan’s refrain about Indonesia taking greater control of its natural resources has made it increasingly clear – if it was not before – that Freeport was always going to be the test case and that for the government there will be no retreat.
Freeport’s position is hardening as well. Its largest individual shareholder, billionaire investor Carl Icahn, who took an 8.5% stake in the company in August 2015, has since presided over a major fire sale to reduce the firm’s US$20 billion debt brought about by a mistimed diversification into oil and gas that cost long-serving chairman James Robert Moffett his job.
Now a special adviser US President Donald Trump on regulatory reform, Icahn has reportedly been following events in Indonesia with close interest. According to insiders, his patience – and that of fellow board members – is wearing thin.
When he took Trump’s advisory job last December, Icahn told reporters: “It’s time to break free of excessive regulation and let our entrepreneurs do what they do best: create jobs and support communities.” He will not like what he sees in Indonesia’s ever-changing regulatory jungle.
Indonesian officials say they are prepared for the worst, including arbitration and the potential closure of Freeport’s Grasberg mine. What is not so clear is whether it can deal with the social unrest that will likely follow in Papua if tens of thousands of miners are suddenly laid off as a result.
John McBeth, a former correspondent with the Far Eastern Economic Review, is a Jakarta-based columnist with over 45 years’ experience covering Southeast Asia.
The government is right. When all of the mineral is gone the country will be left with a hole in the ground and Freeport will take whatever is not nailed down and move to some other location. Better to leave it in the ground than give it away to an american company.
And shoot the tens of thousands of miners that are suddenly laid off?
They should take the money and diversify the economy, make straw hats for instance.
I , unlike you , have worked in the Mining industry all over the world for the last 52 years. Believe me when I tell you, countries are better off leaving it in the ground. Look at Nigeria. Very few countries take the royalties from their mineral resouces and move their country forward. Norway is one. But where in Latin America, Africa and third world countries has that happened. I have been there and done that and I am telling you, better to leave it in the ground, and leave the people to what they have been doing for the last 1000 years. The only people who make money on mining projects, are the promoters, and shareholders, as that old country and western song goes, the foreigners got the gold mine and the people got the shaft. The only thing that poor countries get when they give an off shore mining company a foot hold in their country is massive polution, water, land and air, police state security forces and robbery.
Thomas Daniel Kuhn
When all the minerals reserves are depleted at grasberg the Indonesian government would have collected 60 to 100 billion US dollars in taxes royalties and other revenues to use for its people. ( how they choose to use that huge amount of money is questionable considering the corruption in Indonesia ) That’s 60% of the profit made from this reserve whilst investing 0% , Freeport will collect 40% of the total profit of this reserve while having to provide 100% of the capital to build and construct it.
That’s a pretty good deal in any country 1st or 3rd world. Trust me I know I have also worked internationally in this game for many years.
Thomas you have worked in mining for 50 years plus, you would obviously know that to build the largest UG mine in the world takes a decade or two to develop then construct to a production stage.
Billions invested now in production you may finally see a return on that massive initial investment if the metal prices are in range and the production phase works as designed. That’s a gamble and massive risk that Freeport have made with assurances from the Indonesian government they would get contract extensions for another 20 years.
Now would you think it’s a unfair for a government to agree upon a contract where a company puts down a HUGE capital investment, providing hundreds and thousands of direct and indirect jobs for local Papuan and Indonesian people, with assurances and Guarantees from that signed and agreed COW will not be affected so you have a chance to recover your investment and hopefully make a profit. ?
then just before the mine is nearly developed and constructed they change the regulations and policy restricting the company’s rights to get a return on that investment. ?
demanding them to sign a new amended contract that requires them to hand over 51% of the stock listed company for 0 dollars, with controlling vote on the board, then taking away all and any rights of legal recourse including the international court of arbitration to settle disputes such as this, which basically gives the government of Indonesia legal rights to take control of the mine and all it’s assets and providing 0 security on the return of that massive capital expenditure. ?
Indonesia is not being exploited by Freeport. In fact Freeport is actually being very fair in negotiations and concessions, if you would like to follow up on your comments I suggest you read the COW that’s was agreed upon. ( Google it instead of talking rubbish with zero knowledge to back your reasoning pertaining previous companies taking advantage of and exploiting third world countries,
I can tell you Thomas that is not the case in Papua here and no
Secondly Freeport have done there best in good faith by agreeing to build smelting facilities and other downstreaming revenues the government has asked for, all Freeport ask for is fical security legal security and a fair contract that will provide both Indonesia and Freeport with security, but again the government have made regulation changes to policy after that capital investment is already spent.
That’s not good governance or honest business, its blatant corruption, terribly dishonest, and will frighten of future foreign investment in a country that needs it desperately to drag themselves out of poverty.
If the court of arbitration awards damages to Freeport it will set back the Indonesian people years and years, causing its economy to weaken significantly.
That’s the work of a foolish greedy corrupt government with zero respect for foreign investors and what they have provided for your country.
That will flow on in more sectors than mining I would suspect.
Perhaps, the recent presidential election in the States and who was elected may have a little to do with the Indonesian governments desicion, and your post
And when the mineral is gone, and soon the money, how is that a bennefit to the population. They will have become accustomed to a false standard of living that with the mineral gone will be unsustainable. i will stick with my argument that it is better to leave it in the ground and keep the international mining companies out.
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