Freeport agrees to raise royalties, offers more shares

Posted on July 25, 2012


Rabby Pramudatama, The Jakarta Post, Jakarta | Headlines | Wed, July 25 2012, 5:53 AM


Freeport Indonesia, a subsidiary of Freeport McMoran Copper & Gold will raise its royalty payments and offer more shares to the government, a senior official involved in renegotiating the firm’s contract says.

Deputy Energy and Mineral Resources Minister Rudi Rubiandini said that Freeport Indonesia had agreed to raise its annual royalty payment from 1 percent to 3.75 percent and to give the government an additional 9.6 percent stake in the firm, supplementing its existing 9.6 percent stake.

Rudi said that there was still work to be done, despite the progress. “The renegotiations are still continuing, as there are six strategic issues in the renegotiation.”

The strategic issues still looming over the talks were identified by Rudi as higher royalty payments, the obligation to process ore in Indonesia, the use of local goods and services, divestment, contract extensions and the size of mining areas.

“It is clear that Freeport is still reluctant to discuss the size of mining areas,” Rudi said.

Under the 2009 Minerals and Coal Mining Law, all of the holders of Contracts of Work (CoW) with the government, such as Freeport Indonesia, must apply for mining permits after their current contracts expire.

Meanwhile, mining permit regulations stipulate that the maximum size of an individual plot given to a firm for exploitation must not exceed 25,000 hectares.

Analysts have said that Freeport would likely create subsidiary companies to fulfill production and legal requirements if the firm could not obtain contract extensions or exemptions from the mining permit requirement.

On locally added value, Freeport currently processes part of its copper concentrate at a plant operated by PT Gresik Smelter in Gresik, East Java.

The company said that it might partner with two smelter companies, PT Indosmelt and PT Nusantara Smelting that were planning to build copper smelters in Indonesia.

Freeport Indonesia president director Rozik B Soetjipto told The Jakarta Post that there had been progress in the talks. But he said that no specific amount had been set for the increased royalty payment.

“In general, there has been mutual understanding between the two sides regarding the six strategic issues of the renegotiations, but we have not talked about any specific number or amount,” he said in a text message on Tuesday.

Earlier this year, the government formed a team led by Coordinating Economic Minister Hatta Rajasa to handle negotiations with Freeport, which is Indonesia’s biggest copper and gold miner.

Hatta has previously said that the government hoped to complete all its renegotiations this year, as the team’s working period would end in 2013.

The 2009 Mineral and Coal Mining Law stipulates several obligations for foreign-owned mining companies, such as requirement to divest 51 percent of their stakes to local investors, and to apply for new mining permits when their
contracts expire.

PT Freeport’s initial CoW with the government was signed in 1967.

A second contract was signed in 1991 and will expire in 2021, although the agreement stipulates that it can be extended until 2041.

Freeport’s spokesman said that the company was protected from the regulation to divest 51 percent of its shares to the government by the terms of its long-standing CoW.

Although it is not obliged to divest more shares, Freeport would be ready to offer 9.6 percent of its shares to the government, which already held 9.6 percent, the spokesman said.