Indonesia introduced in January its controversial ban on exports of unprocessed minerals and ore. Under a revision of the tax, Freeport will pay a 7.5 percent duty on its copper concentrate exports, but that rate falls as it spends on its smelter, hitting zero once investment in the project exceeds 30 percent of total cost.
The ban on exports forced Newmont to declare force majeure on copper sales from Indonesia earlier this year, putting roughly 80 percent of its Batu Hijau mine employees on leave at reduced pay. Disputes and confusion over the new mining rule have halted closely $500 million of monthly mineral ore and concentrate exports.
Although this ban had been announced several years earlier, few expected the government to implement it as it was not in line with existing contracts of work between miners and the government. Moreover, Indonesia still lacks sufficient domestic processing facilities (smelters), implying that mining exports would plunge considerably. However, a last-minute government amendment to the ban provided temporary room for adjustment. If a miner can provide evidence that it is serious about building smelting facilities, then exports of unprocessed minerals are temporarily allowed (until 2017). However, the miner will have to face progressive export taxes (increasing from 25 percent in 2014 to 60 percent in mid-2016) and higher royalties.
The world’s largest publicly traded copper producer reduced operations at the copper and gold complex by about half after new restrictions and duties were introduced in mid-January as part of a government initiative to increase local processing of raw materials. Freeport’s local unit signed a memorandum of understanding that included agreement on increased royalties, an export tax and a commitment to help build a domestic smelter, PT Freeport Indonesia President Director Rozik Soetjipto said earlier today.
Freeport also agreed to “provisions” to increase the stake in the local unit held by the Indonesian government and nationals to 30% from the current 9.36%. Freeport currently controls a 90.64% stake.
The deal represents a victory for Indonesia, which has tried to gain greater control of its vast natural resources and milk more in taxes and royalty payments from foreign miners and investors. Freeport Chairman James “Jim Bob” Moffett said the agreement would “enable continuing benefits of the Grasberg operations for the government, the local communities in Papua, our large Indonesian workforce and our shareholders.”
Indonesia‘s top copper miner hopes next month to ramp up production and restart concentrate shipments from Grasberg, one of the world’s largest copper mines, said Freeport Indonesia CEO Rozik Soetjipto.
If other miners follow suit, the deal will take some of the pressure off president elect Joko Widodo. Widodo was declared the winner of Indonesia‘s presidential elections this week and has said solving the dispute – which has sapped government mining revenues – would be one of his top priorities when he takes power in October.
On the buy-side, chinese copper smelters are holding off on spot purchases of raw material concentrate, betting they can charge higher processing fees on imports once Freeport-McMoRan Inc resumes exports from Indonesia, sources at smelters and traders said.
Chinese smelters, the world’s biggest importers of copper concentrate, buy up to half of their requirements in the spot market, and a postponement of purchases will force trading houses and other sellers to find alternative buyers. The sellers will also have to fork out more to the smelters in spot processing fees once Freeport’s concentrates from Indonesia hit the market.
Newmont also said it was negotiating an MOU that could restart stalled shipments, but the government denied such talks had taken place. Goldman Sachs said it expects copper to underperform other base metal prices over the next 12 months, citing the metal’s heavy exposure to China‘s property sector, which it expects to remain bearish this year and next. LME lead rose to its highest since December at $2,279 a tonne on Friday as investors bought the contract that has underperformed its peers on growing economic optimism over China. It closed at $2,267 a tonne, up 1.3 percent.