Early 'minefield' to test Jokowi

When US Republican Senator John McCain made his first visit to Indonesia during the recent Codel (congressional delegation) junket season, it was ostensibly to talk about Senate Armed Services Committee affairs and President Barack Obama's Pivot to Asia, the policy that often has difficulty making itself heard above the ever-present din from the Middle East.

But Mr McCain's constituency is Arizona, the home of mining giant Freeport McMoRan Copper & Gold, and his low-key session with President-elect Joko Widodo touched on something quite different: Indonesia's curbs on mineral exports and what might happen when Mr Joko takes over from President Susilo Bambang Yudhoyono next month.

At stake is the future of the mining industry in Indonesia, which is the world's fourth-biggest exporter of copper, essential for pipes and wire, and a major producer of industrial metals such as nickel, tin and bauxite.

The signals from the Jokowi camp so far suggest he will largely retain the current government's revised export tax regime, imposed in place of an earlier conditional ban on mineral exports, if only to satisfy the strident voices of economic nationalism. But Mr Joko told Mr McCain he wants an amicable solution with Freeport that will suit everyone's interests.

The company has a lot to lose. It is in the initial stages of what will eventually be a US$15 billion (S$19 billion) undertaking to convert Papua's rich Grasberg mine from an open pit to the world's largest underground operation.

Freeport signed a contract of work (CoW) with the Suharto government in 1991 that does not require it to pay export duties on its near-pure concentrates or any other new taxes, and allows it to mine the Grasberg till 2021.

But this January, in a move to enforce an in-country processing requirement laid out in the 2009 Mining Law, the Indonesian government slapped prohibitive taxes on the export of copper concentrate and most other unrefined ore.

The resulting impasse was finally broken with a July 25 memorandum of understanding (MOU) in which Freeport agreed to significant concessions to get exports flowing again. Even then, the two sides have set a six-month deadline to turn the MOU into an amendment to the CoW for the seven years it has to run.

Freeport Indonesia, already the country's largest taxpayer, is now committed to a new tax of up to 7.5 per cent on concentrate exports and has also agreed to a rise in royalties from 3.75 per cent to 4 per cent for copper, and from 1 per cent to 3.5 per cent for gold. It will post a US$115 million bond as a guarantee to build a new US$3 billion smelter - probably at one of three sites in East Java.

Indonesia's other big copper and gold miner, Newmont, initially went in the opposite direction, earning Jakarta's ire by taking its case to international arbitration, halting production and putting 3,200 workers on leave at reduced pay. Two months later, with Jakarta threatening to end its contract, it abruptly withdrew the case.

Newmont's Batu Hijau mine in Sumbawa has nowhere near the same grades as the Grasberg. But in a surprise turnaround, it has confirmed its previous agreement to share in the cost of Freeport's smelter venture, and also to pay the additional royalties and taxes it previously said would eat too much into its bottom line.

Also, Freeport Indonesia will submit to a 30 per cent divestment, up from the 9.36 per cent held by the government. In yet another display of how deeply rooted economic nationalism has become, officials say farming out the US$2 billion stake cannot be done through an initial public offering because that would let foreigners control some shares.

Under the 2009 Mining Law, Freeport still has to get a new licence to replace its contract after 2012. But Jakarta has said it won't start that process until 2019.

That's not good news for the miner because it falls in an election year when Mr Joko will presumably be seeking a second term; if he is under pressure, playing hard ball with Freeport may be seen as a vote-getter.

Board chairman James Moffett and president and CEO Richard Adkerson, who have been intimately involved in the protracted contract talks, are hoping what they have signed on to so far will serve as the basis for a smooth extension process that will allow the company to continue mining the Grasberg until 2041.

By next January, the two sides will have had to agree an amendment to the CoW that not only encapsulates those concessions, but addresses what the MOU calls "the continuation of operations post-2021", including Freeport's proposal for a companion investment stabilisation deal that precludes future fiscal surprises.

The revised contract may still have to be approved by a notoriously nationalistic Parliament. If that's the case - and it's not clear at this point - then recalcitrant lawmakers could send the whole process back to square one. The export ban will be back in force and Freeport will this time have to lay off a big chunk of its workforce, with the threat of political unrest that could bring to Papua.

Indonesia has said "trust us on this" and essentially that's what Freeport is doing, with plans to spend US$8 billion on the mine conversion between now and 2019. It makes for nervous times, underscored by a rare 10-day, under-the-radar visit to Jakarta by Mr Moffett himself. Says one source familiar with the talks: "He was there for one reason - to get something done."

With President Yudhoyono calling the shots behind the scenes, chief economic minister Chairul Tanjung brought a lot more energy to the task of finding common ground with Freeport, while retaining the integrity of the government's underlying value- added policy. With the country's current account deficit continuing to widen, the final outcome will rank with fuel subsidies as one of the early crucial tests of Mr Joko's presidency.


This article was first published on Sep 9, 2014.
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