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US mining firm unit in Indonesia skating on thin ice

Publication Date : 09-06-2014

 

The outgoing administration of President Susilo Bambang Yudhoyono is without legal avenues to guarantee early contract extension to PT Freeport Indonesia, which mines the world’s largest gold site in Papua.

The local unit of US giant miner Freeport-McMoRan Copper & Gold Inc. has requested an early extension of its contract to ensure returns from its investment plan after the contract expires in 2021.

While newly appointed Coordinating Economic Minister Chairul Tanjung has pledged to seal a contract renegotiation deal with several giant miners, including Freeport, before the administration’s term ends in October, an official warned that a decision specifically on contract extension would potentially spell trouble.

The Energy and Mineral Resources Ministry’s director general for mineral and coal, R. Sukhyar, said the extension could only be undertaken by the next government.

Sukhyar argued that a government regulation and the 2009 Mining Law stipulated that a proposal for the extension of mining license could only be fielded two years before it expired, and in the case of Freepor,tin 2019.

“If Freeport expects the returns from its planned investment to be beyond 2021, it will need a guarantee. And that guarantee can only be provided by the next government,” said Sukhyar last week.

The government is working to seal contract renegotiation deals in the form of memorandum of understanding (MoU), these will be the basis of contract amendments.

The debate has recently revolved around the need for the current administration to include a clause in the MoU that provides a contract extension guarantee, which will be legally tied to the next government.

However, Sukhyar suggested thorough consideration was needed when providing such a guarantee.

“The MoU should accommodate Freeport’s interest as well as prevent the current administration from getting into trouble,” said Sukhyar.

Indonesia is slated to hold a two-horse presidential election race on July 9. Presidential frontrunner Joko “Jokowi” Widodo is in a head-to-head race with former president Soeharto’s son-in-law Prabowo Subianto.

Both candidates have tinted their campaign with pledges of nationalistic and protectionist economic policies in an attempt to woo voters.

For Freeport, which has operated the mine since the early 1970s, neither candidate would guarantee smooth renegotiation as the process will coincide with the legislative and presidential elections of 2019, where nationalistic sentiment will run high.

“Freeport is probably worried that it will not get the best result if the negotiation is made with the next administration. They may put pressure on the current government to seal the deal,” said the director of the Indonesian Resources Studies (IRESS), Marwan Batubara.

Freeport has been dubbed by many politicians as the symbol of US economic imperialism in Indonesia, putting government officials in a difficult position as any policies regarding the company are deemed politically sensitive.

Indonesia’s operation accounted for around 20 per cent of Freeport’s consolidated revenue of US$20.9 billion last year.

The government’s contract renegotiation with Freeport, along with local units of other giant miners such as Newmont Mining Corp. and Vale SA, is part of a mandate stipulated in the 2009 Mining Law.

Aside from contract extension, the negotiations also cover royalty adjustment; divestment; mine size; the use of local goods and services; and the obligation of domestic processing and refining activities.

Freeport president director Rozik Soetjipto has repeatedly said that his firm needed to link the renegotiation issue with the extension of its contract as it was developing underground mining.

Marwan warned that negotiation outcome should comply with existing regulations. “If it is not consistent or violates regulations, Yudhoyono’s administration will be suspected of inappropriate conduct,” he said.

Questions have been raised over Yudhoyono’s consistency as he repeatedly vowed to not issue strategic polices during the transition to the next president.

Yudhoyono recently annulled a decision to merge state-run Bank Mandiri with smaller peer Bank Tabungan Negara.

 

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