Mining Renegotiations: Freeport Indonesia Builds Copper Smelter in Gresik

Construction of the new smelter is result of the renegotiations between the Indonesian government and miners to comply with Law 4/2009 on Mineral and Coal Mining (Minerba), also known as the new Mining Law. Through this law the government takes a more protectionist approach in the country’s mining sector. It includes limits to concession areas for miners, stipulates an increase in government royalties, and foresees larger domestic ownership through share divestment. The new law also sets a ban on the export of unprocessed minerals, forcing miners to process the material domestically first (thereby boosting the establishment of domestic processing facilities to produce mining products with added-value). This ban was introduced in January 2014 and caused a storm in Indonesia’s mining sector as it mostly depends on raw commodity exports. Moreover, due to a lack of domestic processing facilities not all raw materials could be processed, resulting in saturated stockpiles of raw minerals. Although the ban had already been announced in 2009, Indonesian miners were unwilling to construct processing facilities (downstream industries) as they expected the government would scale back from implementation. Moreover, a lack of power and infrastructure in remote areas (where most mines are located) were a reason not to invest huge funds on smelting facilities. The government only scaled back slightly by easing some restrictions.

In late July 2014, Freeport Indonesia was allowed to resume copper concentrate exports after a six-month standstill as it had signed a new deal with the Indonesian government. Under this deal, Freeport is allowed to export copper concentrates up to 2017 but in return is required to pay higher royalties (3.75 percent for gold, 4 percent for copper and 3.25 percent for silver), build a smelter (make a security deposit to the government) and pay a 7.5 percent tax on copper concentrate exports (this tax will be phased out when Freeport’s smelter is for 30 percent completed). Indonesia’s Trade Ministry granted Freeport a permit to export 1.1 million tons of copper concentrate worth at least USD $2.3 billion for the remainder of the year.

Freeport Indonesia already owns a 25 percent stake in a copper smelter in Gresik, PT Smelting. Mitsubishi Materials Corporation has a 60.5 percent stake in this smelter. Mitsubishi Corporation Unimetal and Nippon Mining and Metals control the remaining 9.5 percent and 5 percent, respectively.

R. Sukhyar, Director-General for Coal and Mineral Resources at the Ministry for Energy and Mineral Resources, said that Freeport Indonesia has already started working on the design and is studying the environmental impact. The Indonesian government urges that construction of the new plant will start in 2014 and should be completed by 2017.

The new smelter in Gresik, which will have a production capacity of 400,000 metric tons of copper cathode, requires investments worth USD $2.3 billion from Freeport Indonesia.

It remains unclear, however, how Newmont Nusa Tenggara (NNT) and the government will settle their dispute. NNT has threatened to file for international arbitration at the Centre for Settlement of Investment Disputes (ICSID) in Washington DC, USA. In this case, NNT will request a stop to the export ban and abort higher export duties as these are not in line with the contract of work between NNT and the government, and are also not in line with the bilateral investment agreement between the Indonesian and Dutch governments (NNT is majority-owned by Dutch based Nusa Tenggara Partnership BV based in the Netherlands). The Indonesian government is not amused and prepares a counter claim although it still keeps the possibility open to settle the dispute through negotiations.

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