Government of Indonesia plans to Allow Earlier Talks for Extension of Mining Contracts
In an effort to improve legal certainty and the business climate in Indonesia’s mining industry, the government announced it will revise a regulation that currently limits the time to start negotiating about an extension of a mining permit to two years before the concession contract’s expiration date. Sudirman Said, Indonesian Energy and Mineral Resources Minister, said the government plans to allow extension talks to start up to ten years before contracts end.
This revision would be a step forward as investors in the mining industry need to engage in costly investments and are therefore keen on a high degree of certainty. A good example is the case of Freeport Indonesia, a subsidiary of Phoenix-based natural resources firm Freeport McMoRan Copper & Gold Inc. and one of the world's leading copper producers. The company, which has been active in Indonesia since the late 1960s, mines nearly one-fifth of its copper in Indonesia (in the Grasberg mine in Papua).
Freeport's contract to operate the Grasberg mine will expire in 2021. However, due to existing laws it is not possible for Freeport and the Indonesian government to discuss the possibility of a 20-year extension (to which Freeport is entitled according an agreement made in 1991) before 2019. This is a problem as Freeport currently needs to invest heavily for the construction of a smelter (approx. USD $2 billion) and for the expansion of its underground mining operations at the Grasberg mine (approx. USD $15 billion). Obviously, Freeport needs to be sure that it can extend the contract after 2021 before investing these funds.
Although according to an agreement made in 1991 Freeport is entitled to get a 20-year extension in 2021, Freeport would like to have 100 percent certainty about this matter as history shows that (legal) certainty in Indonesia is fragile. In 2009 Indonesia announced the New Mining Law which came as a shock to most (foreign) miners. Through this new law the government tries to gain greater control of the country’s natural resources (resource nationalism) and generate more revenue through taxes and royalty payments from miners and investors. This law also called for the ban on exports of unprocessed minerals (which was introduced in January 2014).
However, as this new law was not in line with existing contracts with miners the Indonesian government needed to renegotiate the existing contracts. Initially Freeport refused but reluctantly it finally agreed to renegotiations (it would have certainly jeopardized the 20-year extension after 2021 if it was unwilling to renegotiate its existing contract). Freeport was allowed to resume copper concentrate exports in mid-2014 (after a six-month hiatus) but in return it had to prove that it is committed about building smelting facilities (smelter development is stipulated by the new Mining Law) and it has to pay an export tax (starting at 7.5 percent but can decline to 0 percent depending on progress of the smelter) as well as higher royalty payments (3.75 percent for gold, 4 percent for copper and 3.25 percent for silver).
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