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opper-mining giant PT Freeport Indonesia has, in principle, agreed to change the company'€™s contract of work (CoW) into a special mining license (IUPK) as required by the government, a deal that will enable it to renew its concession rights earlier than expected, a senior official at the Energy and Mineral Resources Ministry has said.

'€œThis is an important milestone that will give a way out to accelerate decisions regarding Freeport Indonesia'€™s operational continuity,'€ the ministry'€™s spokesman Dadan Kusdiana said in a press briefing after the ministry'€™s meeting with the company'€™s executives.

Freeport Indonesia'€™s future operations have long been an issue partly because the company is seeking certainty for its massive investment in underground mining as well as in developing a copper smelter.

Freeport Indonesia'€™s current CoW will expire in 2021 and under current regulations any request for an extension can only be made two years prior to expiry.

However, with the immediate change from CoW to IUPK, the contract term will no longer be valid as Freeport Indonesia will operate under a new licensing regime.

This will also mean that the government will be in a stronger position and have more authority in the country'€™s mining industry.

Under the CoW system, a company is able to challenge the government at the arbitration stage should a disagreement arise. However, by changing the contract, Freeport will be subject to new taxes and royalties, as well as the need to divest part of its foreign ownership to Indonesian investors.

There are still no exact details on the timeline of changing the contract into a license but Dadan said it would be concluded before the CoW expiry.

With an IUPK, Freeport Indonesia will be able to operate for a longer time in Indonesia. Under the 2009 Mining Law, an IUPK has a maximum term of 20 years and can be extended twice for subsequent terms of 10 years each.

Freeport Indonesia president director Maroef Sjamsoeddin said the deal would provide certainty for the company, a subsidiary of US conglomerate Freeport-McMoRan Inc., and which has operated in Indonesia since 1967, to exercise its investments.

'€œThis deal will be advantageous for our business and the state also.This is a reassurance for us to remove doubts about investing US$2.3 billion in smelter development,'€ Maroef said.

Under the government'€™s downstream policy, based on the 2009 Mining Law, mining firms must process their ores in domestic smelter facilities.

The smelter development should have been completed by 2014, when the government initially banned the export of unprocessed minerals.

As no smelters have been completed, the government has partly implemented the ban and extended the smelter development deadline to 2017. However, no significant progress has been made, particularly by Freeport.

Analysts, however, have warned that changing a CoW into an IUPK may only be done after the contract expires. Legal expert Hikmahanto Juwana said the government should be careful in handling the issue.

'€œWe have to obey the rules and the government should not bow down to this kind of extortion [by Freeport Indonesia]. Freeport is seeking an extension, which can only be made in 2019 when the Jokowi presidency will be due to end its term,'€ Hikmahanto said.

The CoW-IUPK change may be implemented if the Mining Law is amended, according to energy and mining law expert Bisman Bhaktiar.

'€œThe change from CoW to IUPK must be carried out under clear regulations. At this moment, the revision of the Mining Law is in the legislative program and the issue can be handled there. However, whatever the ministry negotiates could be a mess if [the House of Representatives] challenges it,'€ he said.