In its latest move to settle a dispute over mining policy, the government has challenged United States mining giant Freeport McMoran to go to an international arbitration tribunal for a fair result.
Recently, the Energy and Mineral Resources Ministry granted approval to PT Freeport Indonesia, the local subsidiary of the politically connected gold and copper miner, to convert its contract of work (CoW) into a special mining license (IUPK). In so doing, the government will require the company to divest 51 percent of its shares and build a smelter within five years. As compensation, the government will allow Freeport to continue exporting copper concentrate.
Energy and Mineral Resources Minister Ignasius Jonan asserted that resorting to arbitration was a legal right. However, he said the government did not expect to face Freeport at an international tribunal because such a move would negatively impact their partnership.
“Nevertheless, it is a better measure than exploiting employee layoffs as a means to push the government,” Jonan said in a statement on Saturday.
(Read also: Freeport Indonesia chief resigns as dispute over mining policy intensifies)
Jonan also called on Freeport, the country’s largest taxpayer and oldest foreign investor, not to be “allergic” to the idea of divesting 51 percent of its controlling shares as stipulated in its CoW and the newly issued Government Regulation No. 1/2017. So far, the company has divested 9.36 percent of its shares.
The government on Friday issued a recommendation for Freeport, allowing the shipment of 1.1 million tons of copper concentrate until Feb. 16, 2018. Freeport operates Grasberg mine, the world’s second-largest copper mine, in Timika, Papua.
The recommendation was given after a five-week halt on exports. The halt in operations caused a reduction in working times, affecting some 33,000 workers. The government and Freeport have divergent views on divestment and investment guarantees and this is causing friction between the two.
Freeport has consistently stated it will only agree to the contract conversion if it secures a guarantee from the government on the firm’s long-term investment stability, including fiscal and legal certainty, as already stipulated in the CoW signed in 1991.
“PT Freeport Indonesia will keep protecting its rights under the contract of work while cooperating with the government to achieve a substitute agreement that can satisfy both parties,” Freeport spokesperson Riza Pratama said via a text message to The Jakarta Post on Sunday. Riza, however, declined to comment on any possible future moves to take the case to arbitration.
(Read also: Government stands firm as Freeport threatens to cut production)
Apart from the divestment issue, the possibility of Freeport taking the case to arbitration has been stirred by a ruling from a tax court stipulating that the firm pay US$469 million in water taxes and penalties to the Papua provincial administration for the use of water between 2011 and 2015.
An internal shake-up that caused Chappy Hakim to resign from the post of president director on Saturday has also raised speculation over an arbitrationmediated dispute settlement.
Chappy, a retired air chief marshal who took the top position only three months ago, allegedly opposed the option of going to arbitration.
Kurtubi, a legislator from House of Representatives Commission VII overseeing energy and mining, said it would be better for Freeport to avoid a direct confrontation with the government through an arbitration process as the company had largely benefitted from the CoW system over the past 40 years.
“It [the government] has a big chance [of winning the dispute] because the  Mining Law still acknowledges the CoW until it expires,” Kurtubi told the over the phone. “Freeport’s CoW will terminate in 2021 and after that there will be no CoWs in Indonesia, whoever the president will be. So Freeport’s demand to continue its current CoW is not realistic.”
Hikmahanto Juwono, an expert in international law at the University of Indonesia, emphasized the government’s favorable position should it meet with Freeport at a tribunal.
“If this case is taken to arbitration, the government is in a strong position because it never discriminated against Freeport. It has provided the company with alternatives, including allowing an extension of the contract of work,” Hikmahanto said. The expert suggested that the government pay attention to the desire of the Indonesian people to gain a greater degree of control over Freeport.
Despite the sizeable costs of going to arbitration, the current government should proceed because breaching the law could end in impeachment, he added.
According to a government source, the damage claim proposed by Freeport could amount to at least $8.3 billion.