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Govt sticks to guns over Freeport negotiations

The government is sticking to its guns over the negotiations with gold and copper miner PT Freeport Indonesia, keeping a firm stance on the company’s contract conversion and divestment requirements

Viriya P. Singgih (The Jakarta Post)
Jakarta
Wed, July 5, 2017

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Govt sticks to guns over Freeport negotiations

T

he government is sticking to its guns over the negotiations with gold and copper miner PT Freeport Indonesia, keeping a firm stance on the company’s contract conversion and divestment requirements.

Various ministers and other relevant parties gathered on Tuesday morning at the Finance Ministry to discuss four main issues regarding Freeport’s future operations in the country, namely its contract extension, smelter development, divestment and investment stability guarantee.

The State-Owned Enterprise (SOE) Ministry’s deputy for mining, strategic industries and media affairs, Fajar Harry Sampurno, told reporters that the government would only extend Freeport’s contract two times — each extension would last for 10 years — if the company converts the contract of work (CoW) that it signed in 1991 into a special mining permit (IUPK).

Freeport’s contract will be evaluated once again if it obtains the first extension that is to last until 2031.

It will also mean that the subsidiary of American mining giant Freeport-McMoRan Inc. would be obliged to comply with the prevailing raw mineral export duties imposed on all IUPK holders.

Finance Minister Regulation (PMK) No. 13/2017 stipulates that export duties would be imposed in accordance with a miner’s smelter development.

If the smelter progress is between zero and 30 percent, the export duty charged would be 7.5 percent.

If the progress goes higher to between 30 and 50 percent, the duty would fall to 5 percent and if the progress reaches 50 to 75 percent, the duty would only be 2.5 percent.

At present, Freeport only has to pay an export duty of 5 percent, even though its smelter development progress is less than 30 percent.

The situation is in line with the issuance of a temporary IUPK in April by the Energy and Mineral Resources Ministry that was backdated to Feb. 10 and valid for eight months.

The government is still in discussions over the fiscal requirements that should be met by Freeport.

Under the CoW, Freeport is obliged to pay income tax (PPh) of 35 percent, while the current regulations set a PPh of 25 percent.

If Freeport converts its CoW into an IUPK, it will have to pay value-added tax of 10 percent and several regional contributions as well — including a water tax — to the administration of Papua, where the company operates its Grasberg Mine.

The Grasberg Mine is the world’s largest gold mine and second-largest copper mine.

Last year alone, Freeport produced 1.05 million ounces of gold from the mine, which accounted for 97.2 percent of Freeport-McMoRan’s total volume of gold sales.

“It is clear that, in accordance with the existing law, a contract conversion into an IUPK means that [a mining company] should follow the prevailing laws,” Finance Minister Sri Mulyani Indrawati said. “We’ll see where it goes in the discussions [with Freeport].”

Another thorny issue is the government’s demand for Freeport to divest 51 percent of its shares to national entities. Freeport-McMoRan currently owns 90.64 percent of the company, while a mere 9.36 percent is owned by the Indonesian government.

The 51 percent divestment requirement is non-negotiable, Fajar said. He, however, added the government would issue a government regulation in the near future that would stipulate an investment stability guarantee for all mining companies in the country, including Freeport.

No details were immediately available.

Freeport Indonesia spokesperson Riza Pratama said the investment stability guarantee would be crucial for its future operations, especially because it has invested a large amount of money for the development of the underground Grasberg Mine in Papua.

“Freeport expects to get a contract extension until 2041 so that it can continue its investment into the development of the underground mine worth US$15 billion and the new smelter worth $2.3 billion,” Riza said.

“We will convert the CoW into an IUPK if there is an investment stability guarantee that will give us the same law and fiscal certainties that we get in the CoW.”

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— Grace D. Amianti contributed to this story.

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