Indonesia Warns US Mining Giant in Fresh Dispute

Indonesia Warns US Mining Giant in Fresh Dispute

50-year-old “contract of work” at lucrative mine up for grabs

There is rising concern among business sources in Jakarta that tension between the Indonesian government and the US-based mining giant Freeport-McMoRan, Indonesia’s oldest foreign investor, which has been in a months-long deadlock over future mining, could affect relations between Washington and Jakarta.

In addition to taking off a huge share of Freeport’s profits, business sources in Indonesia say the change in the contract could have unpredictable consequences for bilateral ties between the US ad Indonesia. That is because Carl Icahn, a major American investor, acquired 9 percent of Freeport recently. He is now a key investor who also acts as a close adviser to President Donald Trump, who with less than two months in office has already proven to be volatile when it comes to international relations.

Reuters reported last week that shareholders – perhaps meaning the 81-year-old Icahn – are pressuring Freeport to stand up to Indonesia over the changes. Freeport’s chief executive officer Richard Adkerson told a mining conference in Florida that the new regulations are “in effect a form of expropriation of our assets and we are resisting it aggressively.”

“Many of our shareholders feel that we have been too nice,” Adkerson said. “Now we are in the position of standing up for our rights under the contract.” Room exists for common ground – but a resolution could take months during which, according to Jakarta sources, tensions are feared to rise between the US and Indonesian governments.

The government is requiring the company’s local subsidiary PT Freeport Indonesia to convert its 1991 contract of work – its compact with the government to operate – into a special mining license in return for an export permit extension.  The new agreement would require the company to divest 51 percent of its shares to Indonesian interests. The contract of work isn’t due to expire until 2021 but Freeport wants guarantees that it will be extended on the company’s terms before it invests a promised US$18 billion in the mining operation.

Freeport Indonesia operates the huge Grasberg mine in Papua, the world’s biggest copper mine and the second-biggest gold mine.   Its 2016 copper sales from Indonesia were worth about US$2.4 billion, up 130 percent annually since 1996. This year, the Grasberg mine is due to contribute around a third of Freeport’s global 2017 copper sales of £4.1 billion.

The matter spurred President Joko “Jokowi” Widodo to comment on the issue, last week, saying he would take firm action if necessary although he didn’t hit at what action he might take.

“We want to reach a win-win solution, because this is a business matter. Now, I will leave this matter to the ministers. However, if it’s really difficult to deal with, I will take action.” Jokowi said.

Since starting its operations more than 50 years ago, Freeport’s existence has often been greeted with abhorrence by the Indonesian public. All affairs related to the company have always been political, with many Indonesian politicians and activists referring to it as a symbol of US economic imperialism.

Indonesian commercial and political interests have been attempting to modify the contract of work to get a bigger share of the operations for at least two years. In November 2015, Setya Novanto, then the Speaker of the House of Representatives, was caught on tape allegedly seeking to extort shares from the mining concern.

Although Setya lost his job as house speaker, eventually the scandal cost the job as well of Sudirman Said, the Energy and Resources Minister, who had launched the charges against Setya in the House Ethics Council. Other powerful names were dragged into the allegations against Setya at the same time. The affair pretty much ended inconclusively, however, with Setya ultimately regaining his House position.

Freeport Indonesia insists that the 1991 Contract of Work is still valid and should be respected. Freeport owns 90.64 percent of Freeport Indonesia, while 9.36 percent is owned by the Indonesian government.

On February 17, Freeport Indonesia sent a notification letter to the Energy and Mineral Resources Ministry describing areas of dispute between the two parties. The company also said it would seek the possibility of taking the case to the international arbitration if no settlement was reached within 120 days after sending the letter.

Coordinating Maritime Affairs Minister Luhut Pandjaitan has said local administrations in Papua would get shares from PT Freeport Indonesia when the company divests its 51 percent shares, as required by a new regulation.

Last week, Adkerson said the company expects to find what what he called “a win-win solution” during the dispute settlement period as the Grasberg mine is too important for either party to neglect.

In response to the case, Finance Minister Sri Mulyani Indrawati said the government is undertaking “transitional negotiations” to tweak the management of the mining industry for the sake of investment and national interests, such as job creation, exports and state revenues.

“There will not be private, murky negotiations any longer. We just want to abide by the law and try to be better in explaining this situation to the investors.” She told local media.

PT Freeport Indonesia employs some 32,000 people and has reportedly laid off 25 senior employees as the company negotiates with the government.

Jokowi on Jan. 22 signed the government regulation revising previous conditions on the implementation of the mineral and coal mining business. Under the regulation, mining companies are required to construct domestic smelters as a precondition for them to export the concentrates. That regulation has caused chaos in the mining industry because smelters require huge amounts of power and the government can’t produce enough near distant mining sites to operate them.

What next?

The “win-win solution” seems unlikely, considering Jokowi has the burden to show the Indonesians that “he can stand up against Freeport bullies for more than 50 years.”  If both parties fail to come to terms, conciliation or arbitration proceedings would be held in Jakarta, or another location if agreed by both sides.

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