Feb 24 U.S. mining giant Freeport-McMoRan Inc
warned this week that it could take the Indonesian
government to arbitration and seek damages over a contractual
dispute that has halted operations at the world's second-biggest
Marking a sharp escalation in the row, the government also
said it would go to arbitration if no resolution was reached.
Here are some questions and answers on the contract dispute:
WHAT IS AT STAKE FOR FREEPORT AND INDONESIA?
Freeport's 2016 copper sales from Indonesia were worth about
$2.4 billion, up 130 percent since 1996. This year, its Grasberg
mine is due to contribute around a third of Freeport's global
copper sales of 4.1 billion pounds.
But despite being one of the largest tax payers in
Indonesia, Freeport's relations with the government have become
strained, particularly as Southeast Asia's biggest economy has
sought greater control over its natural resources.
Freeport and the government have been in talks on converting
its 1991 mining contract to a new permit and have made some
progress in recent years. Freeport has agreed to pay export
taxes, higher royalties on copper, gold and silver sales, and to
triple its smelter capacity and cut its concession size by more
In January, however, Indonesia introduced rules that prevent
Freeport from exporting copper concentrate until it adopts a new
permit that would terminate its current contract and impose new
terms, including some different than those already agreed.
Freeport's current contract is not due to expire until 2021
and it wants guarantees that its mining rights will not change
before committing to $15 billion of investment to expand its
Grasberg underground mining operations.
WHAT IS AT THE HEART OF THE LATEST ROW?
The halt in January to Indonesia's exports of semi-processed ore
exports came as part of a renewed push for miners to build
domestic smelters and squeeze more from its mineral resources.
Miners like Freeport were given an option: exports could
only continue once they replaced contracts of work with special
A new permit would allow Freeport to apply for an early
extension to its mining rights, but would also leave it open to
prevailing rules and changes to taxes and other terms from which
it is currently exempt.
The rules require Freeport to divest up to 51 percent of its
Indonesian unit compared with 30 percent currently. So far it
has divested 9.36 percent.
Freeport would also have to pay a dividend tax, 10 percent
VAT and an export duty of up to 7.5 percent on copper
WHAT ARE BOTH SIDES SAYING?
Freeport says the stoppage of its exports and attempts to
enforce the new rules on taxes and divestment violate its
contract of work.
According to Freeport, the new mining permit lacks the legal
and fiscal certainty it needs, and that under Indonesian and
international law its contract should be immune to changes.
The company said it is only willing to adopt the new permit
once it has a stable agreement providing the same rights and the
same legal and fiscal certainty it has now.
The government has said Freeport must comply with
Indonesia's 2009 mining law, recent regulations and its 1945
Constitution, which in some cases have different requirements
than terms set out in Freeport's 1991 contract of work.
Freeport's contract, for example, requires the company to
only construct one smelter, while the government now says it
must build at least one more.
The government has said it will seek a resolution that does
not break the law and that honours Freeport's contract.
HOW HAS THE ROW ESCALATED?
On Feb. 17 the government issued a new export permit for
Freeport allowing it to export up to 1.1 million tonnes of
copper concentrate over the next year, while proposing a
six-month window to negotiate fiscal terms.
Freeport has said it "cannot accept" the new permit that
would require the termination of its existing contract at the
end of this window, regardless of where negotiations were at.
After declaring force majeure on exports, Freeport said on
Monday it had started laying off workers in Indonesia and that
it had given a formal notice to the government of multiple
breaches of its contract in a step towards arbitration.
WHAT HAPPENS NEXT?
Freeport's contract allows 120 days to "use its best endeavours
to resolve the dispute through consultation and use of
If this fails, conciliation or arbitration proceedings would
be held in Jakarta, or another location if agreed by both sides.
If Freeport opts to terminate its contract, all contract
properties would be offered for sale to the government at cost
or market value, whichever is lower, but not below the
depreciated book value.
If the government does not accept this offer, Freeport would
have 12 months to sell or dispose of assets. All roads, schools
and other immovable properties that are in public use would
immediately become Indonesian property.
(Reporting by Fergus Jensen; Editing by Tom Hogue)