* 2017 daily ore output estimate cut by a third -memo
* $1 bln/yr underground expansion investments shelved -memo
* ‘Painful but necessary’ for company survival -memo (Recasts, updates on smelting operations)
By Fergus Jensen
JAKARTA, March 1 (Reuters) - Freeport-McMoRan’s Indonesian unit sees “no returning to business as usual”, an internal company memo said, as the miner cut output and laid off workers at its giant Grasberg copper mine in a battle with Jakarta over mining rights that has paralysed its operations.
Freeport’s Indonesian unit has shelved plans to invest $1 billion a year in long-term underground expansion at the world’s second-biggest copper mine, the company said in a memo to all staff on Feb. 28, citing a stoppage to Grasberg exports since mid-January resulting from changes to Indonesian mining rules.
Copper ore output from the Grasberg mine in Papua will be cut to 95,000 tonnes a day in 2017 from 140,000 tonnes previously estimated, it said in the document reviewed by Reuters.
“This is not the direction we want to go, as these investments are needed to build our future business and would provide continued economic growth in Papua and thousands of job opportunities for decades, beyond the completion of the Grasberg open pit,” it said.
Copper concentrate production at Grasberg has been stopped since Feb. 11, and ore output is currently limited to stockpiling for future processing. A transition from open pit to underground mining at Grasberg may now be postponed to beyond late 2018.
Freeport, the world’s biggest publicly listed copper producer, warned last week it could take the Indonesian government to arbitration and seek damages over the dispute.
The company’s chief executive, Richard Adkerson, said on Monday that regulations Indonesia issued on Jan. 12 requiring Freeport to forfeit its long-term mining rights before resuming exports, were “in effect a form of expropriation”.
Asked about the memo, a Freeport Indonesia spokesman said Grasberg’s “operation and production is reduced to adjust to Smelting Gresik capacity”.
Operations at Freeport’s sole domestic buyer of copper concentrate, PT Smelting in Gresik, East Java, resumed briefly on Wednesday after a six-week halt that has limited Grasberg’s output options. Operations stopped again due to a technical glitch.
In the memo, Freeport said that over the past month it has revised its operating plans, slowed its underground expansion and announced “drastic reductions” to manpower levels in efforts to cut costs.
“These are painful but necessary measures the company needs to survive while it works with the government to achieve a mutually acceptable solution to resume exporting copper concentrate,” it said.
“The outcome of our negotiations with the government will not change this. There is no returning to ‘business as usual,'”it said. The changes represented “a fundamental shift” in how Freeport operates, it said.
Production of copper concentrate has yet to resume at Grasberg as a result of the export stoppage, a company source with direct knowledge of the matter told Reuters.
Indonesia’s director general of coal and minerals, Bambang Gatot, declined to comment on the changes in output. The government often met Freeport to discuss its mining rights “but there has been no conclusion yet,” Gatot said.
Indonesian President Joko Widodo said on Thursday that the government was seeking a solution to the Freeport issues that benefited both parties.
Freeport CEO Adkerson said on Monday that he hoped and believed the dispute will be resolved, “but we have to plan for it not being resolved, and we’re doing that.”
“This is not a sweetheart contract for Freeport,” he said, referring to $16.5 billion in taxes, royalties and dividends Indonesia has received from Freeport since it signed its mining contract in 1991, while the company has taken $10.8 billion.
“We’re all going to win together, or we’re all going to lose together, and I believe that’s going to be the dynamics that bring us to the table and reach a mutual agreement,” he said.
Freeport estimated in January that Grasberg would account for 1.3 billion pounds (589,670.081 tonnes) of its global copper sales of 4.1 billion pounds in 2017, assuming exports resumed in February. The export stoppage was expected to reduce Grasberg’s copper output by around 70 million pounds per month.
Freeport’s export stoppage, coupled with a strike at BHP Billiton’s Escondida mine in Chile - the world’s biggest copper mine - pushed copper prices to 20-month highs of $6,204 a tonne on the London Metal Exchange in February.
Additional reporting by Wilda Asmarini; Editing by Christian Schmollinger and Kenneth Maxwell