Freeport, Newmont Say Indonesian Rules Infringe on Pacts – by Liezel Hill (Bloomberg News – January 23, 2014)

Freeport-McMoRan Copper & Gold Inc. (FCX) and Newmont Mining Corp. (NEM), the largest U.S. miners, said new Indonesian rules on metal export duties infringe on contracts they have with the government.

Indonesia issued regulations on metal exports this month that curbed the shipping of unprocessed ore and placed duties on exports of copper concentrate, a semi-processed ore that’s shipped from mines to smelters. The rules have resulted in delays to obtain export permits, and Freeport plans to defer some production, according to the Phoenix-based company, the world’s biggest publicly traded copper producer.

The duties on copper, which begin at 25 percent and will rise to 60 percent by mid-2016, took Freeport by surprise, Chief Executive Officer Richard Adkerson said yesterday on a conference call with analysts. Indonesia, where the company operates its biggest mine, the Grasberg copper and gold operation, accounted for 19 percent of its third-quarter revenue, according to data compiled by Bloomberg. Newmont’s Batu Hijau mine in the country contributed 6.8 percent of the miner’s total sales, the data show.

“It would get pretty rough for Freeport if Indonesia stuck to its guns on this,” Dan Rohr, an analyst at Morningstar Inc. in Chicago, said yesterday in a phone interview. “Grasberg is Freeport’s single most important asset, far and away, both in terms of size and in terms of quality.”

New Rules

Freeport fell 2.1 percent to close at $34.52 yesterday in New York. Newmont declined 1.7 percent to $24.39.

The new rules were changed just prior to their introduction on Jan. 12 to allow the shipping of copper concentrates subject to the new duty, Adkerson said on the call. Exports of unprocessed metals including nickel and aluminum have been banned as the Indonesian government seeks to increase the value of mineral exports.

Freeport, which also reported fourth-quarter earnings yesterday, said it’s in talks with the government to clarify the situation. The company said it will defend its rights under the so-called contract of work, which protects the company from additional taxes and duties. It’s unclear how the tax will be implemented, Adkerson said.

’Legal Action’

“Every business entity has the right to object, including to legally object,” A.R. Sukhyar, a director general at Indonesia’s Energy and Mineral Resources Ministry, said by text message today.

Freeport is also trying to obtain 2014 export permits, which it says have been delayed as a result of the new regulations. Freeport expects to defer production of about 40 million pounds of the metal — the equivalent of about a 10th of its monthly sales of copper — and 80,000 ounces of gold per month until the approvals are received.

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