Adkerson says Freeport holds right to commence arbitration

Petromindo|Thomas

Freeport McMoRan Inc, the parent of gold and copper giant PT Freeport Indonesia (PFI), hopes to be able to resolve ongoing dispute with the government of Indonesia, but stresses that it holds contractual right to commence arbitration to enforce its mining contract in the country.

Richard C. Akderson, President and CEO of Freeport, said in a statement on Monday that PTFI on January 17 submitted to the Ministry of Energy and Mineral Resources a notification describing breaches and violations of the company?s mining contract of work by the government following the introduction on January 12 of new mining regulations.

?PTFI expressed a sincere hope that this impending dispute with the government can be resolved but reserved all of its rights pursuant to the (PTFI mining) contract against the government, including the right to commence arbitration to enforce all provisions of the contract and to seek applicable damages,? he said in the statement.

On Saturday, Minister of Energy and Mineral Resources Ignasius Jonan said in a statement that the government was ready to face Freeport should the company decides to go to the court to challenge the recently-introduced mining rules.

Ignasius said that it?s better to settle the ongoing dispute at the court rather than the company using the issue of workers layoff to pressure the government. ?It (arbitration) is better than exploiting employee layoff as a means to pressure the government,? he said in a statement issued a day after PTFI president director Chappy Hakim announced his resignation, reportedly because he opposed plan by the company to go to international arbitration to settle dispute with the government.

The government introduced last month new Government Regulation No 1/2017 and the implementing rulings allowing mining firms to continue export of mineral concentrates including copper concentrates produced by firms such as PTFI for another five years, which has been banned since January 12 of this year as stipulated by a 2014 government regulation. Companies, however, are required to meet tougher requirements to be allowed to resume export including conversion of their mining permit status from mining contract of work (COW) to special mining business license (or IUPK), and commitment to develop domestic smelters within five years. Mining firms controlled by foreign investors such as PTFI must also gradually divest up to 51 percent of their state to Indonesian investors.

While PTFI has agreed to convert its COW to IUPK, the company demanded certain conditions notably fiscal and legal terms that are similar to those set in the COW regime as part of investment stability agreement. A key condition demanded by PTFI is for its new IUPK to acknowledge a nailed-down tax principle as set in the COW. The government, however, has said that an IUPK must follow prevailing regulations including in term of tax, not a nailed-down principle.

PTFI has suspended production at its Grasberg mine in Papua since February 10 and started layoffs as the company has been unable to export copper concentrates since January 12. In a bid to allow the company to resume export, Jonan issued a ?transitional ruling? applying the fiscal terms in the COW to IUPK, pending completion of negotiation with the company over the final terms of the IUPK, hopefully to be reached within six months. The ministry last week then issued export recommendation letter for PTFI and another gold and copper giant PT Amman Mineral Nusa Tenggara for export of copper concentrates with the former getting an export quota of 1.1 million tons under a permit that is valid until February 16, 2018.

Adkerson, however, said in the statement that PFTI can?t accept the permit to continue export as it requires the company to forfeit its COW.

?We had discussed with the government having a six months period to negotiate this investment agreement. Exports would be allowed and the contract would remain in effect prior to signing the investment agreement. However, government decrees now mandate that our contract be terminated to obtain permission to export, which we cannot accept,? he said.

?Because Freeport cannot export without forfeiting its contract, there will be severe unfavorable consequences for all stakeholders, including the suspension of capital investments, a significant reduction in domestic purchases of goods and services, and job losses for contractors and workers as we are forced to adjust our business costs to match constrained production,? he further explained.

Elsewhere, Adkerson said that for more than five years, PTFI has consistently made good faith efforts to be responsive to changes in Indonesian laws and government regulations, some of which have negatively impacted our operations at the Grasberg mining operations in Papua.

?I have been in Jakarta for many days working to address issues facing our company from the recent decrees from the Ministry of Energy and Mineral Resources on exports of copper concentrates. Together with our management team and members of the local community, we have been working to protect the interests of the company and its many stakeholders, including our valued employees,? he said.

Even though Indonesia?s Mining Law of 2009 states that Contracts of Work remain in force during their terms, the government is seeking to require Freeport to forfeit the 1991 Contract of Work in return for an uncertain operating license and short-term approval to export, Adkerson said.

?We cannot relinquish the legal rights provided by the contract which are the basis of long-term stability and protection for our company and vital to the long-term interests of our employees, communities and shareholders. Legal and fiscal certainty is necessary for PTFI to make the massive long-term investments of capital necessary to develop our resources in the remote area of our operations in Papua,? he explained.

Under the contract, Adkerson said Freeport has made US$12 billion of investments and is undertaking $15 billion of ongoing capital investments to develop our underground resources. ?We have built a business with a workforce of 32,000 Indonesians.?

Under the contract, Adkerson said the government of Indonesia has received 60 percent of the direct financial benefits of the company?s operations. Taxes, royalties, and dividends paid to the government since 1991 have exceeded $16.5 billion while Freeport-McMoRan has received $10.8 billion in dividends. Future taxes, royalties, and dividends to be paid to the government through 2041 are expected to exceed $40 billion, he said.

Editing by Reiner Simanjuntak