Freeport: PT-FI Q2 sales volume down on export restriction

By Romel S. Gurky

US mining giant Freeport-McMoRan Copper & Gold Inc. (FCX) announced Wednesday that its Indonesia copper and gold mining unit PT Freeport Indonesia (PT-FI) saw lower sales volume in the first quarter of this year due to continued export restriction by the Indonesian government.

The company said in a statement that sales volume of gold during the quarter declined to 135,000 ounces from 151 ounces in the same quarter of last year, while copper sales volume fell to 117 million pounds from 158 million pounds because of lower milling rates.

The export restrictions on concentrate exports introduced in January of this year, ?resulted in the deferral of approximately 150 million pounds of copper and 240 thousand ounces of gold in the second quarter 2014 and 275 million pounds of copper and 380 thousand ounces of gold for the first six months of 2014,? the firm said.

At the Grasberg mine, the sequencing of mining areas with varying ore grades causes fluctuations in quarterly and annual production of copper and gold.

Freeport said that sales from Indonesia mining are expected to approximate 0.7 billion pounds of copper and 1.25 million ounces of gold for the year 2014, compared with 0.9 billion pounds of copper and 1.1 million ounces of gold for the year 2013.

?These estimates assume resumption of exports from PT-FI beginning in August 2014. To the extent PT-FI is unable to resume exports in August 2014, this will result in a deferral of approximately 50 million pounds of copper and 80 thousand ounces of gold per month,? it said. ?Upon a favorable resolution of the restrictions on exports matter, sales from Indonesia mining are expected to increase through 2016 as PT-FI gains access to higher grade ore.?

In January 2014, the Indonesian government published regulations providing that holders of contracts of work with existing processing facilities in Indonesia could continue to export product through January 12, 2017, but established new requirements for the continued export of copper concentrates, including the development of domestic smelter and refining facilities and the imposition of a progressive export duty on copper concentrates in the amount of 25 percent in 2014, rising to 60 percent by mid-2016. ?To date, PT-FI has not received authorization from the Indonesian government to export copper concentrate,? the statement said.

The Indonesian government is also seeking to amend PT-FI?s mining contract of work (COW) to incorporate changes pursuant to Indonesia?s 2009 mining law and subsequent regulations. PT-FI and the Indonesian government have developed a MOU, expected to be signed imminently, that addresses provisions in PT-FI?s COW related to the size of PT-FI?s concession area, royalties and taxes, domestic processing and refining, divestment, local content, and continuation of operations post-2021, when the existing COW expires. The MOU would enable the immediate resumption of exports.

Under the MOU, PT-FI would agree to provide a US$115 million assurance bond to support its commitment for smelter development, pay reduced export duties that would decline as smelter development progresses and pay increased royalties of 4 percent for copper and 3.75 percent for gold from the current rates of 3.5 percent for copper and 1 percent for gold. The MOU provides that PT-FI and the Indonesian government would commence immediate negotiations for an amended COW. ?These negotiations will take into consideration the need for assurance of legal and fiscal terms for PT-FI to continue with its large-scale investment program for the development of its reserves,? the company said.

As a result of the delay in obtaining approvals for 2014 exports, Freeport said PT FI has implemented changes to its operations to align its concentrate production with PT Smelting?s operating plans. PT-FI?s milling rate averaged 102,900 metric tons of ore per day in second-quarter 2014 and 110,400 metric tons of ore per day for the first six months of 2014, which is approximately half of normal rates, and resulted in the deferral of approximately 150 million pounds of copper and 240 thousand ounces of gold in second-quarter 2014 and 275 million pounds of copper and 380 thousand ounces of gold for the first six months of 2014.

Freeport said PT-FI?s 2014 production estimates assume resumption of exports beginning in August 2014. ?In the event that PT-FI is unable to resume normal operations for an extended period, PT-FI intends to implement plans to reduce operating costs, defer capital expenditures and implement workforce reductions,? it said.

Indonesian Mining Operations	Three Months Ended June 30
	2014	2013
Copper (million of recoverable pounds):
Production	122	139
Sales	117	158
Average realized price per pound	$3.19	$3.08
Gold (thousands of recoverable ounces):
Production	142	131
Sales	135	151
Average realized price per ounce	$1,294	$1,321
Unit net cash (credits) costs per pound of copper:
Site production and delivery, excluding adjustments	$3.86	$3.55
Gold and silver credits	(1.57 )	(1.20 )
Treatment charges	0.26	0.23
Royalties	0.11	0.13
Unit net cash (credits) costs (*)	$2.66	$2.71
* For a reconciliation of unit net cash costs (credits) per pound to production and delivery costs applicable to sales reported in FCX's consolidated financial statements, refer to the supplemental schedule, "Product Revenues and Production Costs," beginning on page VI, which is available on FCX's website, "www.fcx.com."

Editing by Reiner Simanjuntak