Freeport says to defend contractual rights in RI

By Romel S. Gurky

US-based Freeport McMoRan Copper & Gold Inc (FCX), which operates one of the world?s largest gold and copper mines in Indonesia?s Papua province through subsidiary PT Freeport Indonesia (PTFI), said that the Indonesian government?s new minerals export ban regulations are in conflict with the company?s contract of work (COW).

The company said in a statement Wednesday that it aims to defend its contractual rights.

?The January 2014 regulations conflict with PT-FI?s contractual rights, and FCX and PTFI are working with the Indonesian government to clarify the situation and to defend PTFI's rights under the COW,? the company said.

?PTFI is also seeking to obtain its administrative permits for 2014 exports, which are currently pending and have been delayed as a result of the new regulations,? it added.

PTFI?s COW, which has a primary term through 2021 and allows for two 10-year extensions through 2041 (subject to approval by the Indonesian government, which cannot be withheld or delayed unreasonably), authorizes it to export concentrates and sets forth the taxes and other fiscal terms applicable to its operations. The COW states that PTFI shall not be subject to taxes, duties or fees subsequently imposed or approved by the Indonesian government except as expressly provided in the COW.

The government of Indonesia implemented the long-planned export ban policy on mineral ores on January 12, 2014 as mandated by the 2009 Mining Law in a bid to generate greater benefits from mineral commodities by forcing miners to process the ores at domestic smelters, which have raised protest from the industry given the limited capacity of existing smelters and the huge cost of building new ones. But the export ban policy still allows for the selling overseas of six mineral concentrates including copper until 2017, thus allowing major producers such as Freeport and PT Newmont Nusa Tenggara (a local unit of US-based Newmont Mining Corp) to continue export, although ensuing new regulations subject the copper concentrates to punitive progressive export duties of 25 percent in 2014, and rising up to 60 percent by mid 2016.

New regulations introduced by the government also require the miners to obtain export permit from the Ministry of Trade, and approval from the Ministry of Energy and Mineral Resources, as well as pre-shipment inspection by surveyors and the Custom Office, thus lengthening the bureaucracy line for export, forcing miners such as PTFI to delay export shipment.

Newmont has also protested the new export regulations saying they?re in conflict with its contract of work, and plan remedies including possible legal action.

FCX Chief Executive, Richard Adkerson, was quoted as saying that he did not want to speculate on next steps because he was confident of Freeport to reach an agreement with the Indonesian government.

"We have a strong desire not to go to international arbitration," he said. "The much more attractive course of action would be ... to find a mutually agreeable resolution to it with the government."

FCX, through its 90.64 percent owned PTFI, said it has several projects in progress in the Grasberg minerals district related to the development of large-scale, long-lived, high-grade underground ore bodies. In aggregate, these underground ore bodies are expected to ramp up over several years to produce approximately 240,000 metric tons of ore per day following the transition from the Grasberg open pit, currently anticipated to occur in 2017. Development of the Grasberg Block Cave and Deep Mill Level Zone (DMLZ) mines is advancing to enable DMLZ to commence production in 2015 and the Grasberg Block Cave mine to commence production in 2017. Over the next five years, estimated aggregate capital spending on these projects is currently expected to average $0.9 billion per year ($0.7 billion per year net to PTFI).

PTFI sends about 40 percent of its copper concentrates output to Indonesia?s only copper smelter PT Smelting in East Java, while the balance were exported.

Elsewhere, FCX said that as a result of the delay in obtaining administrative approvals for 2014 exports, associated with the new regulations, PTFI is implementing near-term changes to its operations to coordinate its concentrate production with PT Smelting's operating plans.

?These changes will result in the deferral of an estimated 40 million pounds of copper and 80 thousand ounces of gold per month pending resolution of these matters. FCX will update its 2014 outlook as export approvals are obtained,? the company said.

FCX said that fourth-quarter 2013 copper sales of 292 million pounds and gold sales of 476 thousand ounces from Indonesia were significantly higher than fourth-quarter 2012 copper sales of 204 million pounds and gold sales of 224 thousand ounces and above October 2013 estimates resulting primarily from higher ore grades and increased mill rates and recoveries. Results benefited from strong productivity throughout the open pit and underground mining operations and milling operations. During fourth-quarter 2013, the Deep Ore Zone underground mine's rates averaged 59,900 metric tons of ore per day and are expected to reach 80,000 metric tons of ore per day by mid-2014.

At the Grasberg mine, the sequencing of mining areas with varying ore grades causes fluctuations in quarterly and annual production of copper and gold. Sales from Indonesia mining are expected to approximate 1.1 billion pounds of copper and 1.6 million ounces of gold for the year 2014, compared with 885 million pounds of copper and 1.1 million ounces of gold for the year 2013.

Sales from Indonesia mining are expected to increase in 2014 through 2016 as PTFI gains access to higher grade ore. PTFI's estimated sales volumes are subject to change depending on timing of resolution of export matters as described above.

A significant portion of PTFI's costs are fixed and unit costs vary depending on production volumes. Indonesia's unit net cash costs (including gold and silver credits) of $0.21 per pound of copper in fourth-quarter 2013 were lower than unit net cash costs of $1.33 per pound in fourth-quarter 2012 reflecting significantly higher volumes and lower operating costs.

Unit net cash costs (net of gold and silver credits) for Indonesia mining are expected to approximate $0.81 per pound of copper for the year 2014, based on current sales volume and cost estimates and assuming an average gold price of $1,200 per ounce. Indonesia mining's projected unit net cash costs would change by approximately $0.075 per pound for each $50 per ounce change in the average price of gold. Because of the fixed nature of a large portion of Indonesia's costs, unit costs vary from quarter to quarter depending on copper and gold volumes.

Indonesian Mining Operations	Three Months Ended December 31
	2013	2012
Copper (million of recoverable pounds):
Production	304	200
Sales	292	204
Average realized price per pound	$ 3.33	$ 3.59
Gold (thousands of recoverable ounces):
Production	502	221
Sales	476	224
Average realized price per ounce	$ 1,219	$ 1,680
Unit net cash (credits) costs per pound of copper:
Site production and delivery, excluding adjustments	$ 1.89	$ 2.91
Gold and silver credits	(2.04 )	(1.93 )
Treatment charges	0.24	0.22
Royalties	0.12	0.13
Unit net cash (credits) costs (*)	$ 0.21	$ 1.33
* 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