Freeport to Pay Higher Royalties After Months of Contract Talks

By webadmin on 10:22 pm Jul 23, 2012
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Tito Summa Siahaan

Freeport Indonesia has agreed to raise its royalty payment to the government, according to a statement from a top economic minister on Monday.

The announcement represents progress in the government’s protracted renegotiations with Freeport Indonesia, a subsidiary of US based mining giant Freeport-McMoran Copper & Gold, who was one of the first foreign companies to invest in Suharto’s New Order Regime in the 1960’s.

Freeport operates the world’s biggest gold and second-biggest copper mine in the restive province of Papua.

“[Freeport] is willing to increase the royalty,” said Coordinating Minister for the Economy Hatta Rajasa. He did not, however, specify the percentage increase.

In February, the government created a team to renegotiate older mining contracts that generally asked for smaller royalties. And in March, Indonesian authorities announced a new law cutting maximum foreign ownership in mining companies from 80 percent to less than half.

Both actions were a bid to keep a larger portion of revenues from the country’s vast natural resources, and increase the participation of local entities in the mining sector.

At present, Freeport pays a 1 percent royalty to the government on its total gross sales of gold.

A 2003 government regulation requires mining companies to pay a royalty of 4 percent for copper exports, 3.25 percent for silver, and 3.75 percent for gold. But Freeport’s contract was established before 2003, and the Indonesian legal system does not recognize the principle of retroactivity.

Terms agreed to in contracts signed before the 2003 law, in other words, take precedent.

“Now, [the royalty] is only at 1 percent, it is very small,’’ Hatta said in February.

Royalties have been just one issue on the negotiating table, however. Government revenue, requirements for miners to process raw materials in Indonesia and divest a stake to local owners, the size of mining concession areas and the use of local content in operations have also been up for discussion.

On these matters, Hatta said Freeport was willing to build a smelter to comply with the government requirement to process ore minerals locally. He also said the mining giant was willing to give up some of its land due to a reevaluation of its mining concession area and increase the participation of the local government and regional companies.

Hatta, who is chairman of the National Mandate Party (PAN), a close ally to President Susilo Yudhoyono’s Democratic Party, also said Freeport-McMoran had agreed to sell part of their interest in their Indonesian operation.

“[Freeport Indonesia] agreed to divest a stake, but there’s no agreement on the 51 percent that we requested,” Hatta Rajasa told reporters on Monday.

Details on other terms of the IPO, including the time frame, have not been shared.

Freeport Indonesia’s president director, Rozik B. Soetjipto, had said early this month that the miner was willing to increase its royalty, but asked the government to reduce the amount it must pay in corporate income tax.

Indonesian companies typically pay a 25 percent income tax, while Freeport pays 35 percent.

Additional reporting by Agence France-Presse