Indonesia wants to renegotiate copper contract

Indonesia wants to renegotiate copper contract

By Bambang Dwi Djanuarto and Claire Leow, Bloomberg News

13th August 2007

Indonesia wants to renegotiate its contract with Freeport-McMoRan Copper & Gold, the world's second-largest copper producer, [* see note] potentially cutting output and increasing royalties from its Grasberg mine, a minister said.

"Both parties must agree to change the contract of work," Purnomo Yusgiantoro, the minister of Energy and Mineral Resources, said Monday. The government wants to lower the daily output ceiling at the mine and increase local smelting, Purnomo said.

Freeport, based in Phoenix, Arizona, has not received formal notice of the plan, Mindo Pangaribuan, a spokesman for the company's Indonesian unit, said by telephone Monday.

Grasberg accounted for 4 percent of all copper mined last year, and lower output may extend this year's 18 percent rally in prices on the London Metal Exchange. The mine, located in Papua province, operates under a 30-year contract signed in 1992, which may be extended for as many as 20 years.

"It has to be a win-win situation, and cannot be at the expense of the company or it will send a bad signal to mining companies," Ahmad Solihin, an analyst at Mandiri Sekuritas in Jakarta, said by telephone. "It has to be agreed to by both parties."

Indonesia wants to lower maximum daily production at Grasberg to between 200,000 tons and 250,000 tons of copper ore from 300,000 tons, Purnomo said in Jakarta. The proposal comes after a state audit of the mine's operations. The company targets daily output of 220,000 tons to 230,000 tons under a five-year plan, Pangaribuan, of Freeport, said.

The government also wants as much as 50 percent of Grasberg's output to be smelted at a facility in East Java province, the minister said. At present, the smelter processes about 30 percent of the mine's output.

Shares in Freeport, which is led by Richard Adkerson, have gained 63 percent over the past 12 months, and settled at $86.46 in New York on Friday. The company said last month that second-quarter profit gained to $1.17 billion from $382 million a year earlier, bolstered by the $26 billion acquisition of Phelps Dodge.

"It is not easy" to amend the U.S. company's contract of work, Purnomo said Monday, adding that any changes needed to be agreed to through negotiations.

Still, "we have not received any notification," said Pangaribuan, the spokesman for Freeport's Indonesian unit. "The royalty is calculated on a quarterly basis using a complex formula related to copper prices and production."

Grasberg is second only to Escondida in Chile in terms of copper output. Freeport plans to produce 1.1 billion pounds of copper from the site this year, compared with 1.2 billion pounds in 2006. Gold output may gain 6 percent to 1.8 million ounces.

Three-month copper futures in London traded at $7,506 per metric ton in late afternoon trading in Jakarta on Monday.

* Editorial note: Freeport-Phelps Dodge is the world's biggest producer of copper