Freeport-McMoRan Copper & Gold Inc. (FCX:US) and Newmont Mining Corp. (NEM:US), the largest U.S. miners, said new Indonesian rules on metal export duties infringe on contracts they have with the government.
Indonesia issued regulations on metal exports this month that curbed the shipping of unprocessed ore and placed duties on exports of copper concentrate, a semi-processed ore that’s shipped from mines to smelters. The rules have resulted in delays to obtain export permits, and Freeport plans to defer some production, according to the Phoenix-based company, the world’s biggest publicly traded copper producer.
The duties on copper, which begin at 25 percent and will rise to 60 percent by mid-2016, took Freeport by surprise, Chief Executive Officer Richard Adkerson said yesterday on a conference call with analysts. Indonesia, where the company operates its biggest mine, the Grasberg copper and gold operation, accounted (FCX:US) for 19 percent of its third-quarter revenue, according to data compiled by Bloomberg. Newmont’s Batu Hijau mine in the country contributed 6.8 percent of the miner’s total sales, the data show.
“It would get pretty rough for Freeport if Indonesia stuck to its guns on this,” Dan Rohr, an analyst at Morningstar Inc. in Chicago, said yesterday in a phone interview. “Grasberg is Freeport’s single most important asset, far and away, both in terms of size and in terms of quality.”
Freeport fell (FCX:US) 2.1 percent to close at $34.52 yesterday in New York. Newmont declined 1.7 percent to $24.39.
The new rules were changed just prior to their introduction on Jan. 12 to allow the shipping of copper concentrates subject to the new duty, Adkerson said on the call. Exports of unprocessed metals including nickel and aluminum have been banned as the Indonesian government seeks to increase the value of mineral exports.
Freeport, which also reported fourth-quarter earnings (FCX:US) yesterday, said it’s in talks with the government to clarify the situation. The company said it will defend its rights under the so-called contract of work, which protects the company from additional taxes and duties. It’s unclear how the tax will be implemented, Adkerson said.
“Every business entity has the right to object, including to legally object,” A.R. Sukhyar, a director general at Indonesia’s Energy and Mineral Resources Ministry, said by text message today.
Freeport is also trying to obtain 2014 export permits, which it says have been delayed as a result of the new regulations. Freeport expects to defer production of about 40 million pounds of the metal -- the equivalent of about a 10th of its monthly sales of copper -- and 80,000 ounces of gold per month until the approvals are received.
Newmont, which also operates under a contract of work in Indonesia, is evaluating the possible impact on its operating plans at Batu Hijau, the company said yesterday in a statement. The Greenwood Village, Colorado-based miner, the largest U.S. gold producer, said it completed its scheduled shipments in early January and doesn’t have plans to export copper concentrate until later in the quarter.
Newmont’s minority-owned Indonesian unit will continue talks with government officials to resolve the issue “while also considering other remedies, including possible legal action,” the company said.
Batu Hijau ships as much copper concentrate to PT Smelting Gresik, Indonesia’s only copper smelter, as Gresik will accept, Newmont said.
Newmont said “multiple” studies have shown that it’s not economically viable to build its own smelter in Indonesia. Newmont has signed conditional supply agreements with two Indonesian companies that plan to build smelters in the country.
While Freeport sends about 40 percent of the Grasberg concentrate to Smelting Gresik, in which its local unit owns 25 percent, the rest is exported and the company has limited options for storing concentrates while the issues and permits are resolved, Adkerson said on the call. The economics of building a new smelter would be “challenging,” he said.
Freeport’s current forecasts (FCX:US) for copper sales of 4.4 billion pounds of copper and 1.7 million ounces of gold in 2014 assume no changes to planned shipments from its Indonesian unit. The company will update its 2014 outlook as export approvals are obtained.
Adkerson said he’s “positive” an agreement will be reached and the company would prefer not to resort to international arbitration.
“These disputes between Jakarta and Freeport have been fairly common and they always seem to be resolved rather amicably,” Rohr said. “I would expect that this will get resolved in fairly short order.”
Freeport reported fourth-quarter profit (FCX:US) excluding one-time items of 84 cents a share, beating the 80-cent average of 18 analysts’ estimates (FCX:US) compiled by Bloomberg, after costs in its mining business declined.
“Despite the strong performance, we would expect uncertainty surrounding the exporting of copper concentrate from Indonesia to continue to weigh on shares,” Anthony Rizzuto, an analyst at Cowen & Co., said yesterday in a note.
The Democratic Republic of Congo, where Freeport operates the Tenke Fungurume mine, also had planned to introduce a ban on exports of copper and cobalt concentrates early this year. The move was postponed until 2015 because the country doesn’t have enough electricity to process the minerals, Mines Minister Martin Kabwelulu said Jan. 15.
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