Mining Company Freeport Agrees to Cut Concession Area

Jakarta Globe, ID/Retno Ayuningtyas, January 03, 2013

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Mining company Freeport Indonesia has agreed to trim its concession area in Timika, Papua, indicating that the government’s efforts to renegotiate mining contracts have started to bear fruit.

“There has been some progress with renegotiation, the concession area [of Freeport] will be cut,” Thamrin Sihite, the director for mineral resources and coal at the Energy and Mineral Resources Ministry, said last week.

Thamrin did not mention how much of Freeport’s concession area would be cut, however, according to the 2009 mining law, the maximum size of a concession area must be limited to just 25,000 hectares.

Currently the company controls 170,000 hectares in Timika where the world’s largest recoverable reserves of copper and the biggest gold mine in Indonesia, the Grasberg mine, is located.

Limiting the size of concession areas for miners is part of the renegotiation goals initiated by President Susilo Bambang Yudhoyono’s administration. The 2009 mining law also compels to government to seek more revenue, bigger royalty fees, order miners to establish ore processing facilities as well as divest stakes to local entities.

Miners under the “contract of work” or the previous mining contract are not affected by the law. Only miners under the new permit called the “mining business licenses” are affected.

Yudhoyono said in June last year that he has a “moral obligation” to seek changes in contracts, some of which were signed decades ago that he believed are “unfair.”

Led by Chief Economics Minister Hatta Rajasa the government has set up a team to renegotiate contracts with miners that hold contract of works, such as Freeport and Newmont Nusa Tenggara.

Thamrin said the government views royalties, concession areas and the length of contracts as related to each other and are all for a greater benefit of the state.

“For the government, the bigger the royalty, the better it is,” he said.

Freeport currently pays 1 percent in royalty on their gross gold sales, apart from a 35 percent corporate income tax, which is bigger than the common 25 percent tax charged for non-resource companies. The government is seeking to increase the royalty for gold to 3.75 percent.

Freeport Indonesia’s president director, Rozik B. Soetjipto, said his company is willing to renegotiate with the government.

The company has also sent responses toward the six clauses of contracts that will be reviewed.

“Internally, we already have our position, but we cannot reveal it yet,” he said.

Rozik believes the cut in concession areas will not impact on the company’s production.

He said Freeport Indonesia, which in the past relied on open-pit mining, for extracting copper ore, has begun underground mining construction as surface reserves have depleted.

The project will involve between $16 billion to $18.5 billion in investments. The underground mining is expected to start in 2017.