Indonesia threatens Newmont’s licence for Batu Hijau

VANCOUVER — The Indonesian government is threatening to terminate the Batu Hijau copper–gold mine contract if owner Newmont Mining (TSX: NMC; NYSE: NEM) does not withdraw a legal challenge to the country’s new export taxes.

After six months of failed negotiations with the government, Newmont filed for international arbitration over an escalating import tax imposed in January that the company says violates the contract that governs Batu Hijau, a joint venture between Newmont, three Indonesian corporations and Japanese firm PTNNT.

“PTNNT and its shareholders are left with no option but to seek relief through international arbitration to ensure our stakeholders’ jobs, rights and interests are protected,” Martiono Hadianto, president director of PTNNT, said in a statement. “We want continued dialogue with the government to lead to a resolution outside of arbitration. In the meantime, we have an obligation to protect the value of Batu Hijau and the thousands of jobs it provides, as we are still unable to export copper concentrates.”

The arbitration filing comes a month after the company suspended operations at the mine and six months after Newmont and Freeport-McMoRan Copper & Gold (NYSE: FCX) stopped exporting copper from the country. Freeport owns and operates the Grasberg mine in Papau province while Newmont is the operator and largest owner of Batu Hijau.

The companies stopped exporting copper when Indonesia enacted a long-discussed ban on exporting unprocessed minerals. Some minerals were temporarily exempted, including copper, lead, zinc, iron and manganese. But exporting these commodities requires a permit that acknowledges the new escalating sales tax.

For now, the tax is the issue. It kicked in at 25% and will increase monthly until it reaches 60% in 2017. Soon after that, all unprocessed ore exports will be banned.

At mid-year, Newmont and Freeport lacked the permits needed to export copper concentrates because they refused to accept the new tax regime. Both miners said  they believe that the contracts of work they negotiated with the government govern the level of taxes and royalties payable over the contracts’ lifetime in a legally binding agreement that supersedes any new legislation.

For a while Freeport reduced the milling rate at Grasberg by half to align its output with the intake capacity of Indonesia’s sole copper smelter, Gresik, which Freeport partly owns.

On July 25 Freeport and its Grasberg partners agreed to amended terms to provide a $115-million assurance bond to support its commitment for smelter development and to increase royalties to 4% for copper and 3.75% for gold from the current rates of 3.5% for copper and 1% for gold.

Grasberg has resumed full operations and exports of concentrates are set to resume in August.

Newmont has only a small off-take agreement with Gresik. As such the company kept Batu Hijau operating until June, when its copper concentrate storage facilities reached full capacity. With no room left to store concentrate and no permit to export it, Newmont says it had no choice but to suspend the mine and declare force majeure on shipments.

Indonesian officials have said the suspension equates to negligence, though the government has not declared that Newmont is in default. Such a declaration would start a 90-day clock, after which point the government says it could revoke Newmont’s mining contract. It has also threatened to sue Newmont for breach of contract.

Batu Hijau was supposed to produce 100,000 tonnes of copper in concentrate in 2014.

Freeport has taken a less aggressive approach to the situation and holds high-level negotiations with the government. This may reflect the fact that Freeport is more invested in Indonesia than Newmont. Grasberg is a much larger operation and Freeport is transforming the predominantly open-pit mine into an underground-only operation, as open-pit reserves at Grasberg are scheduled to be fully depleted in late 2016 or 2017.

The prohibition on exporting unprocessed ores is intended to promote domestic beneficiation. However, Indonesia has only one smelter, and smelters are costly to build and expensive to operate.

Indeed, Newmont has been vocal that building a smelter for Batu Hijau does not make economic sense. The company is working with Freeport to assess opportunities to develop smelter capacity in the country, and PTNNT has signed conditional supply agreements with two Indonesian companies working to build smelters.

However, in February Newmont CEO Gary Goldberg told Bloomberg that, because of the smelting capacity in China, the economics of running a smelter in Indonesia “just aren’t there.”

Newmont argues that copper concentrates are not “unprocessed minerals” and that producing a concentrate captures most of the value chain, which Newmont pegs at 95%.