UPDATE 1-Freeport says Indonesia export ban may cut copper output

Tue Aug 13, 2013 8:31am EDT

By Fergus Jensen

JAKARTA Aug 13 (Reuters) - Freeport-McMoRan Copper & Gold Inc's Indonesian subsidiary warned that output from Grasberg, the world's second-biggest copper mine, could be cut by a ban on unprocessed ore exports that takes effect next year.

The Indonesian government is pushing miners, especially foreign-owned operations such as Freeport's Grasberg, to add more value within the country.

Freeport, which on Tuesday signed two memorandums of understanding with Indonesian companies planning to build smelters that would process its ore, said it might seek a way around the rules during its contract renegotiation with the government.

The company currently processes only around 40 percent of its ore mined in Indonesia at one smelter in East Java, PT Freeport Indonesia Chief Executive Rozik Soetjipto said on Tuesday, but the law now requires it to smelt all of the ore in Indonesia from January 2014.

"If there is no dispensation from the government... our mining capacity will need to be reduced ... It's very complicated," Soetjipto said at a news conference in Jakarta.

"Because of this, we will continue to try to talk to the government," he added.

Freeport's current contract to operate Grasberg in Papua province expires in 2021. The U.S.-based company wants a new contract completed before it makes investments of around $15 billion to extend the life of the complex after open-pit mining ends.

Its long-running negotiations, however, have rumbled on for more than a year as the government has sought bigger royalty payments, commitments on domestic processing and greater divestment by foreign miners.

Neither of the smelter companies planning to process copper concentrate from Grasberg have commenced construction yet, and neither is to likely complete their projects until at least 2017. Both also plan to use concentrate from the Indonesian unit of Newmont Mining Corp.

"We hope that the government will help us overcome the various difficulties this industry will face in the international market," Soetjipto said, adding that Freeport did not expect Indonesia to absorb all of its current copper output from Grasberg.

"PT Smelting Gresik, PT Indovasi (Mineral Indonesia) and PT Indosmelt would produce around 600,000 tonnes of copper cathode, assuming they all operate. That would require a big market," Soetjipto said, adding that the combined copper concentrate required to feed these smelters would reach around 2.5 million tonnes a year.

"We must still request the government's understanding of this problem - if there is any flexibility (and) if we must fulfil our obligation to process 100 percent of our production domestically," Soetjipto said, reiterating that Freeport's concentrate was already an intermediate product that was sold at 95 percent of the market value of the copper it contains.

In response to Freeport's request, however, the government's mineral enterprise director, Dede Suhendra, said the rules had been in place since 2009 and that it had appointed an independent team to evaluate the feasibility of building smelters.