UPDATE 3-Freeport confident of resolving Indonesia export impasse

Wed Jan 22, 2014 2:53pm EST

By Allison Martell and Nicole Mordant

Jan 22 (Reuters) - Freeport McMoRan Copper & Gold Inc said on Wednesday it would "defend its rights" in Indonesia against a new export tax but was confident of resolving its dispute with the government without going to international arbitration.

Freeport, the world's biggest publicly traded copper company, said the new regulations conflicted with a contract it signed with the government of Indonesia in 1991, which stated it would not be subject to any new taxes, duties or fees.

The company said that due to delays in getting government approval for 2014 exports it would defer production of some 40 million pounds of copper and 80,000 ounces of gold per month until the issue was resolved.

It made no mention of declaring force majeure to free itself from obligations to deliver concentrate from its massive Grasberg mine in Indonesia, although it did say it was in "active communications" with customers.

Chief Executive Richard Adkerson said he did not want to speculate on next steps because he is confident Freeport will reach an agreement with the government.

"We have a strong desire not to go to international arbitration," he said. "The much more attractive course of action would be ... to find a mutually agreeable resolution to it with the government."

Adkerson was speaking on a call with analysts and investors to discuss Freeport's fourth-quarter results. Earnings at the U.S.-based miner, which also has large oil and gas operations, fell from a year ago on weaker metals prices.

Freeport's Grasberg gold and copper complex, located in Indonesia's Papua province, is one of the world's largest copper and gold deposits. In 2012, Freeport's Indonesian operations contributed 23 percent of its group pre-tax income.

SEEKING CLARITY

Morningstar analyst Daniel Rohr said that over the years Freeport, which has been active in Indonesia since the 1970s, had always managed to resolve disputes there more or less amicably.

"Each side gives a little bit. I expect that's going to be the case here," Rohr said.

The Indonesian government on Jan. 11 gave Freeport and fellow miner Newmont Mining Corp a reprieve from a controversial mineral ore export ban, but then surprised the U.S.-based majors by imposing an export tax.

Freeport had previously paid no export duties on concentrate shipments. As a result of the new tax, Freeport could pay around $5 billion more in taxes over the next three years, according to Reuters calculations.

Indonesia's new policies are meant to force miners to process more material in country and narrow a current account deficit that has battered Indonesia's currency.

Under their current contracts, Freeport and Newmont pay corporate income taxes of 35 percent plus royalties and other fees.

The new export tax, starting off at 25 percent, is set to rise to 60 percent by the end of 2016 before exports of concentrate are banned from 2017.

Under a joint venture agreement, Rio Tinto gets a 40 percent share of the output from Grasberg above certain levels until 2021, and 40 percent of all production after 2021.

PRICE SLIDE HURTS

Shares in Freeport fell 2.6 percent to $34.34 on Wednesday afternoon, alongside other major mining companies.

Earlier, the company reported a drop in fourth-quarter earnings following a decline in copper and gold prices. Net income fell to $707 million, or 68 cents a share, from $743 million, or 78 cents a share, a year earlier.

Excluding unrealized losses on oil and gas derivatives and other charges in the fourth quarter, earnings would have been 90 cents a share.

RBC Dominion Securities analyst Fraser Phillips said in a note to clients the adjusted earnings topped his expectations, partly because of better-than-expected mining costs, and sales of gold, oil and gas.

"Results were pretty good. Production figures were in line with what they said. Costs, particularly on the mining side, were pretty great," Rohr said.

Freeport said it expects to sell about 4.4 billion pounds of copper, 1.7 million ounces of gold and 60.7 million barrels of oil equivalents in 2014. The forecasts assume Indonesian operations running at normal levels.

Revenue rose to $5.89 billion from $4.51 billion, boosted by the company's recent oil and gas acquisitions.