April 22, 2013 / 10:52 AM / 4 years ago

Freeport near Indonesia supply deal, could ease contract renegotiations

JAKARTA, April 22 (Reuters) - Freeport-McMoRan Copper & Gold Inc is near a deal to supply copper concentrate to an upcoming smelter in Indonesia, the smelter's chairman said, which could help the U.S. miner in its contract renegotiations with the Southeast Asian nation.

The Indonesian government is pushing foreign miners, including Freeport's local unit Freeport Indonesia, to add more value within the country, as well as trying to secure higher royalty payments and sales of controlling shares.

Last year Indonesia asked all miners to submit plans to build refineries or smelters ahead of a January 2014 ban on raw mineral exports. Freeport runs the world's second-biggest copper mine, Grasberg, in west Papua province.

"After long negotiations, I just got a signal from PT Freeport (Indonesia) that they will be ready to sign a raw material supply contract with us soon," PT Indosmelt's chairman Natsir Mansyur told Reuters on Monday.

Besides PT Indosmelt, other smelters due to start construction before the 2014 deadline are PT Nusantara Smelting and PT Global Investindo, which together with the existing PT Smelting will give total copper concentrate capacity of 3.4 million tonnes, according to industry ministry data obtained by Reuters.

Mansyur said construction of PT Indosmelt's copper smelter would start soon after the deal with Freeport is signed.

Freeport Indonesia was unable to comment immediately.

Mansyur did not say how much concentrate Freeport will supply. The U.S. company has said sales from Freeport Indonesia will be around 1.1 billion pounds of copper and 1.2 million ounces of gold in 2013, up 54 percent and 31 percent over 2012 figures, respectively.

Arizona-based Freeport has repeatedly said it is reluctant to build smelters in Indonesia, and the contract renegotiations have delayed Freeport's decision to invest billions of dollars to develop underground mining and extend the life of Grasberg, which also has the world's largest gold reserves.

"This is good because Freeport can say 'look, we are through signing contracts, ensuring that we are adhering to the spirit of the measures to try and ensure all material is processed within Indonesia'," said David Wilson, analyst at Citigroup in London.

"I presume it gets them out of having to invest themselves."

SOFTENING OF POLICY?

Juangga Mangasi, director of PT Nusantara Smelting, told Reuters his company, which is still in talks with Russia's Norilsk Nickel, will rely on domestic copper miners for 90 percent of the 800,000 tonnes copper concentrate capacity at its planned smelter.

PT Global Investindo could not be reached for comment.

Mining contributes around 12 percent to Indonesia's GDP. According to Citigroup's Wilson, Freeport Indonesia accounts for about 80 percent of Indonesia's total copper output, with Newmont Mining Corp accounting for most of the remainder.

The 2014 rule aimed to push miners into processing raw ores domestically to create more jobs and export higher-value finished metals, but the industry says finance, infrastructure and power supply problems make smelter projects problematic.

Besides the three copper smelters, five iron ore, three bauxite, and two nickel smelters are due to start construction before the 2014 deadline, the data showed.

But falling commodity prices have put added pressure on the Indonesian government, where officials have begun softening their rhetoric on the 2014 rule and now claim that smelters need not necessarily be built.

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