* Freeport could face $5 bln in extra taxes over next 3 yrs
* Export taxes could breach Freeport, Newmont contracts
* Government says will stick to its guns
* Arbitration could be a possibility -source
By Randy Fabi and Michael Taylor
JAKARTA, Jan 17 Indonesia's top copper producer,
Freeport McMoRan Copper & Gold, faces billions of
dollars more in taxes if it fails to convince the government to
back down from a new export tax, a dispute sources say may end
in legal arbitration.
Freeport and fellow miner Newmont Mining, which
together account for virtually all copper mining in Indonesia
and are exempt from export taxes under current contracts, are
expected to meet finance ministry officials on Friday.
President Susilo Bambang Yudhoyono gave Freeport and Newmont
a reprieve from a controversial mineral ore export ban, but then
surprised the U.S.-based majors by imposing an export tax.
Freeport, which produces 73 percent of Indonesia's copper
output, has halted concentrate exports from the world's
fifth-largest copper mine since Dec. 15, and has yet to resume
them as it awaits greater clarity on new government policies.
In an internal memo, the company said it would slightly
reduce production from Monday, due to uncertainty over the new
rule and scheduled maintenance.
"International arbitration is a probability, if the
government does not move on the issue of the export tax," said a
source close to the situation, who asked not be named because of
the sensitivity of the matter.
Freeport declined to comment, but a company spokeswoman said
before the ban took effect on Sunday that legal action was seen
as a last resort.
The new rules hike to 25 percent a tax for copper
concentrate exports, from 20 percent, and levy the tax on
Freeport and Newmont for the first time. The tax will rise to 60
percent by the end of 2016, before exports of concentrate are
banned from 2017.
As a result, Freeport could pay around $5 billion more in
taxes over the next three years, according to Reuters
calculations based on the company's production forecasts and
assuming copper prices of $3.50 a pound, and estimates by two
Indonesia's tough new policies aim to force miners to
process mineral ores in the country, as part of plans to
transform Southeast Asia's biggest economy into a producer of
finished goods, from being simply a supplier of raw materials.
That would increase its foreign revenue and narrow the
current account deficit, which has undermined investor
confidence and battered the rupiah currency.
Under their current contracts, Freeport and Newmont are
exempt from paying export taxes or any other government charges
not included in their agreements. The two firms pay corporate
income taxes of 35 percent plus royalties and other fees.
"The proposed export tax would be a brand new tax - on top
of all the others we are obligated to pay - not accounted for in
the contract of work we signed with the government," said
Newmont spokesman Omar Jabara.
"The contract explicitly sets the types and levels of taxes
and rate we are required to pay, thereby contractually assuring
predictability and stability."
Freeport in 2012 paid the government around $1 billion in
taxes and fees, while Newmont has paid more than $3 billion
Newmont, which produces about 24 percent of Indonesia's
copper output, said operations at its Batu Hijau mine were
normal and its first concentrate shipment of the year was
expected later this quarter.
Government officials said they were open to discuss the
matter with Freeport and other miners, but would not back off
from the new regulations.
"All are treated equally by the law. The government has
prepared themselves just in case Freeport and Newmont or any
other (miners) take our policy to arbitration," said Bachrul
Chairi, director general of foreign trade at the trade ministry.
The government is under pressure ahead of elections this
year to ensure that foreign companies are not seen to receive
more favourable treatment than local miners.
The new regulation was a "form of punishment" for companies
that did not have domestic smelters, the finance minister told
reporters this week.
Union officials have warned the new tax will force layoffs
at Freeport, but a top company official said there were no such
"It is an absurd policy," said Syahrir Abubakar, executive
director of the Indonesian Mining Association. "With the high
export tax, the mining industry will be forced to stop and close
Freeport and Newmont are also involved in contract
renegotiations with the government, and any legal action on tax
could hinder their hopes of an extension agreement to work
longer at their lucrative mines.
Freeport's copper production in Indonesia provides around 19
percent of the company's total global revenue, and its contract
is due to expire in 2021.