Freeport Offers Indonesia Concessions to Resume Exports

Freeport-McMoRan Inc. (FCX) said it’s willing to hike royalty payments to the Indonesian government and make other concessions in return for approval to restart exports from the world’s third-largest producing copper mine.

Under a memorandum of understanding that may be signed “imminently,” the biggest publicly traded copper producer would also commit to help develop a smelter, pay new export taxes and will reopen the contract under which it operates in the Southeast Asian nation, Freeport Chief Executive Officer Richard Adkerson said yesterday.

Freeport’s immediate priority is securing approvals to resume copper exports after restrictions and duties introduced in mid-January forced it to reduce operations at the Grasberg copper and gold mine, Adkerson said on a conference call to discuss second-quarter earnings. It also has agreed to discuss selling part of its holding in Grasberg, the company’s biggest mine, to Indonesian interests as part of the contract renegotiation, he said.

The memorandum “is a compromise to create a bridge for us so that we can return to normal operations and so that we maintain goodwill with the government,” Adkerson said. “Our business judgment is that those concessions are warranted.”

The Grasberg complex includes a large pit and two underground mines. Freeport had reserves of 30 billion pounds of copper and 29.8 million ounces of gold in Indonesia at the end of 2013.

Half of Normal

Indonesia introduced restrictions on mineral exports in a bid to increase local processing. Freeport has been able to run Grasberg at about half of normal rates this year because it sends some copper concentrate, a semi-processed raw material, to a domestic smelter it helped build in the 1990s.

The company, which also has operations in the Americas and Africa, expects to be allowed to resume Indonesian exports immediately after the memorandum is signed, Adkerson said.

While it’s giving up ground on several fronts, Freeport also said it expects the renegotiations will include discussion about arrangements for it to continue operating Grasberg beyond 2021, when its contract expires. Freeport works in Indonesia under a so-called contract of work first entered into in 1967 and replaced by a new version in 1991. The arrangement can be extended for two 10-year periods subject to government approval, which according to the contract can’t be withheld or delayed unreasonably.

Escalating Duties

The memorandum also includes cuts to the new escalating export duties introduced this year and the payments would decline progressively, based on progress toward building the new smelter, Adkerson said. Freeport’s goal would be to work toward a zero export duty by 2016, he said.

It’s also agreed to discuss selling part of its holding in Grasberg to increase Indonesian ownership of the mine to 30 percent, from 9.4 percent now, Adkerson said. Any sale of shares in Freeport’s local unit would be at fair value and take place “over time,” he said.

Freeport’s update on Indonesia was “slightly negative,” Tony Robson, an analyst at BMO Capital Markets, said in a note yesterday after the conference call.

“Whilst signing of the MOU is expected to allow immediate resumption of production at Grasberg, it appears Freeport is indeed likely to pay at least some export taxes in the near term,” Robson said. “Signing of the MOU will not completely remove political overhang” because of the pending contract negotiations.

‘Right Direction’

Freeport fell 0.4 percent to $38.55 yesterday in New York. The shares have risen 2.1 percent this year.

The memorandum is “a step in the right direction,” Paul A. Massoud, an analyst at Stifel Nicolaus & Co. in Washington, said in a note today.

The company reduced its forecast for copper sales by 4.7 percent to 4.1 billion pounds, and cut its prediction for gold sales by 19 percent to 1.3 million ounces. The forecasts assume that its Indonesian unit restarts exports in August.

Freeport said yesterday its second-quarter earnings, excluding legal charges and other one-time items, were 58 cents a share, topping the 53-cent average of 18 analysts’ estimates compiled by Bloomberg. Sales rose 29 percent to $5.52 billion, beating the $5.35 billion average estimate.

Freeport acquired Plains Exploration & Production Co. and McMoRan Exploration Co. last year in transactions valued at about $9 billion, excluding assumed debt, to diversify into oil and gas. The company plans to sell another $4 billion to $5 billion of onshore energy assets to reduce debt as it focuses on deep-water oil and natural gas finds in the Gulf of Mexico, Vice Chairman Jim Flores said yesterday on the conference call.

To contact the reporter on this story: Liezel Hill in Toronto at lhill30@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net Steven Frank, Will Wade

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