Indonesia pollution charge piles pressure on Freeport

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Indonesia pollution charge piles pressure on Freeport

Government demand US miner pay $13.5 billion in environmental damages threaten to scupper already tense Grasberg mine divestment negotiations

By JOHN MCBETH JAKARTA, MAY 9, 2018 1:54 PM (UTC+8)

Protracted contract negotiations between the Indonesian government and US-owned mining giant Freeport McMoRan Copper & Gold over the fate of one of the world’s most profitable mines just got a lot more difficult.

With the State Audit Agency (BPK) hitting Freeport last year with a US$13.5 billion bill for environmental damage, the Agriculture and Forestry Ministry has now told the company it must change the previously agreed way it disposes of its tailings, or rock waste from the milling process.

President Joko Widodo wants the talks, now entering a second tense year, completed by the end of June. But it is doubtful the two sides will come to an early resolution of their differences on the terms that would give Indonesia a 51% controlling interest in the Grasberg mine located in Papua’s Central Highlands.

Mining analysts see the government’s latest moves as an effort to pile further pressure on Freeport. The company’s chief executive officer (CEO), Richard Adkerson, has called the BPK audit “outrageous” and claimed that “political motivations” lie behind the ministry’s new environmental demands.

But in a sign that government agencies appear to be pulling in opposite directions, Mines and Energy Minister Jonan Ignasius, who heads the contract negotiations, is reportedly upset at how the latest developments have put new obstacles in the way of a settlement.

First issued last May without attracting much response, the BPK audit assessed damages of US$13.4 billion for Freeport dumping tailings in the forest, rivers and sea and for surface subsidence from underground mining, US$19.6 million in taxes for using protected forest and US$22.3 million in post-mining liabilities.

The Environment Ministry, for its part, has accused Freeport of numerous violations of its 1997 environmental permit, saying in an April 27 letter that the company’s current production system and environmental management procedures were no longer viable.

Among the violations, it claimed, was a 174-hectare expansion of the Grasberg’s open pit, an additional 600 million tons of overburden (the rock and soil overlying an ore body) and an increase in the mining capacity of the so-called Deep Ore Zone and other sub-surface preparatory work.

Without the US$7 billion Freeport has spent so far to ramp up underground production, the government would only be inheriting a yawning pit that runs out of ore this year and a tunneling network that will still take three years to come into full production.

Adkerson didn’t hold back in an April 24 earnings call, insisting the ministry’s demand that 95% of Freeport’s tailings be retained on land – instead of the current 50% – wasn’t possible. “There’s no ‘may’ about it,” he said, “it can’t be done in six months, 24 months or five years.”

“These (claims) were really shocking and disappointing to us,” he told investors. “After 20 years, you can’t simply say ‘we’re going to change the whole structure of what we’re doing.’ You can’t put the genie back in the bottle. It’s addressing a problem that doesn’t exist.”

It is not the first time Freeport has been blindsided by an issue that appeared to come out of left field. Only last month, Indonesia’s Supreme Court rejected a Papuan regional government lawsuit demanding the Arizona-based company pay US$469 million in water taxes and penalties dating back to 2011.

Significantly for any future legal action, the court set a precedent by ruling that Freeport’s 1991 Contract of Work (CoW), which was approved by Parliament and the president, was binding on the central and regional governments and cannot be overridden by any general law.

The BPK audit, meanwhile, was done without an on-site inspection and only in consultation with the Bogor Agriculture University, the National Institute of Aeronautics and Space and the Environment Ministry, which normally would have been expected to lead such an investigation.

But in addressing the possibility of the accrued damage assessment being used as a negotiation bargaining chip, Adkerson said Freeport did not see it as having any impact on the value of the Grasberg, the world’s third largest copper mine and single largest gold reserve.

Following a framework agreement reached in August 2017, under which Freeport agreed to divest 51% of its local subsidiary, the two sides have been working on a special mining license (IUK) to conform with the 2009 Mining Law and to replace the firm’s CoW, which doesn’t expire until 2021.

Indonesia’s first major foreign investor in the late 1960s, Freeport is seeking legal and fiscal assurances as part of securing guaranteed long-term mining rights at the Grasberg through 2041 and to maintain its ability to go to international arbitration as a last resort.

Valuation is a key issue in Jakarta’s separate talks with Freeport and Rio Tinto, the Anglo-Australian firm which has had a participating interest in the Grasberg mine dating back to the mid-1990s when it came on board to help finance the existing underground operations.

There appears to have been little personal contact between the two negotiating teams in more than a month, though Adkerson did meet in Washington two weeks ago with visiting Finance Minister Sri Mulyani Indrawati and Maritime Coordinating Minister Luhut Panjaitan, whose portfolio covers mining.

Last December, in tacit acknowledgment that everyone stands to lose if mining comes to a halt due to protracted negotiations, the government extended Freeport’s temporary IUPK until the end of June. Two months later, it also extended the company’s export license for a further year.

But the environmental issue has added a big new wrinkle. Two decades ago, the then-government agreed that PT Freeport Indonesia could use the unnavigable Ajkwa River as a deposition area for the millions of tons of tailings swept 3,000 meters downstream from the high-altitude mine.

Hemmed in by levees protecting the lowland city of Timika to the west and the Lorenz National Park to the east, the lowland tailings area now covers 230-square kilometers and is being added to at a rate of about 60 million tons a year.

When Freeport signed its contract extension in 1991, it was agreed that an in-river deposition system was the best option to deal with the rock waste, given the danger of an earthquake triggering a catastrophic release from a purpose-built tailings dam, particularly in the highlands.

What would have been a 90-kilometer pipeline to an offshore disposal site was also ruled out because of the high cost and the shallowness of the Arafura Sea, along with the possible threat of the tailings eventually drifting in the prevailing current on to Australia’s Great Barrier Reef.

Freeport is currently mining the final high-grade ore at the bottom of its kilometer-wide pit, before transiting to a wholly underground operation targeting five different ore bodies in the first half of 2019.

Adkerson acknowledges there is a “potential risk” the two sides will fail to meet the late June deadline and that the talks will be delayed until after next year’s presidential and parliamentary elections, with Widodo favored to win a second term that would put him under less pressure than he is now.

Coinciding with a recovery in global commodity prices, Grasberg’s copper output has recently increased substantially, with 311 million pounds mined in the first three months of this year, compared with 155 million pounds in same period last year, at a market rate 70 cents higher than in early 2017.

Similarly, Freeport’s gold production between January and March hit 595,000 ounces, more than double the amount it mined last year over the same period, to benefit from a similar rise in gold prices from US$1,229 to US$1,312 an ounce over the past year.

Substantial progress has already been made to convert the Grasberg into what will become one of the world’s largest underground mines, with a comprehensive ore flow system and the backbone of an extensive electric network expected to be completed this year.

But all that could come to a halt if the negotiations drag on. “If Freeport is unable to reach a definitive agreement on its long-term mining rights,” Adkerson warned last month “it intends to reduce or defer investments significantly in its underground development and will pursue dispute resolution procedures under its contract of work.”

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