Freeport's quid pro quo lands kudos, criticism

Freeport's quid pro quo lands kudos, criticism

JAKARTA (JP): Analysts are split over the quid pro quo made by
mining company PT Freeport Indonesia to increase royalties to the
government in return for the license to raise ore output at its
copper and gold mine in Irian Jaya.

Chairman of the Association of Indonesian Mining Professionals
(Perhapi) Herman Afif Kusumo praised it as "a laudable feat of
the government", but consultancy group Econit dismissed the "high
sounding but empty deal".

Herman told The Jakarta Post on Wednesday that Minister of
Mines and Energy Kuntoro Mangkusubroto deserved praise for
securing higher royalties from Freeport, which he said were "the
world's highest".

However, he noted Kuntoro would still have to determine
Freeport's land conservation programs, including environmental
protection, before giving the go-ahead for expansion to 300,000
metric tons per day (tpd).

"Kuntoro has successfully negotiated for higher royalties but
he has still to ascertain that Freeport will be committed to land
conservation programs before he issues the company permission for
its expansion."

Freeport, a subsidiary of giant U.S. mining company Freeport
McMoRan Copper & Gold, has agreed to double the royalties from
its copper mine and triple royalties from its gold and silver
mine if ore production at the Grasberg site exceeds 200,000 tpd.

The new royalty scheme will be backdated to Jan. 1, 1999,
Kuntoro said.

Under the contract of work signed in late 1991, Freeport has
to deliver to the government between 1.5 percent and 3.5 percent
of its copper sales and 1 percent of its gold and silver sales in
royalties.

Econit, chaired by economist Rizal Ramli, said in a statement
sent to the Post on Tuesday that the government would not enjoy
the increased royalties, even with the retroactive agreement, if
ore output remained below 200,000 tpd.

Econit cited Freeport's 1997 annual report as saying that the
company's ore output was 128,600 tpd for 1997, and added that it
believed output was still below 200,000 tpd.

"As such, the deal is only a high sounding but empty deal. It
looks to bring advantage to the government, but in fact it only
gives promises."

Econit said the new royalty scheme should be applied to all
levels of production.

No Freeport official was available on Wednesday to reveal the
company's current ore production.

Freeport executive vice president Stephen M. Jones said in a
news conference in July 1998 that the company's ore output
reached about 200,000 tpd, with it expected to increase to
240,000 tpd by the end of 1998. The company completed the
construction of its fourth concentrator for that purpose.

Econit regretted the government's failure to pressure Freeport
for a higher share of Grasberg, especially because of its
stronger bargaining position as the company desperately needed
the license.

It said the international community would understand the move
because Freeport was set to reap huge gains from the expansion
while Indonesia needed considerable revenue to deal with the
monetary crisis.

Freeport Indonesia is 81.28 percent owned by New Orleans-based
Freeport McMoRan, 9.36 percent by the Indonesian government and
9.36 percent by PT Indocopper Investama Industries.

Indocopper is 49 percent owned by Freeport McMoRan, 50.48
percent owned by PT Nusamba Mineral Industries, a subsidiary of
the Nusamba group, and the remaining 0.52 percent by the public.

Kuntoro has repeatedly promised to honor contracts to provide
investment security in Indonesia.

Herman said the government's economic benefits from raised
royalties would be "satisfactory enough".

"But, Freeport would do better to divest some of its shares to
the Irian Jaya administration to create a sense of belonging
among the Irianese to the company," he added. (jsk)