Freeport-McMoRan 2011 Annual Report Download - page 104

102 | FREEPORT-McMoRan COPPER & GOLD INC.
Work royalty rates. erefore, PT Freeport Indonesia’s royalty rate
on copper net revenues from production above the agreed levels is
double the Contract of Work royalty rate, and the royalty rates on
gold and silver sales from production above the agreed levels are
triple the Contract of Work royalty rates.
e combined royalties, including the additional royalties
that became eective January 1, 1999, totaled $137 million in 2011,
$156 million in 2010 and $147 million in 2009.
In 2009, Indonesia enacted a new mining law, which will operate
under a licensing system as opposed to the contract of work system
that applies to PT Freeport Indonesia. In 2011 and 2010, the
Government of Indonesia promulgated regulations under the 2009
mining law and certain provisions that address existing contracts
of work. e laws and regulations provide that contracts of work
will continue to be honored until their expiration. However, the
regulations attempt to apply certain provisions of the new law to
existing contracts of work and may seek to apply the licensing
system to any extension periods of contracts of work, even though
PT Freeport Indonesia’s Contract of Work provides for two 10-year
extension periods, subject to Indonesian government approval,
which pursuant to the Contract of Work cannot be withheld
or delayed unreasonably. In February 2012, a new regulation was
adopted that would require mining companies in Indonesia
to process all minerals domestically and possibly ban export of
concentrates and other unrened minerals. However, PT Freeport
Indonesia’s existing Contract of Work includes specic provisions
that dene PT Freeport Indonesia’s rights to export product and
obligate it to develop domestic smelting facilities, if commercially
feasible, or to contract with other domestic smelters on a market
basis. In connection with the obligations under its Contract of
Work, in 1995, PT Freeport Indonesia constructed the only copper
smelter and renery in Indonesia (which is owned and operated by
PT Smelting — refer to Note 2 for further discussion).
Indonesian government ocials have periodically undertaken
reviews regarding compliance with Indonesian environmental
laws and regulations and the terms of the Contracts of Work.
In January 2012, the President of Indonesia issued a decree calling
for the creation of a team to evaluate contracts of work for
adjustment to the 2009 Mining Law, and accordingly, to take steps
to assess and negotiate size of work areas, government revenues
and domestic processing of minerals. e team’s assignment runs
through December 2013 and the group is expected to provide
progress reports to the President every six months. FCX intends to
continue to work cooperatively with the Government of Indonesia
to complete this review and to seek extension of the Contract of
Work beyond 2021, as provided under the terms of the Contract
of Work. e Contract of Work can only be modied by mutual
agreement between PT Freeport Indonesia and the Government
of Indonesia.
Africa. FCX is entitled to mine in the DRC under an Amended
and Restated Mining Convention (ARMC) between TFM and
the Government of the DRC. e original Mining Convention was
entered into in 1996, was replaced with the ARMC in 2005 and
was further amended in 2011. e current ARMC will remain in
eect for as long as the Tenke Fungurume concession is exploitable.
e royalty rate payable by TFM under the ARMC is 2 percent
of net revenue. ese mining royalties totaled $24 million in 2011,
$20 million in 2010 and $7 million in 2009.
In February 2008, the Ministry of Mines, Government of the
DRC, sent a letter seeking comment on proposed material
modications to the mining contracts for the Tenke Fungurume
concession, including the amount of transfer payments payable to
the government, the government’s percentage ownership and
involvement in the management of the mine, regularization of certain
matters under DRC law and the implementation of social plans.
In October 2010, the Government of the DRC concluded its review
of TFM’s existing mining contracts and conrmed that they are
in good standing. TFM’s key scal terms, including a 30 percent
income tax rate, a 2 percent mining royalty rate and a 1 percent
export fee, will continue to apply and are consistent with the rates
in the DRC’s current Mining Code. In connection with the review,
TFM made several commitments, which have been reected in
amendments to its mining contracts, including (1) an increase in
the ownership interest of La Générale des Carrières et des Mines
(Gécamines), which is wholly owned by the government of
the DRC, from 17.5 percent (non-dilutable) to 20.0 percent (non-
dilutable), resulting in a decrease of FCX’s eective ownership
interest from 57.75 percent to 56.0 percent and Lundin Mining
Corporation’s eective ownership interest from 24.75 percent
to 24.0 percent; (2) an additional royalty of $1.2 million for each
100,000 metric tons of proven and probable copper reserves
above 2.5 million metric tons at the time new reserves are
established by FCX; (3) additional payments totaling $30 million
to be paid in six equal installments of $5 million upon reaching
certain production milestones; (4) conversion of $50 million in
intercompany loans to equity; (5) a payment of approximately
$5 million for surface area fees and ongoing surface area fees of
approximately $0.8 million annually; (6) incorporating clarifying
language stating that TFM’s rights and obligations are governed
by its ARMC; and (7) expanding Gécamines’ participation in TFM
management. TFM has also reiterated its commitment to the
use of local services and DRC employment. In connection with
the modications, the annual interest rate on advances from TFM
shareholders increases from a rate of LIBOR plus 2 percent to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS