Freeport-McMoRan 2013 Annual Report Download - page 117

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 ANNUAL REPORT | 115
government revenues and domestic processing of minerals. FCX
has been engaged in discussions with officials of the Indonesian
government to complete this evaluation process and obtain
an extension of the PT-FI Contract of Work beyond its primary
term ending in 2021 to 2041, as provided under the terms of the
Contract of Work, which can only be modified by mutual agreement
between PT-FI and the Indonesian government.
In January 2014, the Indonesian government published
regulations providing that holders of contracts of work with
existing processing facilities in Indonesia may continue to export
product through January 12, 2017, but established new
requirements for the continued export of copper concentrates,
including the imposition of a progressive export duty on
copper concentrates in the amount of 25 percent in 2014, rising to
60 percent by mid-2016. PT-FI’s Contract of Work authorizes it to
export concentrates and specifies the taxes and other fiscal terms
available to its operations. The Contract of Work states that PT-FI
shall not be subject to taxes, duties or fees subsequently imposed
or approved by the Indonesian government except as expressly
provided in the Contract of Work. Additionally, PT-FI complied
with the requirements of its Contract of Work for local processing
by arranging for the construction and commissioning of
Indonesia’s only copper smelter and refinery, which is owned by
PT Smelting (refer to Note 6).
The January 2014 regulations conflict with PT-FI’s contractual
rights under its Contract of Work. FCX is working with the
Indonesian government to clarify the situation and to defend PT-FI’s
rights under its Contract of Work. PT-FI is also seeking to obtain
the required administrative permits for 2014 exports, which have
been delayed as a result of the new regulations.
As of February 21, 2014, PT-FI has not obtained administrative
approval for 2014 exports. PT-FI has implemented near-term
changes to its operations to coordinate its concentrate production
with PT Smelting’s operating plans. PT-FI is engaging with the
government of Indonesia to reach a resolution that would enable
PT-FI to resume normal operations as soon as possible. In the
event that PT-FI is unable to resume normal operations for an
extended period, FCX plans to consider further actions, including
constraining operating costs, deferring capital expenditures and
implementing workforce reductions. PT-FI may also be required
to declare force majeure under its concentrate sales agreements.
Mining Contracts — 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. The original
Mining Convention was entered into in 1996, was replaced with
the ARMC in 2005 and was further amended in 2010 (approved
in 2011). The current ARMC will remain in effect for as long as the
Tenke concession is exploitable. The royalty rate payable by
TFM under the ARMC is two percent of net revenue. These mining
royalties totaled $29 million in 2013, $25 million in 2012 and
$24 million in 2011.
PT Indocopper Investama. In May 2008, FCX signed a Memorandum
of Understanding with the Papua provincial government (the
Province) whereby the parties agreed to work cooperatively to
determine the feasibility of an acquisition by the Province of the
PT Indocopper Investama shares at market value. PT-FI is
currently engaged in discussions with the Indonesian government
related to its Contract of Work and intends to conclude that
process before proceeding with any further discussions about the
potential sale of an interest in PT Indocopper Investama.
The copper royalty rate payable by PT-FI under its Contract of
Work varies from 1.5 percent of copper net revenue at a copper
price of $0.90 or less per pound to 3.5 percent at a copper price of
$1.10 or more per pound. The Contract of Work royalty rate for
gold and silver sales is at a fixed rate of 1.0 percent.
A large part of the mineral royalties under Indonesian
government regulations is designated to the provinces from which
the minerals are extracted. In connection with its fourth
concentrator mill expansion completed in 1998, PT-FI agreed to
pay the Government of Indonesia additional royalties (royalties
not required by the Contract of Work) to provide further support
to the local governments and the people of the Indonesian
province of Papua. The additional royalties are paid on production
exceeding specified annual amounts of copper, gold and silver
expected to be generated when PT-FI’s milling facilities operate
above 200,000 metric tons of ore per day. The additional royalty
for copper equals the Contract of Work royalty rate, and for gold
and silver equals twice the Contract of Work royalty rates.
Therefore, PT-FI’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.
The combined royalties, including the additional royalties that
became effective January 1, 1999, totaled $109 million in 2013,
$93 million in 2012 and $137 million in 2011.
In 2009, Indonesia enacted a mining law (2009 Mining Law),
which operates under a licensing system that is less protective of
licensees than the contract of work system that governs PT-FI.
The 2009 Mining Law and the regulations issued pursuant to that
law provide that contracts of work would continue to be honored
until their expiration. However, the regulations, including those
issued in January 2014, attempt to apply certain provisions of the
2009 Mining Law and regulations to existing contracts of work
and seek to apply the licensing system to any extension periods of
contracts of work.
In January 2012, the President of Indonesia issued a decree
calling for the creation of a team of Ministers to evaluate contracts
of work for adjustment to the 2009 Mining Law and to take steps
to assess and determine the Indonesian government’s position on
reduction to the size of contract concessions, increasing