Newmont Mining Corp. NEM -0.09% declared force majeure over Indonesian export taxes, a surprising move that allows the company to back out of contracts without penalty and could raise tensions with the resource-rich nation.
Martiono Hadianto, chief executive of the Newmont Indonesia subsidiary, said Thursday that his company “was left with no option but to declare force majeure” after taking “numerous steps to help resolve the export issue.”
Indonesia, a major copper producer, banned ore exports in January and introduced taxes on mineral concentrate exports. The goal was to force mining companies to build smelters and refine their minerals in Southeast Asia’s largest economy. Taxes on concentrates are between 20% and 25% and will gradually rise to 60% by 2016.
The government didn’t return calls seeking comment on Thursday, but the Mining Ministry has said that its options were limited regarding the export ban and taxes.
Denver-based Newmont and Phoenix-based Freeport-McMoRan Copper & Gold Inc., FCX -0.26% which control the two largest copper producers in Indonesia, complained that the new tax violated their contracts with the government, which don’t include export taxes. The companies responded by selling to domestic smelters and stockpiling inventory. Freeport also cut production to 140 million pounds of copper in the first quarter, down 36% from a year earlier, while Newmont increased output.
The mining companies chose different tactics in negotiations with the government. Newmont has been more vocal in discussing the possibility of taking Indonesia to arbitration, while Freeport has played its hand more carefully. Freeport CEO Richard Adkerson met with Indonesian government officials this week. Representatives of the government and the company said they were close to reaching an agreement, which could involve Freeport getting a break on taxes in exchange for helping to build a new smelter. Newmont executives said they, too, met with government officials.
Indonesian Industry Minister M.S. Hidayat said Wednesday that a deal on lowering export duties was near. “But as these are all long term contracts, there needs to be legal fine-tunings,” he said. He declined to detail how much the duties would be lowered but hinted that a gradual decrease in export taxes would be linked with the progress of smelter construction.
Newmont’s statement on Thursday was unusual.
“Usually, you only declare force majeure when there’s a mine accident or a strike,” said Charles Bradford, an analyst with Bradford Research Inc. “It doesn’t happen often because governments change the rules, because governments don’t often do that.”
Analysts said Newmont’s and Freeport’s strategies illustrated how a company’s stake will determine the risks it will take in negotiations.
“Freeport is much more heavily invested in the country, so they have more to lose by picking a fight with the government,” said Ignace Proot, an analyst with Sanford C. Bernstein & Co. “For Newmont, it’s a much smaller part of their business.” Freeport employs more than 30,000 people in Indonesia, more than seven times as many as Newmont, and is planning an ambitious new underground copper mine.
“It makes sense for Newmont to do this now, because they have inventory built up for the holiday season, and there’ll be a new president in the fall,” who might renegotiate the export taxes, Mr. Proot said.
Newmont’s move came two days after its subsidiary, PT Newmont Nusa Tenggara, stopped production at its mine in Eastern Indonesia, saying it lacked storage space after going more than four months without exporting copper concentrate. The company has yet to receive an export permit since the new taxes went into effect in January.
About 80% of Newmont’s 4,000 employees in Indonesia will be placed on leave at reduced pay starting Friday, the company said.
The Wall Street Journal
