Indonesia would cut Grasberg mine's production by as much as third

By Bambang Dwi Djanuarto and Berni Moestafa
Bloomberg News Service
Saturday, August 11, 2007

http://www.bloomberg.com/apps/news?pid=20601080&sid=aOUqEAeS4lAU&refer=asia

JAKARTA, Indonesia -- Freeport-McMoRan Copper & Gold Inc., the world's second-largest copper producer, should lower maximum daily production at its Grasberg mine in Indonesia to reduce environmental damage, according to government auditors.

Indonesia should reduce the production limit to between 200,000 tons and 250,000 tons of ore a day from the current cap of 300,000 tons, said Witoro S. Soelarno, head of mine inspection at the nation's Energy Ministry and a member of the auditors. The cut is to limit environmental damage, he said.

"We hope the audit results can be implemented this year," Soelarno said in a telephone interview today. The government has yet to adopt the team's recommendation, he said.

Reducing output at the mine, which provided almost 4 percent of the world's mined copper last year, may help support prices amid speculation losses linked to U.S. subprime mortgages will spread to commodities. Copper, nickel, and zinc prices fell in London yesterday, capping a third straight week of declines.

Copper for delivery in three months dropped $20, or 0.3 per cent, to $7,450 a ton on the London Metal Exchange yesterday. The price declined 2.9 percent this week, while nickel fell 8.6 percent, and zinc dropped 0.9 percent.

New Orleans-based Freeport normally produces about 220,000 tons of ore a day at Grasberg, said Mindo Pangaribuan, a spokesman for the company's Indonesian unit in Jakarta.

Freeport's operations are "in line with government regulation and follow the requirement set under the environmental impact analysis," Pangaribuan said today.

The company targets a production rate of 220,000 tons to 230,000 tons a day under a five-year plan, Pangaribuan said. He declined to say whether Freeport plans to change the target.

Indonesia initiated the audit after local activists last year called for a shut down of the Grasberg mine, in Papua, as Freeport doesn't do enough to benefit local people.

In May 2006, a team of legislators inspecting Grasberg's open-pit mine claimed they had found environmental violations that allegedly threaten the area's ecosystem. Two sites at Grasberg mine don't meet environmental standards, Soelarno said without elaborating.

The audit recommends Indonesia revise the method used for calculating Freeport's royalty payment, he said. Instead of calculating the royalty on a three-month basis, the government should calculate the amount on a per-transaction basis, he said.

Freeport should also pay a royalty on sulfuric acid it sells from its copper smelter in East Java to PT Petrokimia Gresik, Soelarno added. The smelter processes about 30 percent of Grasberg's mine output, he said.

The audit suggests the government ask Freeport to increase the amount it processes at its East Java smelter to 40 to 50 percent of Grasberg's output, he added.

Freeport runs Grasberg under a 30-year contract with the government that started in 1992 and can be extended for up to a further 20 years. The terms can only be modified by agreement of both parties, Freeport spokesman William Collier said Feb. 10 last year. Grasberg is also the world's largest gold mine.

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