Copper miners' paths diverge over Indonesia export tax

By Michael Taylor and Allison Martell

JAKARTA/TORONTO, July 8 (Reuters) - Six months into a dispute with Indonesia's government that has halted copper exports, two U.S. mining giants are using very different tactics in a bid to resume shipments - behind the scenes talks or raising the stakes with an arbitration claim.

Freeport-McMoRan Copper & Gold Inc and Newmont Mining Corp account for 97 percent of Indonesia's copper production, exporting tens of thousands of tonnes of concentrate a month before a row over a new export tax halted shipments.

As the latest bid to broker a deal runs up against Indonesia's presidential election, Freeport is pushing on with government-led talks, with chief executive Richard Adkerson in Jakarta again last week.

Newmont, however, has filed for international arbitration, pushing to uphold the letter of the law on its contract but drawing a rebuke from the government which has questioned its "good will" in talks.

"Freeport is using the carrot and I guess Newmont is using the stick," said Chris Mancini, analyst at Gabelli Gold Fund. Gabelli Funds holds stakes in both companies.

In an effort to push miners to build domestic smelters and processing plants, Indonesia introduced new mining export rules in January. These include an escalating export tax, which will hit 60 percent in the second half of 2016, before a total concentrate export ban in 2017.

Freeport and Newmont, which export about two-thirds of their output as concentrate, insist the new tax violates their contracts, and have questioned the economic viability of building a smelter to ready concentrate for refining.

Despite a revived effort in recent weeks to secure a deal, industry officials say Wednesday's presidential election means the dispute is now unlikely to resolved until after a new president takes office in October.

"A resumption in concentrate exports will not happen until the end of the year," said Syahrir Abubakar, executive director of Indonesian Mining Association.

Copper prices have risen seven percent over the past three weeks, in part due to shrinking supply of refined metal as LME stocks have dropped to near-six year lows.

HARD BALL, SOFT BALL

Sitting atop one of the world's biggest and lowest cost copper and gold deposits and with a plan to mine until 2041, Freeport has a lot to lose if its relationship with the Indonesian government suffers irreparable damage.

Indonesian copper production provides about 19 percent of the Arizona-based company's global revenue, and analysts say enormous exploration potential remains.

Freeport has slashed output, but CEO Adkerson has spend a great deal of time in Indonesia and the miner has agreed to at least study the feasibility of a copper smelter project.

"Freeport is well aware that if you make grandstanding statements, that only enrages and inflames the more extreme elements on the Indonesian side," said Adrian Day, chief executive of Maryland-based Adrian Day Asset Management.

On Tuesday, Freeport said it had agreed a draft memorandum with the government on contract renegotiations, although hurdles remain before any deal is reached.

Colorado-based Newmont has taken a much harder line.

Less than two weeks after the January export rules were introduced, Newmont said it was considering legal action and by June it had declared force majeure and placed most of the 8,000 employees at its Batu Hijau mine on leave.

Piling on more pressure, Newmont last week filed for international arbitration against the Indonesian government, a move that some observers see as a dangerous gambit in a country where open confrontation is often frowned upon.

Indonesia's chief economics minister Chairul Tanjung on Monday urged Newmont to withdraw its arbitration claim or face a law suit from the government.

"If I was Newmont, I'd be very concerned that this might back-fire on them," said Jakarta-based mining law expert Bill Sullivan, foreign counsel at Christian Teo Purwono & Partners.

"Many people would say that, if you start arbitration against Indonesia, it is really an exit strategy," he said.

The move may partly reflect Newmont's smaller operations, which analysts say could not justify a stand-alone smelter.

Newmont's Indonesian operations accounted for about 3 percent of group revenues in 2013 and the miner is not in talks to extend its contract beyond 2030.

It is set to reach richer grades of ore in coming years, but analysts expect it to gradually sell its interest in Batu Hijau before mining draws to a close in about 20 years time.

CONTRACT EXTENSION

For Freeport, the tax talks are also linked to an extension of its current contract, that is due to run out in 2021.

While keen to invest the more than $15 billion needed to turn Grasberg into an underground mine after 2016, it needs the certainty of a contract extension to proceed.

Indonesia's presidential campaigning has been dominated by nationalistic rhetoric from candidates Joko "Jokowi" Widodo and Prabowo Subianto, and foreign miners are often seen as exploiting the country's natural resources.

But the current account deficit is under pressure and both companies pay substantial taxes and fees - $1 billion from Freeport in 2012 - while mine closures would affect more than 30,000 workers.

Newmont has already shuttered its mine, while Freeport may look to cut costs and try to break even at reduced capacity, sources said, but analysts says neither is likely to walk away.

"These are both very important mines for Newmont and Freeport," said Gabelli's Mancini.

(Additional reporting by Yayat Supriatna and Wilda Asmarini in JAKARTA; Editing by Richard Pullin)