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Indonesia wants smelter supply deal before Newmont can resume exports

By Fergus Jensen and Yayat Supriatna

JAKARTA, Aug 27 (Reuters) - Indonesia wants copper miners Newmont Mining Corp and Freeport-McMoRan Inc to hammer out a deal on concentrate supply for an upcoming smelter before allowing Newmont to resume exports, a mining ministry official said on Wednesday.

U.S.-based Newmont, which runs the Batu Hijau copper mine on remote Sumbawa island, withdrew its international arbitration filing against the Indonesian government this week, indicating a possible breakthrough in a seven-month dispute that has halted exports.

Newmont declared force majeure at its Indonesian mine in June and then filed for arbitration in July, and has been in a dispute with the government over an export tax imposed in January that the miner says conflicts with its mining contract.

"They both have to sit together," Sukhyar, director-general of coal and minerals at the mining ministry, told reporters. "We are asking for their (Newmont's) certainty in working with Freeport.

"We recognise that Freeport's smelter plan also accommodates concentrates from Newmont, so I've asked them to meet again to confirm this (plan)." He did not elaborate.

The tax is part of government moves to force miners to develop local mineral-processing facilities, which would bring bigger returns for Indonesia from its mineral resources.

Mining industry executives in Indonesia have balked at the idea of developing downstream industries and building smelters, citing a lack of power and infrastructure in remote areas where mines are often located.

Both Freeport and Newmont, which together account for 97 percent of Indonesia's copper output, had previously argued they should be exempt from the tax, which kicks in at 25 percent and rises to 60 percent in the second half of 2016, before a total concentrate export ban in 2017.

But Freeport's Indonesian unit resumed exports earlier this month after being granted a much reduced tax rate on condition it builds a smelter, and after signing a Memorandum of Understanding (MoU) with the government in July.

Freeport has begun initial work on the construction of a domestic smelter and is looking at potential sites to build the $2.3 billion project. Freeport declined to comment on Wednesday but has previously stated that the project may also involve Newmont.

Newmont could not be reached for immediate comment on Wednesday. Newmont said in a statement on Tuesday that multiple studies had shown it was not economically viable for it to build a smelter on its own.

"The company has an MoU to participate in a process with PT Freeport Indonesia designed to lead towards the development of a smelter," the statement said. Newmont also has conditional concentrate supply agreements with two Indonesian companies that plan to build their own copper smelters in the country, it said.

Government officials have previously stated that Newmont has already agreed to pay an export tax, without giving an exact figure, but that further talks were needed over the issue of an increase in royalties.

The MoU talks between Newmont and the government are likely to be concluded next week, Yoesrawan Galang, chairman of the Newmont Indonesia workers' union, told Reuters, adding that production may return to full capacity by mid-October.

Newmont's copper concentrate stocks are around 80,000 tonnes, Galang added.

Before the new export rules, Newmont forecast total output of copper in concentrate would amount to 110,000 to 125,000 tonnes from its Indonesian mine this year.

A trade ministry official said on Wednesday the ministry was yet to receive a recommendation from the mining ministry to enable issue of a concentrate export permit to Newmont.

(Additional reporting by Wilda Asmarini and Michael Taylor; Writing by Michael Taylor; Editing by Muralikumar Anantharaman)