In January, Indonesia introduced a set of rules requiring miners to shift from their current ‘contracts of work’ to so-called ‘special mining permits’ before being allowed to resume exports of semi-processed ores and concentrates. This move has led to a very public, increasingly costly dispute with miner Freeport-McMoRan, which appears to have ramifications not just on the industry, but also doing business in Indonesia.

Last month, a truce was finally reached on a very public dispute between the Indonesian government and U.S. copper mining giant Freeport McMoRan. The dispute had begun in January, when Indonesia introduced new rules for miners that covered contracts and permits, exports, taxes, divestment obligations and domestic processing requirements, among other issues.

Among its various provisions, the rules required Freeport and other miners to shift from their current “contracts of work” to so-called “special mining permits,” before being allowed to resume exports of semi-processed ores and concentrates, according to Reuters. The new permit required Freeport to pay taxes and royalties it was previously exempt from and divest up to 51 percent of its Indonesian unit, an increase from the previous 30 percent.

The Phoenix, Arizona-based Freeport said it would only agree to a new mining permit with the same fiscal and legal protection in its current contract. With Indonesia banning all copper concentrate exports until the miner adopted its new set standards, all work came to halt at the Freeport-owned Grasberg, the second-largest copper mine in the world, and brought them to a brink of arbitration. Finally, with Freeport losing an estimated $1 billion in revenue and the government losing millions of dollars in royalties, apart from fears of a slowing economy and layoffs, the two sides finally called a truce.

Last month, Indonesia’s trade ministry issued the miner with a permit to export 1.1 million tonnes of copper concentrate till February 2018. But even though the government has promised to allow Freeport to export its copper concentrate once again, negotiations will continue over the next six months on contentious issues, including on divestment, economic and legal protection and smelting investment.

The new rules stem from a ban announced by Indonesia in 2014 on ore shipments to push miners to build smelters to process ore locally, which, however, gave some concessions to concentrate producers after protests from the industry. As part of this push, a ban on the export of mineral concentrates from Indonesia kicked off in January.

Rules now being drafted will allow concentrate shipments to continue beyond that deadline in certain cases. “The prohibition on the exportation of mineral concentrates was actually introduced in 2014 by the issuance of Government Regulation as the Second Amendment to Government Regulation on the Implementation of Coal and Mineral Mining Business Activities,” says Defrizal Djamaris, co-founder of Jakarta law firm Kudri & Djamaris. “This prohibition was the next step of the reform in mining law in Indonesia under Mineral and Coal Mining Law which began in 2009.”

NEGATIVE IMPACT

This isn’t Freeport’s only skirmish with the Indonesian government. In 2014, the miner’s exports from Indonesia were held up for more than six months in a fractious export tax dispute connected to the country’s mining rules, costing Southeast Asia’s top economy more than $1 billion and putting thousands of jobs at risk. However, this recent costly, very public dispute, apart from cutting government revenues, has more potential to damage business sentiment in the country at a time when President Joko Widodo’s reform agenda has been buffeted by political instability and social tensions surrounding just-concluded gubernatorial elections in Jakarta.

Signed in 1991, Freeport’s present contract will not expire until 2021, and it has plans of investing around $15 billion to expand its Grasberg mining centre. The company has made direct contributions of more than $16 billion to Indonesia in taxes, royalties, dividends and other payments between 1992 and 2015, according to company data. Freeport says it has also brought in billions of dollars of investment to Papua, the country’s easternmost province, and employs thousands of its people.

However, tensions had grown around Grasberg after Freeport laid off about 10 percent of its workforce of 32,000 and cut spending on underground expansion by one-third in an effort to stem its losses. This could hamper Indonesia’s efforts to calm Papua, where a low-level insurgency has simmered for decades.

The mine’s social and environmental footprint also remains a source of friction. Papua’s GDP growth is expected to drop to 3 percent this year due to the Freeport dispute, down from 9.21 percent in 2016, according to the Papua branch of Indonesia’s central bank. A slump in Papua’s economy could aggravate tensions with Jakarta, complicating efforts by Widodo to enforce policies to extract more from its natural resources.

Despite the immediate layoffs of thousands of mine workers, the requirement to domestically process ores is not expected to have an entirely negative effect, with a potential upside for the mining sector being the construction of numerous processing facilities, says Fadriyadi Kudri, also a co-founder of Kudri & Djamaris.

The strain between Freeport and Indonesia eased as the government issued a temporary “special mining permit” in a plan to allow the miner’s operations to continue and exports to resume while discussions on longer-term issues continued. The temporary permit, valid for next six months, will see the two sides aiming to finalise agreements on investment stability, divestment and domestic smelting, among other issues.

“A resumption of exports would be a significant positive for Freeport in the near-term and would make us more optimistic about an eventual agreement over the more difficult longer-term issues,” Jefferies analyst Chris LaFemina said in a client note.

The dispute also fanned nationalist fervour in Indonesia, with newspaper headlines calling for Freeport to be “kicked out of Papua,” where Grasberg is located. As the clash escalated, Freeport Chief Executive Richard Adkerson said Indonesian ministers had been “aggressive” and that the new regulations were “in effect a form of expropriation.”

Freeport finally received its permit after U.S. Vice President Mike Pence visited Jakarta, and raised the Grasberg dispute. However, Indonesian Vice President Jusuf Kalla said earlier in an interview there was no political pressure and that this was “normal” in business, but warned Washington against politicising the Freeport issues. “The important thing is that Freeport’s immediate operations will be extended,” Kalla said.

Bill Sullivan, a Jakarta-based foreign legal counsel with Christian Teo & Partners, describes the government approach as a “smoke-and-mirrors strategy”: it appears to adopt a tough stance on miners for a domestic audience, but it is also careful to allow them enough room to continue commercial operations.

FOREIGN INVESTMENT

Fellow mining giant Rio Tinto said last month it was continuing talks on the long-term future of its stake in the Grasberg copper mine, and one of its top executives would visit the country for talks over the coming weeks.

Rio Tinto is in a joint venture with Freeport for Grasberg, with rights to 40 percent of production above specific levels until 2021 and 40 percent of all production after 2021.

“There is no doubt that Grasberg is a world-class resource. However, there’s a difference between a world-class resource and a world-class business,” said Jean-Sebastien Jacques, Rio Tinto’s chief executive, at the company’s annual general meeting in London.

“Depending what will happen in the coming months and years in terms of negotiations with the government, the extension beyond 2021, Rio will have to come to a conclusion whether we want to stay or not.”

For foreign investors that have spent a lot of money investing in facilities in Indonesia, the change of policy by the Indonesian government could be confusing and upsetting, lawyers say. “It should be very challenging for the foreign investors to understand the policy of the Indonesian government and to have business certainty,” notes Djamaris. “Hence, this may harm the reputation of Indonesia in the eyes of foreign investors. On the other hand, the change would probably be appreciated by mining companies as the policy showed that the country’s government intends to find solution for the problems facing by mining companies.”

He explains, however, that with its abundant coal and mineral resources, Indonesia will still attract many investors, including foreign investors to invest and conduct their businesses in the mining industry in the country. Additionally, the Indonesia mining industry in the future should not only on the upstream mining sector but also on the downstream mining sector as intended by the mining reform in mining law in Indonesia which began in 2009.

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JAKARTA ELECTION EXPOSES DEEP POLITICAL, RELIGIOUS DIVIDE

A former Indonesian education minister won the race for Jakarta governor last month after a polarising campaign that cast a shadow over Indonesia’s reputation for practicing a tolerant form of Islam. Anies Baswedan won with 58 percent of the votes versus 42 percent for Basuki Tjahaja Purnama, known by his Chinese nickname as “Ahok”, based on 100 percent of the votes in an unofficial “quick count” by Indikator Politik. Other pollsters showed similar results.

The national elections commission was expected to declare its official results in early May.

The turbulent campaign featured mass rallies led by a hardline Islamist movement, which has strengthened in recent years in a country long dominated by a moderate form of Islam. More than 80 percent of Indonesia’s population professes Islam.

“Going forward, the politics of religion is going to be a potent force,” said Keith Loveard, an analyst at Jakarta-based Concord Consulting and an author of books about Indonesian politics. Baswedan’s huge margin of victory was surprising since opinion polls in the run-up to the election had pointed to a deadheat.

Purnama won the first round of voting for governor in February in a three-way race.

Indonesian social media users likened the election outcome to the shock results of the U.S. presidential vote and the Brexit vote of last year.

One Twitter user, @fuadhn, said Indonesians “can feel what US and British citizens feel now. Welcome populism...”

The election came on the eve of a visit by U.S. Vice President Mike Pence, as the Trump administration sought to engage the world’s fourth-largest nation and largest Muslim-majority country as an emerging regional power.

The Jakarta election will be seen as a barometer for the 2019 presidential election, given the city’s outsized importance as both the nation’s capital and commercial centre.

Purnama is backed by President Joko Widodo’s ruling party.

Baswedan is supported by a retired general, Prabowo Subianto, who narrowly lost to Widodo in a 2014 presidential vote and is expected to challenge him again.

Religious tensions have been an undercurrent in the campaign, with Purnama on trial for blasphemy over comments he made last year that many took to be insulting to Islam.

Hundreds of thousands of Muslims took to the streets late last year to call for his sacking and to urge voters not to elect a non- Muslim leader. One person died and more than 100 were injured after one protest turned violent.

Some voters may have been reluctant to vote for Purnama because of worries about “five more years of protests on the streets by Muslim hardliners,” Loveard says.

Ismail Yusanto, spokesman for one of the groups, Hizbut Tahrir Indonesia, said the election showed that Jakarta voters didn’t want a non-Muslim leader.

“It is forbidden under Islamic law, to have an infidel leader,” he told Reuters.

Members of hardline groups, including the Islamic Defenders Front (FPI), celebrated the election result at Istiqlal mosque in central Jakarta, praying and cheering for the governor-elect.

Investors in Indonesian markets are likely to return to fundamentals such as corporate earnings, now that the political uncertainties surrounding the divisive Jakarta election have diminished, analysts said.

“As long as there are no security issues, the election outcome should not significantly stall the reform programme of the national government, in our view,” Citigroup said in a note. – Agustinus Beo Da Costa and Fergus Jensen of Reuters