Rio Tinto’s copper woes worsen as Jakarta halts export

30 January 2017

Rio Tinto is facing more copper production struggles after Indonesia halted concentrate exports from the giant Grasberg mine, prompting operator Freeport McMoRan to threaten a shutdown of 60 per cent of production, with widespread local lay-offs.

Freeport has also cut 2017 production from Grasberg, where Rio is a partner entitled to a share of production above a certain level, because of low productivity from workers.

While Rio has not said it, uncertainty around the problem-plagued but highly profitable copper and gold mine in Papua province is thought to be the main reason the Anglo-Australian miner earlier this month issued a wide copper production range (525,000 to 665,000 tonnes) for this year — representing $1 billion of uncertain revenue at current prices. Consensus estimates now sit at 614,000 tonnes.

This week, Rio’s chances of coming in at the lower end of guidance increased after Freeport confirmed that concentrate exports from Grasberg had been halted this month. If the situation is not resolved by mid-February, up to 60 per cent of the mine’s production would be shut in, the miner said.

Under a complex joint venture agreement, Rio receives a 40 per cent production share from the mine after a certain amount of copper is produced. After 2023, Rio will have an effective 40 per cent stake in all production from Grasberg.

In an earnings call on Wednesday night, Freeport chief executive Richard Adkerson detailed a litany of problems threatening production and profit at the mine.

The biggest threat is stalled negotiations over converting a long-contested contract of work to a special operating licence that would still allow concentrate exports in the wake of a new Indonesian law banning exports of unprocessed ore. On top of this, there is a strike at the smelter that takes 40 per cent of Grasberg’s production. Indonesia is pushing for locals to own 51 per cent stake of the mine and at the same time the provincial government has lodged a $US400m ($530m) water tax claim.

The disputes have led Rio to increase its presence on the ground in Indonesia to help Freeport, with the big miner sending in the team that successfully negotiated an investment agreement for the giant Oyu Tolgoi copper and gold mine in Mongolia after a two-year standoff with the government halted work on a $US5bn underground expansion there.

Mr Adkerson said that for every month that exports were stopped, 70 million pounds (32,000 tonnes) of copper and 100,000 ounces of gold were being lost. While he said the government had given clear indications the situation would be sorted out soon, existing operations could not be maintained if exports did not start by mid-February.

“We would have to take steps to curtail operations, curtail costs, and that means very large lay-offs and cutbacks in capital spending, and we have developed plans to do that,” he said. “I will say we don’t expect to have to do that based on very recent discussions with the ministry, but it still remains for us to get these exports approval.”

Separate to the export issue, 2017 copper production guidance from Grasberg was cut from 1.45 billion pounds (658,000 tonnes) to 1.3 billion pounds because of low productivity of pit workers.

When Rio released its fourth-quarter production report onn January 17, its full-year copper production of 523,500 tonnes missed guidance of 535,00 to 565,000 tonnes, largely as a result of the productivity problems at Grasberg.

Source – The Australian