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Sunday, February 12, 2006

Indonesia VP Wants Revision Of Freeport Profit Sharing Deal

JAKARTA -(Dow Jones)- Soaring mineral prices on the global market justify a revision of the government's profit-sharing agreement with U.S. mining giant Freeport-McMoRan Copper & Gold Inc., Indonesia's Vice President Jusuf Kalla said Friday.

"Prices of gold and nickel are currently high, (and) based on this, profit sharing should be increased by two-to-three times from the previous figures," Kalla told reporters, without elaborating on the terms of the government's current profit sharing deal.

Kalla said his desire to gain a bigger slice of the profits from Freeport- McMoRan's massive Grasberg mine in remote Papua province was motivated by concern for Papuan residents rather a bid to boost desperately-needed government revenues.

"This is for the sake of Papuan people, because 70% of profit sharing (from Freeport-McMoRan's operations) will be given to the Papuan people," he said, without elaborating. A Freeport-McMoRan spokesperson could not immediately be reached for comment.

Kalla said the government would seek to review the contracts of large foreign investment projects, including Freeport-McMoRan's Grasberg, every five years, without elaborating.

Copper and gold prices on the world market hit record highs earlier this month as fund managers entered the market en masse as a result of strong demand expectations from the Asian economic powerhouses of China and India.

Copper reached an all-time intraday high of $5,110 per metric on Feb. 7 while gold reached an 18-year high of $575 an ounce on Feb. 2. on the London Metals Exchange.

Freeport-McMoRan funneled $260 million into government coffers in the form of taxes, royalties, dividends and fees in 2004, data from the firm's annual report for that year indicates. The report says the firm's total economic benefit to Indonesia totaled $3 billion in the same period.

The Grasberg mine has produced 16.1 billion pounds of copper and 23.3 million ounces of gold net since its discovery in 1988. The mine's estimated reserves of more than 40 billion pounds of copper and 46 million ounces of gold give it " decades" of future production, the Freeport-McMoRan 2004 annual report said.

Kalla's comments are likely to reinforce foreign investors' worst fears about contract sanctity and the predictability of Indonesia's legal and regulatory environment.

Indonesia recorded a 20.6% on-year rise in approved foreign direct investment to $11.69 billion in the first eleven months of 2005, but analysts say concern over the country's judicial unpredictability remains a major deterrent to new investment inflows.

Foreign investors are already aghast at a wrangle between Indonesia's state- owned Petroleum firm Pertamina (PTM.YY) and U.S. oil giant Exxon Mobil Mobil Corp. (XOM) that's preventing the signing of a joint-operations contract for the massive Cepu oil block in East Java province.

The two companies are deadlocked over Pertamina's demand that it be Cepu's sole operator for the first five years of the block's 30-year contract. Exxon Mobil says the demand violates a memorandum of understanding the two companies signed in June 2005.

Kalla's comments coincide with heightening official scrutiny of alleged illegal payments by Freeport-McMoRan to military officers on Papua. Freeport-McMoRan said late Wednesday that it will fully cooperate with government investigations into its Grasberg operations in Papua province.

Indonesia's Minister of Energy and Mineral Resources, Purnomo Yusgiantoro, said Wednesday that the government will "very soon" form a special interdepartmental investigative team to probe complaints about Freeport- McMoRan's Papua operations.

That probe is part of the widening fallout from a December New York Times report that Freeport-McMoRan allegedly made payments of nearly $20 million to military and police officials posted around Grasberg from 1998 to 2004.
Similar allegations were also made by London-based environmental watchdog Global Witness' "Paying for Protection" report in July 2005.

The allegations prompted Indonesia's defense minister last month to call for a probe of Freeport-McMoRan's military payments and for the issuance of specific guidelines for private firms that need the Indonesian military to provide security in remote areas.

In January, the allegations prompted the comptroller of New York City, representing shareholders of city pension funds, to ask both the U.S. Justice Department and the Securities and Exchange Commission to probe the legality of Freeport's financial support for security forces in Papua.

Freeport-McMoRan has said it gave "financial support" to Indonesian security officials in Papua for items including infrastructure and logistics, according to a letter signed by the company's Chief Executive Richard Adkerson, posted on the company Web site on Jan. ll.

The company's vice president of communications, William L. Collier III, last week declined a Dow Jones Newswires request for clarification on the payments, saying he wouldn't comment beyond the company's public disclosure.

Jakarta Bureau; Dow Jones Newswire

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