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UPDATE 2-Freeport to defend itself against Indonesia export tax

Wednesday, 22 Jan 2014 | 10:41 AM ET

Jan 22 (Reuters) - Freeport McMoRan Copper & Gold Inc said on Wednesday it would "defend its rights" in Indonesia against a new export tax it said contravenes its agreement with the government, as it reported a drop in fourth-quarter earnings.

The world's biggest publicly traded copper producer, which has operated in Indonesia since the early 1970s, said it would defer production of some 40 million pounds of copper and 80,000 ounces of gold per month until the issue was resolved.

Freeport, which also produces oil and gas, said the new regulations conflicted with the deal it signed with the Indonesian government. It said the terms of that contract stated it would not be subject to any new taxes, duties or fees.

"We've never had a violation by either party of the contract, and we're confident that we will find a way to work ... that will represent the interest of our shareholders and be responsive to the government," Freeport Chief Executive Richard Adkerson said in a call with analysts and investors.

Sources close to the situation have said the dispute between Freeport and the Indonesian government may end in arbitration.

The government on Jan. 11 gave Freeport and fellow miner Newmont Mining Corp a reprieve from a controversial mineral ore export ban, but then surprised the U.S.-based majors by imposing an export tax.

As a result, Freeport could pay around $5 billion more in taxes over the next three years, according to Reuters calculations.

SEEKING CLARITY

Freeport's Grasberg gold and copper complex, one of the world's largest copper and gold deposits, is located in Papua, Indonesia, and the company's Indonesian operations contributed 23 percent of its consolidated pre-tax income in 2012.

Freeport halted concentrate exports on Dec. 15 amid rising uncertainty about the new policies, which are meant to force miners to process more material in country and narrow a current account deficit that has battered Indonesia's currency.

Under their current contracts, Freeport and Newmont pay corporate income taxes of 35 percent plus royalties and other fees. Freeport paid some $1 billion in taxes and fees in 2012.

It said it was working with the government to "clarify the situation and defend its rights" under the contract of work.

The tax, starting off at 25 percent, is set to rise to 60 percent by the end of 2016 before exports of concentrate are banned from 2017.

Under a joint venture agreement, Rio Tinto gets a 40 percent share of the output from Grasberg above certain levels until 2021, and 40 percent of all production after 2021.

PRICE SLIDE HURTS

Shares in Freeport slipped 1.4 percent to $34.77 in early trading on Wednesday, alongside other major mining companies.

The company reported a drop in fourth-quarter earnings following a decline in copper and gold prices. Net income fell to $707 million, or 68 cents a share, from $743 million, or 78 cents a share, a year earlier.

Excluding unrealized losses on oil and gas derivatives and other charges in the fourth quarter, earnings would have been 90 cents a share.

Analysts had expected earnings of 80 cents a share on revenue of $6.4 billion, according to Thomson Reuters I/B/E/S.

Freeport said it expects to sell about 4.4 billion pounds of copper, 1.7 million ounces of gold and 60.7 million barrels of oil equivalents in 2014.

RBC Dominion Securities analyst Fraser Phillips said in a note to clients the adjusted earnings topped his expectations, partly because of better-than-expected mining costs, and sales of gold, oil and gas.

Revenue rose to $5.89 billion from $4.51 billion, boosted by the company's recent oil and gas acquisitions.

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