Indonesian Economy Mid Term Assignment

By : Reni Handuweni 3104011

International Business Networking Faculty of Business and Economics University of Surabaya 2011 2012

Company profile Freeport-McMoran Copper&Gold Inc. (FCX) is a major international mining company was founded in 1987 with headquarter in Phoenix, Arizona with activities across four continents which mining, processing and exploration for ore containing copper, gold and silver. They operate in the Papua Province highlands, Indonesia. They market a concentrate containing copper, gold and silver all over the world. Problem / Challenges Royalty payer and tax for the government Freeport Indonesia is the largest corporate taxpayers, they also spent millions of dollars of payments to the Indonesian military, paramilitary, and police units and officials, as well as direct payments for vacations and college educations for family members of individual commanders according to the Securities & Exchange Commission because they developed a close relationship with the regime to secure its position in Indonesia. According to the provisions referred in the Contract of Work in 1991 that Freeport Indonesia has been paid to the Government of Indonesia since 1992 until December 2011 amounted to 13.8 billion U.S. dollars. Although FMI is the largest corporate taxpayers. The government receives only 1 percent of Freeport's gold production sales and 1.5 percent of copper sales. But referring to government Regulation No. 13/2000 and Regulation No. 45/2004, which stipulate that the royalties of a working contract are 3.75 percent for gold, 3.25 percent for silver and 4.0 percent for copper. This royalty payer doesnt give many advantages to the Indonesian government because the Freeport earning itself is very huge. This royalty is clearly much lower than other countries that are usually imposed at 6% to 5% for copper and gold and silver compare to 3% - 4% Rayalty. Against The Environment Law PT. Freeport Indonesia had been explored two places in Papua, its Ertsberg block cave (1967 until 1988) and Grasberg block cave (1988 until now) in the Tembagapura, Mimika. In the 1960 US provides the he transfer of control over Papua from the Dutch colonial administration to Indonesia. The bilateral agreement in Indonesias hand was declared in May 1963, then in the 1969 it carried the Act of Free Choice

which means they serve as a formal act of self-determination. In the mining operation, Indonesian Government doesnt get any advantages with the large economic potency in that mining region. And FMI had against the law of environment. They threw its 6 billion waste to the rivers of Lorentz National Park since 1997. FMI paid A multi-million dollar study conducted in 2002 Parametrix with Rio Tinto to said that the upper river and low lying areas are flooded with wet waste is mine now is not suitable for living the life aquatic. The report was submitted to the New York Times by the Ministry of Environment Republic of Indonesia. Financial Problem between employee and the company Freeport hasnt become an open company, which does the good corporate governance principle. In this case we dont know how much that they can produce from the Ertsberg block cave since we dont have the accurate production data from the Freeport. Exploration of land which the government handed over to the Freeport covers an area of 10 908 hectares for 30-year contract since 1972 and 10.000 ton copper was shipped to Japan. In 1995, Freeport just announced that the mine the gold in Papua after 21 years they said that they just mine the copper (1973 1994) even the Papuas people dont know that Freeport can mine gold from the block cave. The Papuas people suspect that Freeport had already mined around 2,16 until 2,5 billion ton of gold, which means its a large amount of money. Contract of work II was extended in 1991 even thought the due for Contract of work I is in 1997. This contract of work doesnt give any financial advantages for Indonesia party. Nothing change except the ownership of the shares and the taxation system but the royalty that they have to pay is still the same although there are a big changes in the amount of gold reserves. FMI earns around 70 trillion in a year. The Indonesian Freeport prioritized the production gain (profit) with the lowest production cost. The 70 billion earning calculate based on the data of PT. Freeport Indonesias profit, which published BBC News. On September 15, 2011 8000 Freeport Indonesias employee strikes because they think that their salary inappropriate according to the standards of Freeport employee in the world. Because of this action, Freeport Indonesia stopped their production on October 17, 2011. Because of this action the company suffered a loss around 19 million U.S dollars. Until November 2011 they could only produce 5% of their usual production.

Freeport didnt welfare the Papuas people from the beginning. The employees wages in Indonesia also inappropriate with the standards of wages around the world Freeport employees or in the other way Indonesian Freeport employees have the lowest wages compared to the other country. This is the data of the Freeport wages in 2006. North America South America US $10 70 / hr US $10 100 / hr Indonesia US $0.98 2 /hr

In 2010 the average wages in South America around US $66,432 / hr and in Indonesia US $4.421 - $7.356. If we compare the wages there is a huge differences between the Indonesian worker and the American worker with the same thing to do, or maybe therere bigger risk for Indonesia people because they have to work in the height of 4.200 meter, foggy, high rainfall, extreme cold temperatures to produce copper, gold, and silver. Thats why 8000 Freeport Indonesias employee strikes. Bad Company Image in front of the society A bad record of respect for human rights in Indonesia in the international eyes. Environmental destruction, poverty local communities, customary rights robbery, violence and murder that happened over and over to people around Freeport's Papua has been a concern nationally, even internationally. Alternative Strategy If we see from the problem that face the company and the environment analysed by SWOT analysis Strength FCX have strong market position because they are one of the largest holding company engaged in the exploration, mining, and production of copper, gold, and molybdenum. FCX have Geographically diverse mining assets. They had been explored two places in Papua, its Ertsberg block cave (1967 until 1988) and Grasberg block cave (1988 until now) in the Tembagapura, Mimika. That two block cave contains a lot of copper, silver, gold concentrates to be mined. FCX Improving financial condition because they prioritized the production gain (profit) with the lowest production cost. Weakness They have significant amount of debt, Freeport has some issues about the royalty payer and the employees wages, which become the main problem of Freeport,

which raise many destruction and the financial loss because of the employees strikes action. Also the royalty that they have to pay for the government, tax, and give many contribution to the And the significant operating risks in relation to Grasberg. Time underground mining operations are scheduled to begin at Grasberg block Cave mine is currently in development. Which have a high risk. Also suspension of field activities in Indonesia. Because Freeport didnt fulfil the demands of equality of wages and still remain employed terror, intimidation, threats Freepot Indonesia has actually been harassed and against the government of Indonesia. Freeport Indonesia forced to stopped their production on October 17, 2011 Opportunities Increasing demand for copper. Because the production of copper had increased so the demand of copper will also increase. Increase in gold prices. Because of the cost of production in mining gold is expensive and the demand of gold increase so the opportunities to increase the price is quite big. Threats Indonesian political, economic, and social uncertainties. Environmental laws and regulations. The image of this company is bad in front the society. From the analysis we can provides some alternative for the Freeport company to keep exist with the good condition from internal also external. The first strategy we can maximize the strength supported by the strong market position, Geographically diverse mining assets so the company can improve more in their financial condition. The second alternative, the company must covered their weakness with fulfill their employees satisfaction and care about the entire company both production and the worker. The third, with a big opportunities in increasing the demand of copper, the company can mines more copper in their block cave and sell it in a big amount. About the opportunities in increasing the gold price they can get more profit, with this profit they can improve the company performances.

And the last alternatives is reducing the threat with building a good image in front of the society eyes. There are some strategy to fix their image to be accepted by the society, like: Aware of the duties and responsibilities in natural resource conservation and sustainable development, particularly in the province of Papua Obeying all things related to the rules and regulations applicable environmental, voluntarily followed the environmental commitments, and the provisions of the Environmental Policy FCX. Ensure that the environmental considerations become an integral part at every stage of planning, engineering, and operation. Working with the communities around the working area with the principles of mutual respect and develop an active partnership. Facilitate and encourage recycling and reuse of the responsible disposal of products used in the operation. Ensure that all policies are documented, communicated to all employees and everyone who works on behalf of the company, and open to all parties. With doing the CSR of the company to the public to build a positive image in the society.

The company should require these alternatives strategies. If the dont their image in the society become worst and it will create more threat for the company.

The Best Alternative The best strategy I chose is the last strategy, because with building a good image in front of the public automatically they will fix all their badness. They also will take care of the environment and do not against the law. In dealing with the environment people they will treat their employee in a good way or in other way they will satisfy many people around. In this case they use the win-win solution, which mean that its good for the environment also good for the company.