Freeport Strike Mines a Political Jungle

Asia Times November 2, 2011

By John McBeth

JAKARTA - He is a mechanic with a single name and a mysterious past, but the man called Sudiro is almost single-handedly leading the eight-week-long strike that has played havoc with the operations of the world's richest copper and gold mine in the central highlands of Papua, Indonesia.

When he was elected chairman of the Freeport Trade Union of Chemical, Energy and Mine Workers - a chapter of the nationwide All-Indonesia Workers Union (SPSI) - in October last year, Sudiro signaled from the beginning that things would be different for the mine's workers.

To the chagrin of Freeport Indonesia, a subsidiary of the Phoenix-based mining giant Freeport McMoRan Copper & Gold, he has been true to his word. Suddenly, labor has became as much a part of the company's problems as perennial environmental and community issues and the renewal of its contract of work (COW) in 2021.

During previous union negotiations going back to 1977, everything had gone smoothly; for a lot of that time SPSI was the only union sanctioned by former president Suharto's New Order regime - and therefore was a docile one at that.

In July, spurred by record-high prices for copper and gold on the world market, Sudiro stunned management by demanding a huge increase in hourly rates for non-staff mine workers - from US$2.10 to $3.50 per hour to a whopping $17 to $43; he has since reduced the bottom end of the scale to $7.50.

Soaring profits have led to similar work stoppages at mines in Peru and Chile, where the demands for higher wages have not been quite so outlandish but seem to represent a game-changing trend all the same.

Freeport was initially convinced Sudiro could mobilize only several hundred workers. In the end, it turned out to be 8,000 - the majority of the company's workforce - leaving only a skeleton operational staff of 1,300 and 5,000 contractors to run the big Grasberg mine.

Production fell by between 30% and 50% a day when the strike began in September, but with the recent cutting of the 112-kilometer pipe carrying concentrate from the mill to the port, the company is now only stockpiling ore and clearing away over-burden while it waits for government mediators to work out a compromise.

Armed Allies

Sudiro is not without powerful friends. His late father was a navy officer and reportedly close to legendary special forces commander Lieutenant General Sarwo Edhie, father of First Lady Kristiani Yudhoyono, who is credited with crushing the Indonesian Communist Party in the mid-1960s.

The friendship has continued into the current generation. When Sarwo Edhie's son, army chief of staff and career special forces officer General Pramono Edhie Wibowo, visited Timika in early September he spent time with Sudiro in what was described as a private family meeting.

The common thread appears to be taekwondo. Sarwo Edhie was founder and president of Taekwondo Indonesia between 1984 and 1988. Sudiro is a taekwondo specialist who is reputed to have once trained Indonesian special forces (Kopassus) commandos at their Jakarta headquarters.

Much of his past, however, remains a mystery. He was born in East Java and joined Freeport as a mechanic about a decade ago. Few people had ever heard of him, including provincial and national SPSI officials, when he was elected to head the union branch last year.

He has turned out to be a charismatic orator with a remarkable ability to win even the Papuan workers to his side. A Muslim, he has been known to invoke the name of Jesus Christ to mobilize the mostly Christian tribesmen who make up 30% of Freeport's workforce.

Sudiro was among six workers fired from Freeport last June, several weeks before the first eight-day strike staged in July. They are alleged to have failed to report for work for three months, but Sudiro says they were busy preparing for the twice yearly collective labor agreement negotiation.

Freeport's workers earn an average of $18,000 a year and are among the highest paid in the country, with free medical care and accommodation. Under the new package, which includes metal bonuses tied to world prices and a new savings plan, that will rise to about $23,000 per year.

But Sudiro is aiming much higher. In July, he complained that while Freeport Indonesia has the lowest production costs of all the company's global operations, the mine's workers are paid even less than their colleagues in Mongolia and the Democratic Republic of Congo.

He also accused the company of treating the employees as "an instrument" and said that far from the strike being simply about wages and benefits, it was also about recognizing the union and its right to freely organize.

Although his bodyguards appear to be off-duty soldiers, not much can be read into Sudiro's military affiliations because there is no evidence he is receiving outside support for his union activities or that powerful Jakarta interests are somehow involved.

But when something can't be explained in Indonesia, conspiracy theories abound - particularly when there have been eight mysterious killings in the past six months, all apparently unrelated to the strike and all in areas supposedly free of separatist activity.

The Free Papua Movement (OPM) was blamed for a series of sniper incidents between July 2009 and mid-2010, which claimed three lives. But all took place on precipitous sections of the road after it leaves the flatlands and begins the long climb through the mountains.

Last April, in a sinister new development, two senior Freeport security men were run off the eastern levee road and executed with gunshots to the head, their bodies left in the burned-out remains of their land cruiser. Only authorized vehicles are permitted in the area where the shooting took place.

The cell-phone of one of the victims came to life a fortnight later and was reportedly traced to a soldier, but local police and civilian officials have never given a full account of the incident and nothing has come of the investigation.

In the second ambush on October 14, gunmen opened fire from the side of the road near the same spot, brutally killing three more workers - one of whom had his throat cut - and burning their vehicle. Although it was never reported, a fourth worker escaped.

A week later, a Freeport worker was killed and two policemen wounded in a pre-dawn attack on the lowland section of the road leading to the mine. Tracker dogs lost the assailants as they escaped though a panning camp, shooting dead two men on the way.

Military Vs Police

All this is being played out against the backdrop of a long-simmering rivalry between the police and army, which gained momentum in 2000 when the police separated from the armed forces and, in doing so, took over many of the military's shady money-making ventures.

Three years later, as part of that transition, the police assumed responsibility for internal security at the Freeport mine, a controversial arrangement under which the company last year paid the paramilitary Police Mobil Brigade $14 million in security-related allowances, food and other in-kind necessities.

Far from being done secretly, the payments have always been part of Freeport's filings to the US Securities and Exchange Commission from the time the army was put in charge of guarding what the government considers a national asset in 1997.

Failure to report them would have made Freeport liable to charges under the Foreign Corrupt Practices Act. The company also spent $28 million last year on its own unarmed security force, up from $22 million in 2009.

Coincidental or not, 2003-2004 marked the first appearance of itinerant gold panners in the river carrying the mine's waste, or tailings, from the company's mill to a lowland deposition area that has been used since the Grasberg mine was opened in 1991.

Today there are an estimated 10,000 panners and, with about 10% of the mine's gold escaping during the milling process, the business has grown to a staggering $100 million per year enterprise - an infinitely more inviting prize than the largesse offered by Freeport.

Up until two years ago, the army and the police managed to work together, with military trucks carrying the panners to points along the river for 1 million rupiahs (US$112) each and the police acting as middlemen for dozens of newly opened gold shops in the coastal town of Timika.

Local sources now claim that the police have begun to squeeze the army out of the trade altogether. The resulting friction may well have been behind the still-unexplained killings and the recent spate of attacks on police vehicles.

As in past incidents, it is the panners who are believed to be responsible for cutting Freeport's 112-kilometer pipe carrying the concentrate from the mill to the port so they can flush out the rich pickings inside. New acts of sabotage last week forced Freeport to shut off the flow and declare force majeure on some of its sales agreements, the first time it has done so since the strike began.

Certainly, the company blames the strikers for the recent sabotage of the oil pipeline to the mine, and for destroying and hijacking other equipment. Strikers have also blockaded the road to the high-altitude mining town of Tembagapura, where supplies are now running low.

Workers who have refused to join the strike are receiving death threats. In one recent incident, 200 of their motorcycles, parked near the company bus terminal, were smashed up and thrown into a nearby river.

The terminal itself was the scene of a clash between strikers and police on October 10 that claimed two lives. The shooting of another six people at an independence rally in the provincial capital of Jayapura 12 days later has raised tensions across the territory even further.

Regulatory Risks

For Freeport shareholders, the stakes could not be higher. Faced with a $10-$12 billion bill to convert Grasberg into what will be the world's largest underground mine, it must secure an early guarantee that its contract will be extended - and under terms that do not enforce strict compliance with the new 2009 Mining Law.

The legislation has created widespread concern in the industry because of the way it changes the tried and tested COW system to one where firms will operate under extendable 20-year licenses. The law's stated purpose is to encourage local investment in at least small to medium-sized enterprises and also to boost government revenues, specifically by adding value to the country's natural resources, instead of exporting commodities in raw form.

The biggest bone of contention is Article 172 and subsequent supporting regulations that allow present contracts to run their course, but with an ambiguous condition that companies conform with at least some provisions of the revised law.

Freeport feels it should be treated differently. Under the terms of its contract, negotiated in 1991, it is allowed two 10-year extensions, "approval of which will not be unreasonably withheld". In other words, it argues, the termination date is 2041 - not 2021.

The company will have to work hard to find a compromise. On top of seeking a further increase in revenues, senior officials say the firm will also have to deal more directly with local authorities and conform with new policies on forestry protection and emission reductions.

Freeport, for its part, is worried about how the new law appears to permit arbitrary changes in the tax regime and, more crucially, would compel it to invest a further $2 billion in a Papua-based smelter to process all of its production in Indonesia; 25% of its concentrate is now smelted at a Mitsubishi-run plant at Gresik, north of Surabaya on the island of Java, producing 200,000 tonnes of copper a year - or enough to meet all of the country's requirements. Another 35% goes to its own smelter in Spain.

Government sources say Freeport will also be expected to improve infrastructure around Timika, which still relies on small, unreliable diesel-powered generators for its electricity supply. The firm's 195 megawatt (MW) coal-fired plant on the coast, and an additional oil-fired facility near its mill, only provide power to the energy-hungry Grasberg operation.

With more power needed when it moves underground, it has agreed to become the base-load customer for a new 330 MW hydro-electric station the Papua government plans on the Urumuka River, 100 kilometers northwest of Timika.

Freeport chief executive Richard Adkerson raised the extension issue with Vice President Boediono at a brief meeting in New York last September, asserting that the current contract allows either side to seek a resolution well before the 2021 deadline. President Susilo Bambang Yudhoyono, a former mines and energy minister himself, has so far turned down three requests for follow-up meetings with senior Freeport executives to discuss the company's concerns.

With 20% of the 240,000 tonnes of ore a day already coming from underground block-caving, the company last year added 44 kilometers to the existing 250 kilometers of tunnel snaking around and under the Grasberg mine.

That work will accelerate to 50 kilometers a year ahead of the closure of the open-pit operation in mid-2016, opening up access to five separate ore bodies lying 400 meters deeper than the current tunnel system. Scheduled to expand to 930 kilometers by 2041, the main tentacles of the tunnel network will accommodate ore conveyers and a standard-gauge electric rail system to carry mine workers and supplies.

For all that, officials and nationalist lawmakers are unlikely to view Freeport's position with much sympathy, given the long-standing public perception that it was given unfair latitude under Suharto's New Order regime. That is a legacy the country's largest corporate taxpayer has found impossible to shake, despite efforts since the early 1990s to improve relations with the local tribal population and find better ways to manage its in-river mine waste deposition.

In addition to the $2.4 billion it will pay the government this year in taxes and royalties and the $80 million it currently spends each year on community development, Freeport is not without some bargaining chips of its own.

Grasberg was once Freeport's only asset, but since it took over Phelps Dodge in 2007, half of the company's revenues now come from 10 other mines in the US, Chile and Peru, with an untapped surface deposit in the Congo shaping up as possibly the best prospect of all.

It would be unimaginable, however, for Freeport to walk away from the world's most profitable copper and gold mine, which boasts seemingly unlimited reserves that will extend its life far out beyond 2041.

John McBeth is a former correspondent with the Far Eastern Economic Review. He is currently a Jakarta-based columnist for the Straits Times of Singapore.

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Reuters November 1, 2011

Freeport Indonesia Mine Operations Lag Q4 Goal

* Grasberg mine operating at reduced rate, mill suspended

* Mining average of 120,000 tonnes per day

* Average below 175,000 needed to meet Q4 sales targets

* Stock drops 6.4 percent

Nov 1 (Reuters) - Freeport-McMoRan Copper & Gold Inc said on Tuesday that production and processing rates at its strike-hit Grasberg nine in Indonesia have fallen below levels needed to meet fourth-quarter sales targets.

The announcement, plus a drop in the copper price, sent the company's shares down 6.4 percent to $37.67 in morning trading on the New York Stock Exchange.

The Phoenix-based company said the Grasberg open pit mine and the adjacent DOZ underground mine were operating at reduced rates using non-striking employees and contractors.

Since Oct. 22, it said, milling operations have been suspended pending repairs to sabotaged pipelines that transport copper concentrate from the mine in Papua to a seaport.

The company said it started repairing the damage but has not been able to gain full access to the affected areas because of road blockages by striking workers.

It suggested it might not achieve fourth-quarter production and sales targets as a result. Freeport has said it expects fourth-quarter sales of 915 million pounds of copper and 305,000 ounces of gold, of which 185 million pounds of copper and 280,000 ounces of gold are expected from Grasberg.

Those estimates were based on fourth-quarter mill throughput averaging 175,000 tonnes per day. But the average so far after one month of the quarter has only been 120,000 tonnes per day, the company said.

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