Indonesia Miner webinar on Covid-19 impact on building Cu smelters – its not easy being Mr Nice Guy.

On Monday 18 May 2020, the Indonesian Miner hosted a webinar titled “How Covid-19 is affecting Indonesian smelters?” The webinar was held in English, with about 300 listed to attend. Prior to kicking off the seminar. It was lamented that the various nickel smelters under construction were not participating in such public forums.

Mr Tony Wenas, President Director PT. Freeport Indonesia (now sporting a lock down short beard & moustache) spoke in a relaxed and to-the-point manner, along with some concise slides. Tony made clear from the beginning that the smelter does not make good business sense, and is being built to comply with the government’s requirements for lease extension to 2041. Note that Freeport already has an operating Copper (Cu) smelter with input of 1 mill ton per year (tpy) concentrate and output of 300,000 ton of Cu anode.

Tony briefly outlined the new PT. FI Copper Smelter, with capex USD3.0 bill, input of 2 million tpy input of copper concentrate and output of 600,000 copper anode, plus the further processing of anode slime (6,000 tpy) from both Freeport smelters. The smelter will employ about 500 people, and require other bodies provide power (150MW), water (6.7 millM3/year, Gas (100 mill Nm3/y and oxygen (533 mill Nm3/y). The smelters will also produce the by-products of sulphuric acid, gypsum and lead. The desired financing package is to obtain bank loans of USD 3 bill with suitable terms.

The smelter had completed most of the ground works, and permits, and was on tract at 4.88% complete. The physical construction works were scheduled to begin in 2020, with overall project to be completed on 18 Dec 2023. However, the covid-9 started to have an impact in February 2020.

·       Many international consultants were confined by lock down.

·       Suppliers could not operate nor deliver as scheduled.

·        The copper price has dropped by around 20%.

·       The closure of bank loans is now uncertain – due largely to concerns over copper price, and this is an “obligatory project” rather than a sound business case.

Freeport has requested the government acknowledge the Covid-9 related delays, and ask for an extension of 12+ months for completion. Discussions with the Mines Department are ongoing about devising a new schedule, and to allow copper concentrate to be continued to be exported.

Mr Rachmat Makkasau, President director PT. Amman Mineral Nusa Tenggara also spoke in a relaxed and frank manner about the Amman Mineral Copper Smelter Project. Rachmat briefly introduced the Batu Hijau mine that was purchased from Newmont in 2016. Newmont spent USD 2.1 bill to construct the mine, and this included USD 1.5 bill for the process plant and necessary 100 MW power plant etc. The mine and concentrate plant capture some 94% of the mineral value, wherein the construction of a further USD 1.9 billion smelter will only add another 5-6% value. This is not a good business proposition, but a government imposed obligatory requirement. Amman’s original capex estimate was USD 1.4 billion has expanded to USD 1.9 bill with more detailed studies. Amman are now looking at ways to trim this project back towards USD 1.4 bill. The smelter is being built near their port and will have a consumption input of 1.3 mill tpy of concentrate, construction to take 2 years and be completed at the end of 2022. Progress to date is 22.9%. The smelter is to produce 300,000 tpy of Cu cathode, 20 tpy gold, silver 100 tpy, along with by-products of sulphuric acid (1,200,000 tpy), iron sand (800,000 tpy), clean gypsum (80,000 tpy), lead (460 tpy) and selenium (142 tpy).

Rachmat indicated the Covid-9 slowdown commenced in February 2020, with the same impacts as Freeport listed: Consultants cannot travel / suppliers cannot deliver / copper price down 25% / finance insecurities. The Amman smelter on Nusa Tenggara has additional logistical difficulties. Amman is also in discussion with the government to accommodate the expected 18-month delay in completion.

Q&A selected notes: -

1.     Both parties confident the Mines Department will accommodate the Covid-9 delays to construction, and permit concentrate exports to continue. A new project schedule will be drawn up for monitoring.

2.     Both parties are concerned the new copper smelters are NOT a good commercial proposition, and both would prefer NOT to be building smelters. Amman indicated the alternative use of limited funds to build a new mine would be of more benefit to the region, and to Indonesia, rather than building the smelter.

3.     The government is urged to reconsider its smelter policy, with the approach to incorporate the economic model for each commodity. Wherein nickel smelters can be a viable business, but other commodities may not be.

4.     The Indonesian smelters need to apply higher smelting charges to accommodate the capex and associated cost of money. International smelting charges are around 25cent per pound (c/p), where Indonesian smelters may need to charge 60c/p, with the difference of 35 c/p being a subsidy from the mining company. This is about USD 300 mill /year for Freeport.