High-flying Freeport CEO steers towards new Indonesia mining deal

By Fergus Jensen

JAKARTA (Reuters) - Chappy Hakim, a retired air force chief who says he knows next to nothing about mining, now heads Indonesia's biggest copper producer, entrusted to use his connections to guide it through regulatory uncertainty to a renewed contract for its mine.

Picking another former military officer to lead the local unit of U.S. mining giant Freeport-McMoRan (FCX.N) underlines how pivotal political ties can be in Indonesia, where the firm got its start nearly 50 years ago helped by close relations to late autocratic President Suharto.

At stake for Freeport is an $18 billion (14.51 billion pounds) investment to expand its Grasberg mine - one of the world's biggest deposits of gold and copper - in the eastern Indonesian province of Papua. A government deadline in January to end ore exports from the country also threatens two-thirds of the mine's copper output.

"Freeport is more politics than business," Hakim told a recent media briefing.

"Right now we are working hard to negotiate with the government ... The political aspect has become very heavy here," said Hakim, who was appointed last month as Freeport Indonesia's new chief executive.

Hakim, 69, a keen saxophonist who holds Indonesian skydiving records, first saw the area where Freeport's giant Papua mine is located from the pilot's seat of a C-130 Hercules in the 1970s.

And while he may know little about mining and finance, Hakim said his experience leading the air force and later an air safety panel after a string of deadly plane crashes would help him with both human resource management and mine safety issues.

Grasberg has had several fatal accidents that disrupted operations and strained union relations, and in 2013 a tunnel collapse killed 28 workers, raising worries about its underground expansion plans. (http://reut.rs/2hhmTiM)

Hakim's appointment was made in consultation with the government, Freeport said, and comes as the company fights to win an extension on its mine beyond 2021.

Freeport needs to sign off in late 2017 on the $18 billion plan to transition Grasberg from open pit to underground mining, and it wants the contract renewed before committing the money.

"One of (Freeport's) priorities is clearly to have someone on board who supposedly has the ear of the government," said Bill Sullivan, a foreign legal counsel and expert on Indonesian mining issues.

"DISPENSATIONS" NEEDED

Freeport faces a narrowing window to make a new deal on taxes, royalties, divestment and a second smelter, before it develops what would be the world's biggest underground mine, Hakim said.

Indonesia has given mixed signals on negotiations, however, and it's not clear if Freeport will be able to win a contract extension next year.

Regulations stipulate contracts can be renewed only in the last two years before they expire, but Hakim said Freeport needed "several dispensations" to justify its investment.

"We have no choice because we have spent so many billions of dollars on the contract ... and we'll be really devastated if we stop," he said.

Hakim also noted that existing rules forbid Freeport from exporting copper concentrate after Jan. 12, 2017, part of an effort to transform Indonesia into a producer of finished goods from a supplier of raw materials.

About a third of Freeport's daily 220,000 tonnes of copper ore from Grasberg goes to its domestic smelter in Gresik, East Java, with the rest exported as concentrate.

Jakarta has said it may revise the deadline on metals processing, but nothing has been announced.

Freeport, which employs 32,400 workers in Indonesia, has said it does not believe Jakarta will ban all exports from 2017 given the harm it could do to Southeast Asia's biggest economy.

Hakim's predecessor, Maroef Sjamsoeddin, also a former air force and intelligence officer, stepped down in January after being caught up in a scandal. The company said he resigned for personal reasons.

(Reporting by Fergus Jensen; Additional reporting by Wilda Asmarini; Editing by Tom Hogue)