Freeport-McMoRan Copper & Gold is considering shutting down its strike-hit Grasberg mine as one of several contingency plans if security does not improve, as it struggles with one of the worst labor disruptions in Indonesia's mining industry.
This comes as the world's second-largest copper mine resumed producing at a reduced rate on Tuesday, after halting output on Monday.
The owner of the mine, which is facing strike action over pay and work conditions, road blockades and possible pipeline sabotage, said in a statement that it will temporarily suspend and/or curtail concentrate production as conditions warrant.
It said preparations for a controlled shutdown that could lead to an eventual mothballing of the mine would begin with the flushing of all remaining materials from its pipelines.
We are continuing to assess whether or not the security conditions are conducive for us to continue production, a Freeport spokesman told Reuters.
Based on the situation that we had Sunday night and Monday, we are preparing for contingencies for a controlled shutdown, he said, adding this would preserve its $2-$3 billion assets in Indonesia.
Freeport Indonesia halted production of copper, gold and silver at the remote Papuan mountain mine on Monday due to security fears, worker blockades and after the main pipe transporting concentrate to its port was cut, in the worst supply disruption since a two-month strike began a month ago.
The road is still blocked... that's true and that's a big problem for us, the spokesman said.
The stoppage on Monday had helped to push copper prices to three-week highs and pounded shares of the Phoenix, Arizona-based firm, ahead of its third-quarter earnings release on Wednesday.
Freeport is also facing problems in Peru, where workers at its copper mine launched a hunger strike this week on hopes of pressuring the government to resolve a labor row 19 days into a walkout.
Analysts and traders said that the firm might declare force majeure on its Indonesian shipments soon. Freeport did not say at what stage force majeure -- which allows it not to meet contractual obligations due to events beyond its control -- would be decided.
It's going to vary depending on what the schedule of our shipment deliveries are in any given moment of time, and whether or not we're going to be able to meet that schedule or work with customers to make appropriate arrangements to work through that schedule, a spokesman said.
Three-month copper on the London Metal Exchange fell more than 3 percent to $7,250 a ton at 1157 GMT, on persistent concerns over the euro zone debt crisis.
If the strike and mine closure is ongoing, this will underpin the price at the $7,000 a ton mark almost irrespective of the euro zone sovereign debt situation, said Citigroup analyst David Thurtell.
Force majeure can surely only be hours or days away.
The stoppage is a setback for Freeport after it said last week it had cranked up copper concentrate output at Grasberg to average above 4,000 tones daily by relying largely on non-unionized and contract workers, a move criticized by the government.
For the repair of the pipeline -- the section in mile 45 that was cut -- I believe we've already got a temporary repair done on that, the spokesman said. He denied initial comments by a company source that the concentrate plant would be shut for 30 days.
The firm said it had still managed to ship 103,189 tons of concentrate in the past week, though with blockades and rising worker tension, it was unclear if more shipments can be made.
The Indonesian energy and mining minister said some production had resumed on Tuesday.
We still have concentrate that's been dried at the port side. The last I heard, there were hopes to continue loading concentrate on ships, the company spokesman said.
Freeport is a major tax contributor to Indonesia and the government said it is committed to resolving the dispute and preventing it from escalating.
Road blockades, part of the strike by around 12,000 of the mine's 23,000 workers, have stopped containers carrying food and medicine from reaching the mine and jet fuel from reaching the nearest airport, the company said on Monday.
Currently in Tembagapura there are some workers, mostly contractors, a Freeport worker, who asked not to be named, told Reuters. Tembagapura, in the north of the province, is the site of the mine.
They are operating heavy machinery, maintenance and electricity.
A circulated email to senior staff, distributed to workers, said there is a security guarantee from security forces and working contractors will be paid double.
A clash earlier last week between striking workers and police near the mine led to the death of two protesters and injured others, while three men were killed in a shooting late last week, though it was unclear if that was linked to the pay dispute or an independence movement.
The road to the port is blocked and has been blocked since last Monday, which means we can't get the supplies that we need, the spokesman said. We continue to work with the government and security authorities, to try to provide adequate security.
An official with the Freeport workers union said on Tuesday it was still blockading roads, but plans to stop once a permanent agreement has been reached with the company.
The official said Freeport had not approached the union for further negotiations, while there had been no security incidents on Tuesday.
Community activities are running normally, except logistic distribution for the company as roads are being blocked, said Juli Parorrongan, a union spokesman.
We haven't received information on who did the (pipe) cutting, she added. But I was informed that there was a landslide at mile 70 and the pipe could be broken because of it. I assure you, it was not the workers.