Freeport’s Indonesia deal leaves key questions unanswered

By Bloomberg News

Freeport-McMoRan Inc. still has some work to do in Indonesia. The company signed a framework accord to cede majority control of its giant Grasberg copper and gold mine, but it leaves key points unresolved.

The proposed arrangement, unveiled in Jakarta overnight, would see state-owned PT Indonesia Asahan Aluminium, or Inalum, pay $3.85 billion for a 51 percent stake, increasing the nation’s holding from just over 9 percent. The three-way pact would see Rio Tinto Group cash out of its interest in the mine for $3.5 billion, with Freeport’s share set at $350 million.

A muted reaction to the deal in the stock market, with shares up slightly before the start of regular trading, reflects its non-binding nature.

The transaction is subject to agreements on extension and stability of mining rights through 2041, the Phoenix-based company said in a statement. It also requires an agreement for Freeport to manage Grasberg through its local unit and a consensus on environmental matters.

“This is significantly less than many people in Indonesia were expecting and nowhere near the ‘completion of divestiture by the end of July’ referred to in the numerous statements from government officials over the past few months,” Bill Sullivan, a lawyer specializing in mining at Christian Teo & Partners in Jakarta, said by email.

Vast Resources

Details were released at a signing ceremony in Jakarta on Thursday attended by ministers and Freeport Chief Executive Officer Richard Adkerson. While a deal is expected to be completed in two months, Rio cautioned that there’s no certainty that a transaction will be completed given there are more negotiations to come.

Indonesia’s President Joko Widodo is seeking more control over the nation’s vast mineral resources, and has given foreign mining companies a deadline of next year to comply with divestment obligations. His government has insisted that Phoenix-based Freeport give up majority ownership of Grasberg in exchange for allowing the producer to keep operating in the country.

For more than a year, Indonesia and Freeport have been discussing the company’s long-term presence in the country, in a process that’s been peppered by reports of progress followed by setbacks.

In Charge

CEO Adkerson has said Freeport must remain in charge of operations regardless of the size of its stake after divestment. Adkerson has also said fiscal and legal stability for Freeport are essential to any deal, as is maintaining the environmental status quo around its treatment of tailings waste.

Rio, the world’s No. 2 mining company, has been a partner in the operation since the 1990s under an agreement that helped Freeport fund an expansion. The London-based producer held rights to a 40 percent share of output above specific levels, and had expected that to shift to 40 percent of all production from 2023.

“Grasberg is no doubt a singularly unique and world-class orebody. However, it has been beset by numerous issues,” said Edward Sterck, an analyst at BMO Capital Markets. “The operational underperformance has resulted in limited production above the metal strip in recent years, meaning that Rio Tinto has received little benefit while continuing to fund its share of development costs.”

The mechanism for the deal involves Inalum paying cash for Rio Tinto’s interest in Grasberg. The mine’s current owner, Freeport’s Indonesian unit, would then issue new equity, allowing Inalum to convert that interest into a 40 percent stake. Further share purchases would boost Inalum’s holding to a majority, leaving Freeport with the remainder. Inalum would also give 10 percent of its stake to the local government in Papua province, where the mine is located.

Even with ownership of Grasberg dropping below 50 percent, Freeport can still reap substantial benefits from the mine as an operator. Consolidated sales from mining in Indonesia are expected to total about 1.15 billion pounds of copper and 2.4 million ounces of gold in 2018, up from 1 billion pounds and 1.5 million ounces last year, according to company data.

National Interest

Bloomberg Intelligence estimates that Grasberg’s reserves are worth about $14 billion. Indonesia accounted for 47 percent of Freeport’s operating income in 2017, according to data compiled by Bloomberg.

While securing control of Grasberg may play well with voters before Widodo stands for re-election as president in 2019, the continuing drive to increase the nation’s grip on natural resources also carries the risk of deterring foreign investors and undermining efforts to generate jobs and growth.

“Whatever happens, national interest must come first,” Widodo told reporters in Jakarta earlier in the day, expressing the hope that securing ownership of Grasberg will yield higher income for Indonesia.

Newmont Mining Corp. and BHP Billiton Ltd. pulled out of Indonesia in 2016, and DP World Ltd., the Dubai-owned company that operates ports from China to South America, said last year it won’t renew a concession to jointly operate a terminal in the Southeast Asian nation beyond 2019 as conditions set by the government weren’t favorable.

Rio’s CEO Jean-Sebastien Jacques in May called out a rising tide of resource nationalism around the world that is causing miners to rethink where they invest.

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