Freeport to Cede Control of Giant Copper Mine to Indonesia

(Bloomberg) -- Indonesia moved a step closer to wresting majority control of the world’s No. 2 copper mine from Freeport McMoRan Inc. under a deal that’s likely to burnish President Joko Widodo’s credentials as a champion of national interests.

After months of wrangling, Freeport agreed to reduce its stake in the Grasberg copper and gold mine to 49 percent in exchange for licenses to operate the massive pit until 2041, Energy and Mineral Resources Minister Ignasius Jonan, flanked by miner’s Chief Executive Officer Richard Adkerson, said at a press conference in Jakarta on Tuesday. While the two sides have set no deadline to complete the stake reduction, Jonan said Freeport could immediately apply for a new license valid from 2021.

While the deal will be cast as a victory for Widodo, also known as Jokowi, ahead of his re-election bid in two years time, it’ll also come as a relief to Freeport, whose operations have been hobbled since a dispute over licenses began in January. At the same time, it risks undermining the confidence of foreign firms investing in the Southeast Asian nation.

Wresting control of Grasberg should benefit Jokowi politically, according to Jeffrosenberg Tan, head of strategy at PT Sinarmas Sekuritas. “This is basically one of many things that would reflect positively on him and for his re-election bid in 2019,” Tan said in a text message.

The agreement between Freeport and Indonesia follows last year’s purchase by a local consortium of Newmont Mining Corp.’s copper and gold assets for $1.3 billion. That sale also followed months of talks that began after Indonesia banned raw ore shipments and put a progressive tax on concentrates.

Freeport’s willingness “to divest and build a smelter is a major concession and compromise on our part,” Adkerson said. The company has agreed to the government raising its stake in the Indonesian unit to 51 percent in a way that “compensates market value,” he said. Grasberg will require an investment of as much as $20 billion through 2031 to further develop the mine, including the construction of a smelter, according to Adkerson.

National Interest

In a statement, the energy and mineral resources ministry said the “result of this negotiation is in line with instruction from President Joko Widodo to prioritize national interest, the interest of people of Papua, state sovereignty in managing natural resources, while ensuring investment climate remains conducive.”

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Eve Warburton, a Canberra-based researcher on Indonesian politics and resource nationalism at the Australian National University’s Coral Bell School, called it a significant victory for the president. “This insulates him from the sorts of attacks that he endured in 2014 around his nationalist credentials, his ability to be a strong leader and his ability to take on foreign forces,” Warburton said by phone.

Freeport has won some certainty on its investment and will likely now focus on a mechanism for establishing a price for the sale of its stake and new agreements on taxes, Warburton said. “Agreeing on a price is going to be the next big hurdle,” she said.

Copper Upswing

“It’s a bit early to say whether Freeport caved in or not,” Helen Lau, analyst at Argonaut Securities Asia Pty, said by phone from Hong Kong. “We don’t know the price of the transfer, or whether the government will defray some of the mine costs in terms of royalties or taxes, for example,” she said.

“Freeport knows this mine very well and must understand it can be maintained at low costs in the long term. Ultimately this is profit driven and by agreeing this deal Freeport can potentially benefit for 20 years,” according to Lau.

Freeport directly owns 81.28 percent of the local unit and has a 9.36 percent indirect stake through a subsidiary. The Indonesian government owns the other 9.36 percent. Freeport’s shares have rallied 18 percent this year, compared with a 23 percent gain in the benchmark copper prices on the London Metals Exchange.

All well as being its biggest copper asset, Grasberg accounted for most of the company’s 1.09 million ounces of gold production last year. Freeport generated 18 percent of its revenue from Indonesia in 2016, according to data compiled by Bloomberg. Copper prices, meanwhile, are on an upswing, rallying to near three-year highs in London as the outlook improves in China, the biggest consumer. The metal is also getting a lift from the prospect of a shortage in coming years, and new sources of demand linked to renewable energy.

Rio’s Role

Rio Tinto Group, the world’s second-biggest miner, also has an interest in Grasberg through a joint venture with Freeport. Under the terms of their partnership, Rio is entitled to a 40 percent share of output above specific levels until 2021 and 40 percent of all production after that year. Rio didn’t immediately respond to emailed requests for comment.
Earlier this month, Jonan had said Freeport would be allowed to continue as operator of Grasberg until an Indonesian company has the capacity to take over. Jonan has also floated the idea of an initial public offering of a 10 percent stake to help establish a valuation for the local unit.

The accord could have a negative impact on “foreign investors’ attitudes to Indonesia,” according to Bill Sullivan, a lawyer specializing in mining at Christian Teo & Partners in Jakarta. It doesn’t inspire confidence that Indonesia “will honor the promised new investment guarantee” if the agreement is no longer in the government’s interests, he said by email.

Details of the accord include:

• Freeport and the government will negotiate the price for divestment and a decision will be made in the near future
• New mining license, known as IUPK, linked to Freeport meeting three requirements: divestment, smelter completion by October 2022 and higher revenue for government
• Freeport, Indonesia to discuss tax rate, revenue paid to government
• Government agrees to provide investment certainty for Freeport
• Tax, royalty to be linked to future copper prices

--With assistance from Harry Suhartono Yudith Ho Martin Ritchie and David Stringer

To contact the reporters on this story: Eko Listiyorini in Jakarta at elistiyorini@bloomberg.net, Rieka Rahadiana in Jakarta at rrahadiana@bloomberg.net.

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Thomas Kutty Abraham, Alexander Kwiatkowski