Freeport Indonesia's Workers - Photo by PTFI

JAKARTA (TheInsiderStories) – For the umpteenth time PT Freeport Indonesia‘s (PTFI) share divestment agreement drag on for unexplained reasons. Earlier President Joko Widodo optimistic PTFI divestment could be completed in April since have been taking place in early 2017.

Instead of meeting the Widodo’s targets the Ministry of Energy and Mineral Resources (EMR) has issued an extension of American mining giant Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) contract renegotiation until 2019.

Latterly, State Own Enterprises (SOEs) Minister Rini Soemarno set a new target for PT Indonesia Asahan Alumunium (Inalum) to complete the divestment of stake in PTFI in June 2018. The President Director Budi Gunawan Sadikin optimistic the divestment of PTFI shares it will soon complete.

Freeport CEO Richard A. Adkerson is in Indonesia now and has met several Indonesian officials. EMR officials were reluctant to comment on the substance of the meeting.

To be known, the ministry issued EMR Ministerial decree No. 25/2018 that extended the divestment deadline to 2019 for foreign companies holding a special mining permit, which included Freeport.

The regulation stipulates that a holder of a special mining permit and which formerly had a working contract and has been in production for at least five years since the issuance of Government Regulation No 1/2017 is obliged to divest 51 percent of its stake no later than 2019.

The government’s demand included increased Indonesian ownership in PTFI from 9.36 percent to 51 percent in return for an extension to PTFI’s operating permit. PTFI is also expected to convert its contract of work into the special mining permit and build a new smelter by January 2022.

Indonesia would purchase the remaining 41.64 percent of PTFI’s shares through a scheme that involved Anglo-Australian mining giant Rio Tinto and PT Indocopper Investama, another Freeport subsidiary that also controls 9.36 percent of PTFI. Freeport Mcmoran currently owns 81.28 percent of local subsidiary PTFI.

Rio Tinto has the option to obtain a 40 percent interest in all output from Grasberg’s Block A after 2022. The government then intends to acquire Rio Tinto’s 40 percent interest, which would be converted into shares through a rights issue.

This would dilute the shares held by the government and Indocopper to around 5.5 percent each. The government plans to then acquire Indocopper’s shares in PTFI, thereby finally controlling a 51 percent majority stake in PTFI.

Freeport itself had reiterated on having a definitive agreement with the Indonesian government by first half of 2018, however, no such progress has been achieved as of yet. In fact, Freeport’s operations in Indonesia have become increasingly riskier due to the latest inimical developments in the region

Given that Grasberg accounted for around 26 percent of Freeport’s copper output and almost 99 percent of its gold output in 2017 have increased concerns regarding the company’s long-term operation. Previously, Freeport has initiated the development of the final phase of the Grasberg open pit mine which is expected to result in an increased annual capital spending of an average of $800 million per year over the next five years.

According to Sadikin, during Adkerson visited in Indonesia, he also attended the PTFI shareholders meeting and discuss with Inalum and Rio Tinto talks about the divestment. He said, the progress of the divestment-related talks is pretty good, especially on environmental issues.

With this step, he quite confident that the divestment of PTFI’s shares can be completed soon. As for funding needs, Sadikit said, Inalum has EBITDA of US$1 billion in 2017 and in this year is believed to reach $1.5 billion.

Furthermore, he said PTFI’s gold reserves are still quite large. For Grasberg Open Pit will soon be exhausted this year but in addition to Grasberg, there are other copper and gold mines in the area under the name Wild Cats and Block B which until now have not been excavated by Freeport.

The divestment of Freeport shares is in accordance with the Government Regulation Number 1, 2017 on the Fourth Amendment of the Government Regulation Number 23, 2010 in Mineral and Coal Business.

The talks have been delayed several times as both parties – the Indonesian government and Freeport – failed to come up with an agreement including the valuation of the shares and the shares sale mechanism.

The talks dragged on given that Freeport has also earlier entered a bilateral deal with another giant world miner Rio Tinto over production sharing of the Grasberg mining.

Minister Jonan reiterated the government’s intention to purchase Freeport McMoran shares directly as well as Rio Tinto’s participating interest in the mining site through a share-conversion mechanism.

Both parties have in principle agreed in August last year over the 51 per cent share divestment. However, both parties still needed to discuss the technical aspects of the share divestment, including ongoing operation, share divestment stability of investment and the development of smelter in the country.

Indonesia’s mining policy requires, among other, Freeport to divest its stake up to 51 per cent to local entities, build a new smelter to add value to its export commodities, if they wish to extend the existing 30-year contract.

Jonan has suggested the value of the 51 per cent stake to be divested by PTFI to be worth around $4 billion.

Currently, Freeport has asked for a guarantee on rights to mine Grasberg up to 2041 before committing to billions of dollars of planned underground mine investments and a second Indonesian copper smelter.

The ministry has announced that Freeport can apply for a 10-year permit extension over the near term, to extend its current one, due to expire in 2021. This means the world’s largest publicly-traded copper company could secure the privilege of extending its contract five years before it expires.

The Indonesian government and Freeport are still facing off, far apart on a mutually-agreeable deal with contract renegotiation ongoing. Need assertiveness from the government to end the negotiations so that the investment climate in Indonesia is not disturbed.

In addition, to provide certainty of mineral supply for smelters in this country.

Email: linda.silaen@theinsiderstories.com

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The Insider Stories Founder Linda Silaen has a solid, proven history, established over more than a decade as a journalist with a leading internasional news organization, of being the first with the biggest economic news stories in Indonesia. Specializing in corporate news, Linda is also a veteran of some of the biggest macroeconomic and general news stories as Indonesia rapidly transforms into a major market economy. One of the founders of the original blog from which this company developed, Linda’s knowledge of investors’ information communications and data us developed from unrivaled networking skills that make her a well-known name among CEOs, bankers, government officials and private equity investors both in Indonesia and other countries.

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