Photo by Freeport Indonesia

JAKARTA (TheInsiderStories) – The Indonesian government and U.S mining giant Freeport-McMoRan Inc. are still facing off, far apart on a mutually-agreeable deal with contract renegotiation ongoing.

Likely caving in to external pressure, the government has agreed to extend PT Freeport Indonesia’s (PTFI) special mining business permits and its subsequent export license by three months, now set at Jan 10, 2018.

The government has stuck to its guns, aiming to complete negotiations with Freeport, focusing on five underlying issues, by Oct. 10. Freeport has also stubbornly refused to budge, and as of this writing there has been no significant progress in negotiations.

Minister of Energy and Mineral Resources (MEMR) Ignasius Jonan announced that the government has concluded a deal with Freeport-McMoRan allowing the company to apply for a permit to continue operations at its giant Grasberg gold and copper mine in Papua.

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.

In return, the company has agreed to divest a 51 percent stake in the local unit (the government currently holds just 10.64 percent in PTFI. Freeport has also agreed to build a copper smelter by Jan 2022 at the latest.

Jonan has suggested the value of the 51 per cent stake to be divested by PTFI to be worth around US$4 billion. Chief Executive Officer (CEO) of Freeport McMoRan Richard Adkerson recently sent a letter to the Secretary General of the Ministry of Finance, which detailing the company’s rejections on the government’s terms with regard to its valuation.

Freeport is in the process of developing an underground mining operation, a critical juncture in the future of the hugely lucrative Grasberg gold and copper mine in Papua. Such a move will demand a huge investment – as much as $17 billion to $20 billion by 2031.

Deputy for Minister of State-Owned Enterprises (SOEs) Fajar Harry Sampurno said the government will set up a holding company to purchase Freeport’s shares. The consortium will comprise state-owned mining enterprises PT Indonesia Asahan Alumunium (Inalum),Employees Social System Security (BPJS Ketenagakerjaan), Papua Provincial Government, and districts that are directly in contact with Freeport’s work area.

The consortium stated that Inalum will receive 55 per cent of the share, BPJS Ketenagakerjaan will receive 25 per cent, and regional government will be given 20 per cent of the 41.64 per cent shares of PTFI.

The Phoenix, Arizona-based company has been in lengthy discussions with the government of Southeast Asia’s largest economy over a number of issues that will affect its operations in the world’s second-biggest copper mine.

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.

It was feared that copper concentrate exports from the Freeport operation in Indonesia could have been interrupted, if the two sides had failed to reach a deal on a new mining permit before its current temporary export permit expires in October.

The U.S. mining giant ships about two-thirds of the copper concentrate it produces from the Grasberg mine, while keeping the remainder to be processed domestically.

Last Friday (6/10), Jonan received Adkerson in Jakarta, to follow up on the President’s directive to expedite the process of continuing PTFI operations in Indonesia to a mutually agreeable conclusion.

As it is widely known, the negotiations began with four main points: operability, stock divestment, investment stability and smelter development. These four main points are discussed in one package, in order to come to a complete agreement.

Earlier, in a working visit to review the infrastructure of thermal-coal power plant in Banten (5/10), Java, President Joko Widodo revealed that negotiations are nearing completion.

Widodo assures the public that the negotiations, running for three years, will soon find a win-win solution. He stressed that the results of negotiations will have to defend the national interest, the interests of the people of Papua, the sovereignty of the state in natural resources while maintaining a conducive investment climate.

Win-win Solution

If the conclusion of contract negotiations between the Indonesian government and mining giant Freeport McMoRan does indeed end with a ‘win-win’ solution, this may help to improve the nation’s standing in the eyes of foreign investors.

“We expect Freeport’s negotiations with the government to come up with the best solution,” said Riyatno, Head of Legal Aid Center of the Investment Coordinating Board at an Indonesian business climate seminar in Jakarta on Wednesday (11/10).

The board still expects the negotiations to end “win-win” or equally benefit both parties, and thus ease concerns of foreign investors on business prospects in Indonesia.

The government’s policy on the mining sector has flip-flopped, which has led to a prolonged dispute with Freeport McMoRan, the high profile of this enterprise will likely damage the country’s investment climate over the long run.

Indecisiveness and conflicting policies are among the underlying concerns among foreign investors looking at Indonesia.

Previously, Thomas Trikasih Lembong, Head of Investment body, explained there are five main complaints of experienced investors in Indonesia, the main one being regulations that often shift around.

“The number-one complaint of all investors is regulations: some 43 thousand regulations ranging from Presidential Decrees, Ministerial Regulations, Head of Institution Regulations to Regional Regulations can all change suddenly; our competence in policy-making clearly needs to be improved,” he said.

The former Trade Minister explained that the next complaint is about taxes. According to him, taxation is not simply the responsibility of the Ministry of Finance (in this case the Directorate General of Taxation), but rather a joint responsibility.

“It’s our shared responsibility: how to build a system and a culture of taxation that is fair, so the tax burden should not be on the industrial sector,” he said.

The next complaint, continued Tom, is about work permits, especially for foreign nationals. In addition, land clearance issues taking an enormous amount of time are also brought up as another complaint.

“In many local governments, a building permit can be delayed for many years. The last complaint, which appeared recently, is about the infrastructure work that is granted to state enterprises too often,” he said.

Nevertheless, he did confirm that foreign investors’ interest in Indonesia is rising, which can be attributed to the recent upgrade of this country’s credit rating by Standard & Poor’s to ‘investment grade’. The government’s aggressive moves in infrastructure development may also help to court foreign investors.

Writing by Linda Silaen/Elisa Valenta, Email: linda.silaen@theinsiderstories.com and elisa.valenta@theinsiderstories.com

LEAVE A REPLY

Please enter your comment!
Please enter your name here