David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Judging by the reaction of shareholders, the news that Freeport-McMoRan Inc. struck a deal with the Indonesian government to offload half its stake in the world's second-largest copper mine is unambiguously bad.

Freeport tumbled as much as 5.7 percent in New York on Tuesday after the biggest U.S. miner said Indonesia would buy a 51 percent interest in the Grasberg pit "at fair market value," in return for the right to operate the mine until 2041. The transaction will also involve Phoenix-based Freeport building a new smelter. A closer look, however, suggests that the winners and losers from this deal might not be the obvious ones.

Gold Star
Indonesia's poor investment climate hasn't stopped Grasberg churning out copper and gold
Source: Company reports

Clearly, Freeport has surrendered ground in the face of a sustained campaign by Jakarta to force a divestment. Go back to January and its President Richard Adkerson was adamant he'd never let go of more than about 30 percent of the equity in the venture. Now he's preparing to sign away a majority stake in a region that Freeport has mined for more than four decades.

Grasberg has some formidable advantages. As well as being rich in copper, it's got the biggest gold lode of any mine on the planet. Selling that as a by-product makes the copper from Grasberg astonishingly cheap to produce -- cash costs in the first half came to just 36 U.S. cents per pound of copper, versus $1.29/lb across the group as a whole and an average $2.62/lb for Comex copper futures.

Rich Vein
Grasberg's unit costs for producing copper are far and away the lowest among Freeport's mines
Source: Bloomberg

At the same time, mines that have been chipped away at for decades get harder and harder to operate. Grasberg's open pit is expected to cease production within the next 12 months, and Freeport has been digging into the rocks beneath it since the 1980s. The Deep Mill Level Zone under most active development at present lies nearly a mile down, and Freeport has had to slow its ramp-up to full production in 2021 because the act of removing rock is causing seismic activity.

When you consider the capital spending that goes into producing metal in such conditions, Grasberg's low operating costs look a good deal less attractive. While the mine accounted for some 47 percent of Freeport's operating cash flow in the first half, it sucked up $431 million of capex, or 61 percent of the total. That amount will, if anything, rise as the Deep Mill Level Zone and Grasberg Block Cave areas are developed, with Macquarie Group Ltd. estimating an outlay of $1 billion a year up to 2020.

Oil companies working in challenging conditions typically take on equity partners to spread risk and costs. By raising the government's stake in Grasberg, Freeport has achieved just that. Adkerson's forecast Tuesday that the company would invest $17 billion to $20 billion in Indonesia by 2031 suggests the change and greater political certainty has done little to dim the attractions of the project.

Capital Flight
Net foreign direct investment in Indonesia's mining and quarrying industries has slumped over the past year
Source: Bank Indonesia

What of Indonesia? While the deal has delivered Jakarta an extra 40 percent of one of the world's great mineral deposits and given President Joko Widodo a major political win, the collateral damage to the country's reputation could be significant. Foreign direct investment in Indonesia's mining and quarrying industries slipped to a 10-year low of $621 million in 2016, and the prospects this year look even worse: Net investments were negative in each of the first two quarters, for a total divestment of $1 billion in the first six months.

For an emerging economy blessed with some of the richest mineral deposits on earth, that looks like a catastrophic own goal. Jakarta may have won the battle for Grasberg. It risks losing the war.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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David Fickling in Sydney at

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Katrina Nicholas at