Indonesia Expects 2018 Deal With Freeport on Giant Copper Mine

Updated on
  • Government talking to Freeport, Rio Tinto on structure of deal
  • Minister says basic agreement may be in place by year’s end

Grasberg mine in Papua province, Indonesia.

Photographer: Dadang Tri/Bloomberg

Indonesia expects to conclude a deal with Freeport-McMoRan Inc. by February that will see the U.S. miner shed its majority ownership of the giant Grasberg copper and gold mine.

The basic structure of the deal may be in place by the end of the year and signed by February, State-Owned Enterprises Minister Rini Soemarno said in an interview in Jakarta on Tuesday. The government was happy with the progress of negotiations with Freeport and its partner Rio Tinto Group, she said.

Riza Pratama, a spokesman for Freeport’s local unit, said the negotiations are “going well” and constructive. Eric Kinneberg, a spokesman for the Phoenix-based parent company, said it had nothing to add beyond Pratama’s comments. A Rio spokesman declined to comment.

Freeport shares were down 1.1 percent at 2:35 p.m. in New York as copper declined for a third day. Even though Pratama’s language was favourable, “some investors get nervous anytime there is talk of a deal,” said Jeremy Sussman, an analyst with Clarksons Platou Securities Inc.

Soemarno’s comments signal an easing of tension between the two sides. In September, Freeport rebuffed government proposals on the valuation and method of divestment of the miner’s Indonesian unit within a framework agreement reached in August. Under the deal, state ownership will rise to 51 percent in exchange for a license that will allow Freeport to operate the project through 2041.

“Sometimes when we go to a negotiation table, you know everybody’s a bit suspicious of what’s what,” Soemarno said. “But I think after a few sessions, all of us realize and believe that we want to do a good thing, the best thing for everybody, a win-win for everybody. We are in a good position and we are quite confident that we should be able to get it done by February. ”

Under Freeport’s pact with Indonesia, Grasberg will see an investment of as much as $20 billion through 2031 to further develop the mine, including the construction of a smelter. In January 2016, Freeport valued its Indonesian operations in a government filing, excluding an interest held by Rio, at $16 billion, according to Freeport Chief Executive Officer Richard Adkerson.

Freeport has maintained that the divestment process was contingent on reaching an agreement on “fair value” for the stake. How that value would be determined, and other details -- including timing -- were left to be negotiated later. Freeport also needs to reach an agreement with Rio Tinto over its income stream asset that’s part of the joint venture agreement. The minister said she was happy with the progress of those two-way talks.

Conversation

“We’re discussing with Rio Tinto, we’re discussing with Freeport, and Freeport is also discussing with Rio Tinto,” Soemarno said. “So it becomes a three-way conversation, which I think has gone very well. We’re very happy.”

Under an agreement struck in the 1990s to help Freeport finance an expansion of Grasberg, Rio is entitled to cash flows on a 40 percent share of production above specific levels until 2021 and on 40 percent of all production after that year. In August, Freeport’s Adkerson said the miner will need Rio’s approval for any changes.

Rio has held talks with Indonesian groups, including state-owned PT Indonesia Asahan Aluminium, known as Inalum, about a possible exit from its interest in Grasberg, people with knowledge of the matter said last month. At present, Freeport directly owns 81.28 percent of Freeport Indonesia and has an additional 9.36 percent indirect stake through a unit.

Inalum, which is being converted into a mining holding company to lead the state’s purchase of the stake in Freeport’s unit, will not face any difficulty in raising enough money to finance the acquisition, Soemarno said. While there were still some differences to be ironed out, the minister expects to eventually reach common ground with all the stakeholders.

“The differences are still there, that is the process of negotiation,” Soemarno said. “A bit of laughing, a bit of screaming. But it’s OK.”

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