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Freeport unveils Indonesia price but plenty left to resolve

Bloomberg - July 12, 2018

Danielle Bochove, Viriya Singgih and Yoga Rusmana In what has become a pattern of two steps forward and one back, Freeport-McMoRan Inc. hailed a framework agreement that has been reached over its flagship copper-and-gold mine in Indonesia while acknowledging it's far from definitive.

"What we've done today, after months of hard work, is reach an important step towards progressing this framework agreement to point towards an ultimate consummation of it," Chief Executive Officer Richard Adkerson said in a conference call Thursday.

Earlier in Jakarta, Freeport and the Indonesian government announced a deal that confirms the price-tag to cede majority control of the Grasberg mine. Under the agreement, state-owned PT Indonesia Asahan Aluminium, or Inalum, would pay $3.85 billion to increase the nation's stake in the asset to 51 percent from just over 9 percent now.

The deal is part of a series of complex discussions that would see Rio Tinto Group cash out on its interest for $3.5 billion, leaving Freeport's share of the payment at $350 million.

Freeport made it clear that there are still big issues to be resolved. They include: finalizing the company's long-term rights in Indonesia until 2041, negotiating terms that would allow Freeport to maintain operational control once it's no longer the biggest stakeholder, and coming to an agreement on environment matters, including its treatment of tailings waste.

That, in turn, means Rio's sale isn't a done deal.

"Given the terms that remain to be agreed, there is no certainty that a transaction will be completed. Any final agreements will be subject to approval by the necessary government regulators and authorities," Rio said in a statement.

Indonesia and Freeport have been locked in negotiations for more than a year over the miner's long-term presence in the country. Talks have been peppered by reports of progress, usually from the Indonesian side, followed by complications.

Negotiations will continue between the company and authorities in Jakarta, Adkerson said, calling it a "new day" for relations with the government. "We are not slowing down."

Next steps include finalizing a joint-venture agreement, after which the divestment payment will be made, State-Owned Enterprises Minister Rini Soemarno said. Once that happens, the government will issue a new mining license to Freeport and an "investment stability regulation."

On the issue of fiscal stability, officials have said terms are close to being finalized. Adkerson estimates direct benefits to the central and local governments in Indonesia, and dividends to Inalum, would be between $60 billion and $90 billion under a new contract between now and 2041, assuming copper prices between $3 and $4 a pound.

Since 1992, Freeport has paid about $18 billion in taxes, dividends and royalties to Indonesia, Adkerson said. He and Chief Financial Officer Kathleen Quirk stressed that most of the increase over the next 20 years is due to higher dividends flowing to Indonesia because of its bigger ownership stake, not to higher taxes or royalites.

Waste debate

Freeport has received assurances "that we will find a resolution of the environmental issues that will be acceptable for all parties," Adkerson said. The company was blindsided by new regulations around tailings waste earlier this year and he has insisted its right to dump and store much of the waste in a local river system be grandfathered.

Earlier in Jakarta, Environment and Forestry Minister Siti Nurbaya Bakar said tailings treatment is a crucial point of discussion. "We will keep pushing for this, following the developments and, if needed, there will be policies." she said.

Energy and Mineral Resources Minister Ignasius Jonan said a letter of recommendation is needed from the environment and forestry ministry before Freeport can get two 10-year extensions to operate Grasberg.

Freeport also made clear in a statement Thursday that it expects to remain in charge of operations through its local unit PT-FI, regardless of the size of its stake after divestment. During the call, Adkerson defined this as being able to create and execute a long-term mine plan.

Freeport expects the divestment transaction to take place in the second half of 2018. Soemarno said management decisions are still being finalized. Shares of Freeport were up 0.2 percent at 1pm in New York as the price of copper advanced 1.4 percent.

"This is significantly less than many people in Indonesia were expecting and nowhere near the "completion of divestiture by the end of July" referred to in the numerous statements from Government officials over the past few months," Bill Sullivan, a lawyer specializing in mining at Christian Teo & Partners in Jakarta said by email.

The deal is likely "a face-saving strategy for the Government and designed to give the President some "political cover" for next year's elections," he said.

-­ With assistance by Tassia Sipahutar, and Thomas Biesheuvel

Source: https://www.bloomberg.com/news/articles/2018-07-12/indonesia-reaches-preliminary-deal-with-freeport-on-grasberg-jji3ehey.

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