MAC: Mines and Communities

Freeport apparently to cede control of Grasberg, while Rio Tinto sheds its stake

Published by MAC on 2018-07-14
Source:, Reuters, Bloomberg

It looks like the protracted negotiations for the Indonesian Government to take a controlling stake in the Graberg mine in Papua, as well as for Rio Tinto to exit the project, are nearing their conclusion.

Still missing from the negotiations, and most of the reporting, are references to the Papuan people on whose land the mine, and its significant waste, sit.

If Rio Tinto do manage to get out with their hefty pay-off, how will they be held responsible for the environmental, social & human rights abuses over these past years?

Previous article on MAC: Freeport protesters call for Grasberg closure, and Papua self-determination

Rio Tinto sells $3.5bn stake in Grasberg mine to Indonesian state miner

Cecilia Jamasmie

12 July 2018

World’s No.2 miner Rio Tinto said Thursday it had sold its 40% stake in the giant Grasberg mine, the world’s second largest copper operation, to Indonesia's state mining company PT Indonesia Asahan Aluminium (Inalum) for $3.5 billion.

The deal is expected to end to a long-drawn-out, three-way dispute over the mine, which has been centred on bringing local ownership of Grasberg up to 51%, a main requisite set by the Indonesian government to allow Freeport-McMoRan, operator of Grasberg, to keep doing so.

Rio had a joint venture with Freeport for a 40% share of Grasberg's production above specific levels until 2021 and 40% of all production after that. But as a result of strikes and other disruptions and as the open pit at Grasberg nears the end of its life, the Melbourne-based miner hasn’t seen any benefit since 2014.

Freeport separately said it had inked a final agreement with PT Inalum through which it cedes the Indonesian miner majority control of Grasberg.

The three-way pact would see Inalum pay $3.85 billion for a 51% stake, increasing Indonesia’s holding from just over 9%. After the sale, Rio Tinto will cash out of its interest in the mine, while Freeport will receive $350 million and the right to remain as operator of Grasberg until 2041.

As Indonesia heads to presidential elections next year, sealing a deal to get a majority stake in Grasberg was a priority for President Joko Widodo, who most analysts expect will seek a second term in office.

Bloomberg Intelligence estimates that Grasberg’s reserves are worth about $14 billion. Indonesia accounted for 47% of Freeport’s operating income in 2017, according to data compiled by Bloomberg.

Grasberg, the world’s second-largest copper mine and fourth largest gold operation, is transitioning to an underground operation, set to reach full capacity by 2022, when it will produce 160,000 tonnes per day of ore. Today's deal secures much-needed investment to develop underground mines at the site.

The additional Deep Mill Level Zone block cave mine, currently under construction, is projected to contribute an additional 80,000 tonnes per day of ore once at full capacity, expected in 2021.

Freeport to cede control of Indonesian copper mine in $3.9 bn deal

By Wilda Asmarini, Bernadette Christina Munthe and Susan Taylor

Reuters -

12 July 2018

JAKARTA/TORONTO – Freeport-McMoRan Inc said on Thursday it will sell a majority stake in the world's second-biggest copper mine to the Indonesian government, seemingly ending a long-running dispute via a series of complex deals worth $3.85 billion.

The agreement, which could still collapse, will see Freeport give up majority control but remain the operator of the Grasberg mine, located in the country's eastern province of Papua, as Jakarta seeks to gain greater control over its mineral wealth.

Freeport accepted far less than it could have gotten for its majority Grasberg stake, highlighting the company's desire to end an acrimonious chapter that had weighed on its shares for more than six years. The company risked getting nothing had the case moved to arbitration.

Shares of Phoenix, Arizona-based Freeport were down slightly in Thursday afternoon trading.

"Freeport left money on the table to get this deal done," Freeport Chief Executive Officer Richard Adkerson said on a conference call with investors after a signing ceremony in Jakarta. "It's a new day for Freeport, and a new day for our working with the government."

It was not immediately clear if the agreement would be binding. While Freeport and Rio both said the agreement was non-binding, Jakarta said it was a binding deal.

The transactions will be completed this month, said State-Owned Enterprises Minister Rini Soemarno.
"The deal is critical for the massive investment needed to develop underground mines at Grasberg."

The deal could be a boon for Freeport's stock, which has fallen behind peers. Most analysts believe the stock should trade about 14 percent above current levels, according to Thomson Reuters data.

"Just to have clarity is critically important because for many investors, Freeport has been uninvestable because of the uncertainty around Grasberg," Jefferies mining analyst Christopher LaFemina said in an interview.

Under the agreement, Indonesian state-owned miner PT Inalum plans to acquire the Indonesian unit of Rio Tinto , which holds a 40 percent participating interest in Grasberg, for $3.5 billion.

That interest would then be transferred to Freeport's local unit, PT Freeport Indonesia, and converted into a 40 percent equity holding in the unit via a rights issuance that would then be given to Inalum.

A subsequent purchase of the share of Grasberg held by Freeport unit PT Indocopper Investama, valued at $350 million, would give Indonesia a total holding of 51.38 percent in Freeport Indonesia.

Estimates on the value of that stake vary. Jefferies values it at $800 million, while some estimates are lower.

Freeport, which will hold about 49 percent of Grasberg when the agreement is set, has also agreed to build a smelter in Indonesia within five years of the deal being signed, Adkerson said.

The two sides had agreed in principle last August to a deal. Thursday's agreement hammers out most of the specifics.

Rio for its part said it hoped for binding agreements by the end of the year, adding in a statement "there is no certainty that a transaction will be completed."


Indonesian President Joko Widodo praised the agreement as "a leap forward."

"We have to have a larger amount of income from tax, royalties, dividends … so the value of our mining sector can benefit everybody," Widodo said at the ceremony.

Sealing a deal to get a majority stake for Indonesia in Grasberg is a priority for Widodo, who is widely expected to seek a second term in office in presidential elections next year.

The deal is also critical for the massive investment needed to develop underground mines at Grasberg as the current open-pit operation is phased out this year.

Still, planned agreements on how Freeport will manage mine operations with Inalum as the majority shareholder also need to be resolved.

Adkerson, Freeport's CEO since 2003, said that under the agreement Freeport alone will have authority to manage mine operations, but Inalum will work as an equal partner at the board level.

Inalum wants Freeport to "take the lead," he said, because Grasberg is "the most complicated mine in the world to operate." The high-altitude mine operates in an extremely rugged and remote area of New Guinea surrounded by jungle.

Efforts to finalise a deal have been complicated by concerns over the environmental impact of the project, in particular its handling of mine waste or tailings.

Environment Minister Siti Nurbaya must still issue a recommendation to Freeport Indonesia before the miner can secure the rights to Grasberg up to 2041.

Freeport Unveils Indonesia Price But Plenty Left to Resolve

By Danielle Bochove, Viriya Singgih, and Yoga Rusmana

12 July 2018

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



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