JAKARTA -- State-owned mining holding company Indonesia Asahan Aluminum on Thursday signed an agreement with Freeport-McMoRan that will see it take control of the U.S. miner's local unit for $3.85 billion.
The deal includes Australian miner Rio Tinto's participating interest in Freeport Indonesia's operations at the Grasberg mine in Papua province, one of the world's largest gold and copper pits.
Rio's interest will be converted into shares of Freeport Indonesia, allowing Indonesia Asahan Aluminum, known as Inalum, to increase its stake in the unit from 9.36% to 51%.
"With the signing of the heads of agreement, the partnership between [Freeport-McMoRan] and Inalum is expected to increase the quality and added value of the extractive industry in the future, and improve the welfare of the Indonesian public," said Finance Minister Sri Mulyani Indrawati after the signing ceremony.
The agreement was signed by Freeport-McMoRan Chief Executive Richard Adkerson and Inalum President Budi Sadikin. It follows a year of intense negotiations concerning the valuation of Freeport Indonesia and the Grasberg operations, among numerous other issues, after the American miner agreed to divest the majority of its stake in its Indonesian unit last year.
Sadikin said Rio's participating interest was valued at $3.5 billion, and $350 million will be paid to Freeport for the remainder of the shares. He said Inalum, which was established as the state mining holding company last November, will partly fund the purchase with internal cash flow -- it currently holds $1.5 billion. Inalum is also in talks with 11 local and foreign banks regarding loans to cover the rest. The related parties hope to complete the purchase deal by the end of the year.
A joint-venture agreement on the new ownership structure of Freeport Indonesia, a special mining permit and a government guarantee for Freeport's investment stability in the country are expected to be issued over the next few months.
The new deal and the permit will render Freeport eligible to extend its Papua operations for 20 years through 2041. Its current contract, signed with a previous administration, expires in 2021.
Freeport has been seeking a guarantee from the government as it planned to invest $20 billion to develop underground mining operations at Grasberg, with open-pit resources at the mine being depleted. Freeport has also agreed to build a second smelter in Indonesia.
"We're pleased to renew [our] partnership with the government of Indonesia ... and enter into a new period of cooperation," Adkerson said at a news conference.
President Joko Widodo expressed his pleasure at the conclusion of the deal earlier in the day, saying negotiations had been "very tough and intensive."
Widodo has been determined to bring what is seen as a strategic national resource under state control after decades of being in the hands of the U.S. miner.
Reaching an agreement now is of particular significance, with Widodo expected to register his candidacy for re-election in April next month.
The negotiations gathered pace when the government in January last year brought in rules requiring foreign mining companies to divest the majority of their stakes in Indonesian operations to local entities if they wished to continue exporting certain concentrates.
The regulations form part of Jakarta's efforts to develop the domestic downstream industry while nationalizing the country's natural resources. The rule specifies that divestment can be made in stages over a period of 10 years.