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Freeport seeks deal on Papua mine operator by year-end

CEO calls $13bn 'logical' valuation for Indonesia for copper and gold producer

Trucks operate in the open-pit mine of PT Freeport's Grasberg copper and gold mine complex near Timika, in the eastern region of Papua, Indonesia.   © Reuters

JAKARTA -- Freeport-McMoRan has two months to hammer out a deal with the Indonesian government that will determine the future of a giant copper and gold mine in the remote province of Papua.

Speaking from Indonesia in a phone call with analysts on Wednesday night, Freeport chief executive Richard Adkerson said the company wants to reach a "comprehensive and final agreement" with Indonesian authorities by the end of the year. It will update the so-called framework agreement that was announced in August, in which Freeport agreed to cut its stake in local unit Freeport Indonesia, which operates the Grasberg mine, from 90.64% to 49% and to build a copper smelter. In turn, the government has agreed to extend Freeport's mining contract for 20 years beyond 2021.

Freeport-McMoRan CEO Richard Adkerson, left, speaks at the Ministry of Energy and Mineral Resources in Jakarta on Aug. 29, as Indonesian Finance Minister Sri Mulyani Indrawati looks on.   © Reuters

In light of the ongoing negotiations, Freeport's temporary export license, which was initially set to expire in October, was extended to Dec. 31.

The negotiations are being closely watched by investors and market participants. The Grasberg mine has one of the world's largest reserves of copper, used in electric cables and pipes, and is highly profitable because it also produces gold. Freeport is the largest private-sector employer in Papua, and says it has contributed $60 billion to Indonesia's gross domestic product since 1991.

The company was exempted from a ban on raw mineral exports that Indonesia imposed in 2014, but the government has become increasingly aggressive in trying to regain control of its natural resources. The current dispute stems from a string of regulations that Jakarta rolled out in January, which required Freeport to convert to a new license subject to divestment and other conditions.

Adkerson brushed off worries about a deep divide between the two sides, saying the company is "working positively and amicably" with Indonesian authorities. Still, his remarks indicate they remain far from a deal on key issues, including the valuation of Freeport Indonesia.

Energy and Mineral Resources Minister Ignasius Jonan reportedly told the parliament in October that Freeport Indonesia should be worth about $8 billion, assuming that it accounts for about 40% of the parent company's stock capitalization. In the analyst call, Adkerson said a valuation of more than $13 billion is a "logical analysis," if debt and the government's 9.36% stake in Freeport Indonesia are taken into consideration.

Indonesian Energy and Mineral Resources Minister Ignasius Jonan   © Reuters

Adkerson added that "there has been reluctance from government" regarding Freeport's proposal to list Freeport Indonesia on the Indonesia Stock Exchange. Instead, the government is trying to create a state-owned mining holding company that will take over Freeport's stake in the Indonesian mine operator.

Further complicating the negotiations is the role of Anglo-Australian miner Rio Tinto, which is entitled to 40% of all production after 2021. Adkerson said its stake in Freeport Indonesia may further drop to 29% from 49% under this agreement, although it aims to maintain operational control. Some media reports have suggested that Rio Tinto may sell its interest.

Adkerson said a smelter costing up to $3 billion will be built within five years after a final agreement is reached. Freeport is negotiating with Amman Mineral, a local mining company that took over U.S. miner Newmont Mining's stake in a large copper mine in 2016, to jointly build the smelter.

Freeport's New York-listed shares closed down 3.5% on Wednesday. 

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