JAKARTA -- Indonesia's nationalization of a major copper and gold mine formerly run by U.S. metals company Freeport-McMoRan is a win for Indonesian President Joko Widodo who has been calling for the reclamation of strategic resources. But the lack of consensus over future investments puts one of the world's biggest sources of the red metal on shaky grounds.
According to the agreement spelling out the terms signed July 12, Freeport and Anglo-Australian peer Rio Tinto will sell their shares and interests in the local joint venture Freeport Indonesia, which runs the Grasberg mine, to state-owned resources company Indonesia Asahan Aluminum, or Inalum.
Indonesian State Owned Enterprises Minister Rini Soemarno claimed that the agreement is legally binding, while Freeport and Rio said in their press releases that it is nonbinding, according to Reuters.
Inalum will pay a combined $3.85 billion to the two companies to acquire all of Rio Tinto's interest and lift its overall stake to 51%. Freeport will hold onto the remaining 49% stake in the operator of the mine in eastern Indonesia's Papua province. A final deal is expected this year.
President Widodo hailed the agreement as "the product of three and a half years of negotiations." The leader has been hurrying to solve the Freeport issue, the biggest knot in his policy of reclaiming strategic resources, ahead of elections in April.
Freeport discovered the Grasberg copper and gold deposit in Papua in 1988. It is said to be the world's second-largest copper mine in output terms and the top source of gold. The Indonesian government demanded a majority stake in return for extending the Freeport unit's rights to the mine, which are set to expire in 2021, and the American miner agreed last year.
Last week's deal is a "win-win-win," Freeport's President and CEO Richard Adkerson told analysts in a conference call. Freeport is expected to continue leading the operation of the mine until its rights expire in 2041, Rio Tinto will receive $3.5 billion for giving up its right to receive metals from the mine, and Jakarta will gain an over-51% share of Freeport Indonesia.
Freeport will receive about 20% less per share in the sale than Rio -- a bitter pill Adkerson said was taken to restart stalled negotiations. The company wanted to avoid the potential hit to earnings if talks over its largest copper mine, which provides one-third of its supplies of the metal, dragged on too long.
The U.S. company initially opposed Jakarta's plan to nationalize Grasberg, citing differences from their contract. At one point, a government ban on exporting ore not processed in Indonesia forced Freeport to halt operations at the mine. That stoppage, combined with halts at another major South American mine, caused international copper prices to jump.
By around 2019, the open-pit Grasberg mine is expected to run dry of ore reserves. The plan is to switch to underground mining, a move that will require costly tunnel digging. The price tag for keeping the mine running through 2041 is expected to be between $15 billion and $20 billion, including the cost of building a second smelting plant -- one of Jakarta's conditions for extending Freeport's rights.
Few see the companies reaching fast agreement on how to split the costs, and an interruption in investment could impact production of copper, a crucial resource for electric vehicles.
Furthermore, Indonesian authorities in April revealed a plan to introduce environmental rules requiring that 95% of scrap minerals left over from the process of ore dressing -- or separating ore from surrounding valueless minerals -- be returned to the mountain they were taken from. Grasberg currently returns only 50% of leftover minerals, disposing of the rest in rivers, meaning it will take further investment to meet the new regulations.
Appointing top personnel may also be a thorn for the two sides. Some expect that Inalum will get to choose the top spot and Freeport will appoint the chief operating officer and chief finance officer, but no compromise is yet in sight.
Though the U.S. and China's escalating trade fight has copper prices on the decline, the spread of electric vehicles -- which use high volumes of the metal -- is expected to lift demand. Instability in copper mines could land a significant blow to global production.