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Economy

Indonesia and Freeport end their squabble over Papua mine

Friends again, but much heavy lifting remains as the two dig through details of a deal

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

JAKARTA The chief executive of U.S. mining company Freeport-McMoRan and two Indonesian ministers publicly declared on Aug. 29 an end to an acrimonious dispute over a giant copper mine in Papua that has raged for months.

The deal is seen as a testament to Indonesian President Joko Widodo's resolve to balance foreign investment with national interests. CEO Richard Adkerson told a press conference that Freeport has agreed to relinquish a majority stake in its subsidiary, Freeport Indonesia, to local interests in exchange for extending the Papua mining contract by 20 years to 2041.

Dressed in a traditional batik shirt, Adkerson cut a very different figure to his last public appearance in Jakarta in February, when he wore a black suit and threatened the government with arbitration.

With open-pit resources depleting at the company's Grasberg copper and gold mine in Papua, Freeport now has the "confidence" to invest up to $20 billion in developing underground mining operations, Adkerson said. The agreement will require Freeport to build a smelter over the next five years to process copper concentrate.

Local media presented the presumptive deal as a success for Widodo in attracting investment to the energy sector while promoting national ownership. The deal is far from done, however, as key details remain to be resolved.

Freeport was a major foreign investor under the regime of former Indonesian President Suharto, who came to power in 1967 and left in 1998. Development of the Grasberg mine brought some economic gains to Papua, but the operations have often been blamed for violence in the restive region. Foreign control of national resources has also been a contentious issue over the past five decades.

Tensions between the two sides escalated after the government issued new mining and mineral export regulations in January that required at least 51% divestment to be carried out in stages within 10 years after the issuance of an IUPK, a special mining business permit that Freeport needs to resume exports of copper concentrate. Freeport earlier said the rules violate its current contract of work, signed in 1991.

WELCOME PROGRESS The unexpected agreement came more than a month ahead of an Oct. 10 deadline. It has been seen as a sign of Widodo's determination to stimulate foreign investment and economic growth, which have languished since he took office nearly three years ago. Widodo pressed for a deal after negotiations begun in February ran into difficulties, according to officials involved.

Underground at the Grasberg copper and gold mine operated by an Indonesian subsidiary of Freeport-McMoRan near Timika, Papua Province   © Antara/Reuters

Adkerson noted in April during an analysts' call that in countries like Indonesia, "divergent views" exist among various ministries. Three months later, he was much more upbeat. "I believe we are seeing ... a near-term resolution ... being more clearly identified by senior levels in the Indonesian government than we have seen in the past," he said.

Energy Minister Ignasius Jonan said a "final agreement" with Freeport was reached on Aug. 27 at a meeting between Adkerson and the Indonesian energy and finance ministers.

"Outcomes of the negotiations are in line with ... President Joko Widodo's instructions to advance the nation's and the Papua people's interest, to [stake] national sovereignty over natural resources, and to keep the climate conducive for investment," Jonan said two days later.

Meannwhile, Adkerson said, "We appreciate the leadership of ... President Joko Widodo, and we listen carefully to his desires and objectives that have been conveyed to us by the ministers." Freeport said it will formally apply for an IUPK to replace its current contract that expires in 2021, as well as for the first 10-year extension to its Grasberg operations, a process that Jonan said can begin "immediately."

DEVILISH DETAILS However, particulars of the agreement -- including divestment scheme, timeline and share valuation especially -- still need to be hammered out, and this could prove tough.

The Indonesian government currently owns a 9.36% stake in Freeport Indonesia. The company previously agreed to increase the stake to 30%, but the deal failed as the two sides disagreed on the mine's value. Last year, Freeport offered a 10.64% stake in Grasberg for $1.7 billion, valuing the mine at about $16.2 billion, while the government was only prepared to offer $630 million, according to Reuters.

The two sides disagree over whether to take into account the mine's gold and copper reserves. The government has said it will appoint an independent business valuation company in concert with Freeport.

Distribution of the divested shares has also not been settled. The regulations stipulate that the central government and local administration in Papua should have priority. Other options include state enterprises, private companies and the stock market. State-Owned Enterprises Minister Rini Soemarno said a holding company of SOE miners would be the most suitable buyers. But analysts argue that Indonesia is not equipped to take over a major asset given its cash-strapped government and lack of strong local mining companies.

The involvement of Anglo-Australian miner Rio Tinto, which is entitled to 40% of the production from Grasberg's reserves after 2022, further complicates the issue. Adkerson, however, said Freeport is also representing Rio Tinto in its negotiations with the Indonesia government. "And my own view is that if Freeport views that these changes are appropriate and official as we're saying today, then we will be able to obtain Rio Tinto's agreement," he said.

In a follow-up statement, Freeport added that "the divestment will be structured so that [Freeport] will retain control over operations and governance."

There is also the issue of tax and royalty payments. To mollify the public, the government has said the mining company will have to pay more of them combined, but exactly how much has yet to be calculated, and will be subject to new tax and royalty policies for the mining sector expected to be released "soon." Adkerson merely said the company will work on "the appropriate levels of taxes and other non-tax payments that are consistent with our current obligations under the contract."

For now, by agreeing to Jakarta's terms, Freeport will be able to resume copper concentrate exports for five years instead of stopping on Oct. 10.

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