Indonesia’s demand for US mining giant Freeport McMoRan Inc. (FCX) to sell down its controlling stake in its Indonesian unit is moving closer to the deadline for the two parties to come up with an amicable agreement.
With the two parties having agreed to settle all their differences by October or risk either party taking the dispute to international arbitration, the divestment issue is now taking the center stage.
Finance Minister Sri Mulyani Indrawati is spearheading the negotiation for the divestment of FCX shares in gold and copper miner PT Freeport Indonesia (PTFI), which operates Grasberg, the world’s biggest gold mine in Indonesia’s poorest province, Papua.
Sri Mulyani has thus far refused to reveal the state of progress in the divestment negotiation after she held a meeting with Energy and Mineral Resources Minister Ignasius Jonan last week.
Complicating the matter, the divestment process also concerns Rio Tinto. The Anglo-Australian company and world’s second-biggest miner has a stock option in PTFI under an unincorporated joint venture with FCX.
PTFI has been in a deadlock over its future operations in the country, as the government demands a conversion of its Contract of Work (CoW) signed in 1991, and is set to expire in 2021, into a special mining license (IUPK).
Such a move would annul the company’s long-term investment stability guarantee provided in the CoW, while also forcing it to build a smelter within five years and reduce the stake held by FCX so that national entities own at least 51 percent.
The dispute, which led to a temporary stoppage in PTFI’s copper concentrate exports in the January-April period, has forced Rio Tinto to reconsider its option to enlarge its ownership in PTFI.
“Yes, it’s possible [for Rio Tinto to walk away from the option],” Sammy Hamzah, the Indonesian Employers Association (Apindo) energy and mineral resources chairman and the non-executive director of Rio Tinto Indonesia, told The Jakarta Post recently.
Rio Tinto CEO Jean-Sebastian Jacques said in February, as reported by Reuters, that Grasberg might not be a world-class mining investment, especially considering the dispute involving PTFI and the government.
Sammy pointed out the same issue, as he said it seemed the government was doing everything it could to force its will on PTFI, even if that may breach the CoW.
“The two parties should have equal rights under the contract. If one is more powerful than the other and is able to change the commitment whenever it wants, what’s the point?” Sammy asked.
In 1996, FCX and Rio Tinto established an unincorporated joint venture, paving the way for the latter to control 40 percent in PTFI’s CoW and the option to participate in 40 percent of any other future exploration projects in Papua.
Under the agreement, Rio Tinto has a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver through 2022 in Grasberg’s Block A, and, after 2022, a 40 percent interest in all production from Block A.
All of PTFI’s proven and probable reserves and all its mining operations are located in the 9996-hectare Block A.
Under the arrangement, Rio Tinto funded US$100 million in 1996 for approved exploration costs in the areas covered by PTFI and Eastern Minerals, which also conducts mineral exploration activities in Papua. The exploration costs in the joint venture are shared 60/40 by FCX and Rio Tinto.
Sammy said Rio Tinto signed the joint venture agreement with FCX because PTFI’s CoW stated that the government could not unreasonably withhold the approval of a contract extension after 2021.
“That means that if no fatal problem occurs, the government cannot reject a proposal of contract extension by PTFI,” Sammy said.
The divestment obligation further complicates the problem.
The previous administration had decided to revise it to only 30 percent for Indonesian entities through the issuance of Government Regulation (PP) No. 77/2014, before the current administration reversed the course earlier this year with PP No. 1/2017.
PTFI has also proposed a plan to go public by floating some of its shares on the Indonesia Stock Exchange (IDX), paving the way for various investors, including Rio Tinto, to grab the company’s shares. However, the government has stated that it is unlikely to accept such a plan.
At present, FCX owns 90.64 percent of PTFI, while merely 9.36 percent is owned by the government.
- Sukhyar, who served as the Energy and Mineral Resources Ministry’s director general for minerals and coal from December 2013 to April 2015, said the previous administration had decided to lower the divestment requirement to 30 percent in return for PTFI’s commitment to develop Grasberg’s underground mine.
“[PTFI] never imagined that the investment for the underground mine in Papua would be so big when it signed the CoW in 1991, resulting in a longer payback period for the company. That’s the explanation from PTFI’s former CEOs to us,” Sukhyar told the Post.
PTFI spokesperson Riza Pratama also previously said that the company expected its contract to be extended until 2041 so that it could continue its investment on the underground Grasberg mine worth $15 billion, $7 billion of which had been disbursed in the 2004-2016 period.
Sammy also reminded the government to immediately prepare for the transition of PTFI’s ownership as there were only three mining companies in the world that had the technology needed to operate and develop the underground Grasberg mine, namely Rio Tinto, FCX and the world’s largest copper miner, Codelco.
Source: Viriya P. Singgih / The Jakarta Post
14 August 2015