Indonesia’s attempt to detour to Rio Tinto from the former’s course to acquire gold and copper miner PT Freeport Indonesia (PTFI) may become a win-win deal for all parties involved, particularly for production split at the Grasberg mine.
The government has been negotiating with American mining giant Freeport-McMoRan (FCX) to increase the stake of Indonesian entities in PTFI to 51 percent from 9.36 percent.
State-owned mining holding firm PT Indonesia Asahan Aluminium (Inalum) now leads a consortium of Indonesian investors that will take over PTFI’s majority stake by April.
FCX now directly controls 81.28 percent of PTFI, while its other local subsidiary, PT Indocopper Investama, holds the remaining 9.36 percent.
Under a joint venture deal between Rio Tinto, the world’s second-largest miner, and PTFI signed in 1995, the former will be entitled to 40 percent interest in the entire production of Grasberg’s Block A, where the latter’s proven and probable reserves as well as its whole mining operation are located.
The acquisition of FCX’s 41.64 percent stake in PTFI will enable Indonesia to obtain merely 31 percent of the production, while FCX and Rio Tinto are set to get 29 percent and 40 percent, respectively and therefore, the country will still have no dominant control of the output in Grasberg, the world’s second-biggest copper mine.
However, Indonesia will have a majority share of 51 percent of the production if it buys Rio Tinto’s 40 percent interest in Grasberg and convert it into PTFI shares with an equal percentage, and then acquire Indocopper, leaving the rest for FCX.
“The purchase of Rio Tinto’s participating interest is aimed at unifying the equity and economic interests [of PTFI and the Grasberg project, respectively,] to be 51 percent for Indonesia and 49 percent for FCX,” Inalum head of corporate communication Rendi A. Witular said on Tuesday.
Energy and Mineral Resources Minister Ignasius Jonan said on Jan. 25 that Rio Tinto’s 40 percent interest would be converted into shares through a rights issue, resulting in the dilution of the stakes currently held by Inalum and Indocopper to around 5.5 percent each. Consequently, after the conversion of Rio Tinto’s interest into shares and the acquisition of Indocopper, Indonesia would control a 51 percent share in PTFI, Jonan said.
Earlier this month, PTFI executive vice president Tony Wenas acknowledged that Rio Tinto’s 40 percent interest could be converted into 40 percent shares in PTFI with the approval of its parent company, FCX. He also said there would be no problem in securing the deal in the near future even though Rio Tinto’s agreement with PTFI was supposed to become effective in 2022.
“Technically, we can arrange it so that we will be able to directly convert [Rio Tinto’s] interest into PTFI’s shares,” Tony said on March 7.
Inalum has hired Indonesia’s state-owned investment firm PT Danareksa and two American consultancy firms — Morgan Stanley and PricewaterhouseCoopers (PwC) — to calculate the value of Rio Tinto’s interest. The process has reportedly been complete, although the figure has not been publicly disclosed.
Germany’s top lender, Deutsche Bank, said in a report published on Feb. 13 that an exit from Grasberg for above US$3.3 billion, with an implied discount rate of around 14 percent, would be a reasonable outcome for Rio Tinto.
The miner, which had operating assets totaling $1.14 billion for Grasberg as of last year, is projected to see its copper production more than double to 1.05 million tons per year in the 2023-2027 period from only 478,000 tons last year, according to the lender.
By the mid-2020s, as Grasberg’s underground mine ramps up, the huge mining site is expected to make up about 8 percent of Rio Tinto’s total earnings before interest, taxes, depreciation and amortization (EBITDA), in accordance with its 40 percent interest in the project.
However, Deutsche Bank also said considering Indonesia’s current mining rules, which demand government control of all mining assets, the best-case scenario for Rio Tinto would be to see its ownership in Grasberg dwindle to 20 percent from 40 percent at present.
Source: Viriya P. Singgih / The Jakarta Post
21 March 2018