Freeport’s $3.8b divestment mine deal – what it actually means

By Stefanno Reinard Sulaiman in Jakarta

Four Indonesian ministers gathered to witness the signing of an agreement between state-owned mining holding group PT Indonesia Asahan Aluminium (Inalum) and Freeport-McMoran (FCX) to take over Papua’s PT Freeport Indonesia (PTFI) in complex deals worth $3.85 billion.

Under the agreement, Indonesia will take control of 51 percent of Freeport Indonesia’s equity, and hold a majority stake in the company that operates the world’s largest gold mine, Grasberg in Papua.

The signing was the culmination of years of negotiations, preceding the current administration of President Joko “Jokowi” Widodo, and a tug-of-war between Indonesia and the American company.

The presence of four ministers at the signing was an indication of the economic and political importance of the deal to the Jokowi administration. But it is not yet a done deal, as officials have liked to claim.

The agreement requires the two parties to conduct further negotiations to finalise the details of the divestment. The government expects to finish ironing out the details sometime in August.

Freeport’s footprint in Indonesia
Here is your guide to understanding the seemingly never-ending negotiations, and why it matters for Indonesia to cement the deal as soon as possible:

  • Freeport-McMoran has operated in Indonesia since it signed its first contract in 1967 in a deal that was good for 30 years. In 1997, it received an extension for its operation until 2021. The two contracts in essence covered mining for copper, with gold and silver treated as associated resources found alongside copper ores.
  • Both contracts were signed during the regime of president Suharto. The first contract in 1967 was widely hailed as a landmark moment, symbolising the ushering in of Indonesia’s open-door policy to foreign investment under the pro-Western General Suharto, who had just taken over power from the socialist-leaning Sukarno a year earlier.
  • Developing the mines deep in the mountainous jungles of Papua required huge initial investment to build core infrastructure, including roads, housing and power plants, as well as preparing the pool of workers. In return for this investment, Freeport received generous tax breaks.

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Freeport’s first phase of operations exploited the Ertsberg Mountain in Mimika regency. Once the mountain was flattened, Freeport turned to mining the adjacent Mt Grasberg, which turned out to contain even larger reserves. Freeport is looking to mine the large gold reserves underground, assuming the latest agreement holds.

Bloomberg Intelligence estimates that the reserves at the world’s biggest gold deposit and second-largest copper mine are worth about $14 billion.

Freeport-MacMoran’s operations in Indonesia accounted for 47 percent of its operating income in 2017, according to Bloomberg.

Freeport’s huge profits have been a source of contention with long-standing criticism that the tax and royalty revenues paid to the Indonesian government represent only a pittance of its true income.

Indonesia’s 9.36 percent stake in PTFI, as stipulated in the 1991 contract of work (CoW), also does not amount to much, particularly as Freeport has at times withheld paying dividends.

For example, PTFI paid Rp 1.4 trillion in dividends in 2017 after three years of failing to make any payments, according to the Finance Ministry.

Freeport has also attracted controversy for the environmental and social impacts of its operations in the heart of Papua.

Last year, the Supreme Audit Agency (BPK) came out with a damning report claiming that Freeport had caused $13 billion in environmental damages.

Wind of change for Freeport
In 2009, Indonesia passed the Coal and Mineral Mining Law, or Law No. 4/2009. The law requires all foreign mining companies to divest 51 percent of their shares to the Indonesian government, state-owned or regional-owned enterprises or private Indonesian companies within 10 years of the start of operation.

Freeport has managed to work its way around the regulation by indicating that it is operating under a CoW, which is good until 2021.

In January 2017, the government issued a new regulation requiring all mining contracting companies to switch to special mining permits (IUPK) in order to export products in the form of concentrates, which is one step above ore but still not refined.

Freeport refused to fully comply, arguing that the IUPK was not a nailed-down scheme because the stipulations, including the taxation scheme, could change according to changes in government regulations.

In February 2017, the Energy and Mineral Resources Ministry issued PTFI an IUPK saying the company had finally agreed to the terms, paving the way for the divestment deal signed on Thursday.

Series of agreements
In August 2017, following pressure from the government to divest its shares in PTFI, Freeport-McMoran’s top management agreed to increase Indonesia’s share in PTFI to 51 percent, as well as to develop a smelter and increase Indonesia’s revenue from PTFI’s tax and royalty payments.

The Indonesian government chose state mining holding company Inalum to become the majority shareholder in PTFI.

However, questions remain regarding the price tag and how Inalum will pay for its stake in Freeport. Inalum president director Budi Gunadi Sadikin said on Thursday that the company would have to pay $3.85 billion in August and that it had already secured loans from 11 banks.

What are the benefits of majority ownership in Freeport?

Bisman Bakhtiar, the executive director of the Center for Energy and Mining Law (Pushep), said it was time for Indonesia to take control over the huge gold reserves in Papua, as 50 years had passed since PTFI began operations.

“Too much of our resources have been exploited. Surely after 50 years, we have the capability to operate it ourselves,” Bisman said.

Indonesia will reap the largest share of the profits and dividends, which in the past had almost entirely gone to PTFI. The government will also continue to enjoy taxes, royalties as well as a cut of the revenue.

“There are many ways to maximise the benefits from PTFI for the people, and divestment is one of them,” he said.

However, Bisman urged the government to ensure that Indonesia benefited from the next phase of negotiations to finalise the divestment deal.

“Even though we will finally become the majority owner in August, we need to look at the tax, royalty and revenue sharing arrangements. Are they better or not?”

Stefanno Reinard Sulaiman is a journalist with The Jakarta Post.

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Freeport Indonesia chief resigns as dispute over mining policy intensifies

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Headline: Freeport Indonesia chief resigns as dispute over mining policy intensifies

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Freeport Indonesia’s Chappy Hakim … “an extraordinary commitment of time”. Image: Bernadette Christina Munthe/Jakarta Globe file

Chappy Hakim has resigned as its president director, only three months after his appointment as the mining giant’s top executive, PT Freeport Indonesia announced at the weekend.

In a media release, Freeport Indonesia did not specify when Hakim, a retired air chief marshal, would officially step down.

However, it said he would move to an advisory role with the company.

“Serving as Freeport Indonesia president director involves an extraordinary commitment of time. I have decided it is in the best interests of Freeport Indonesia and my family to step down from my duties as president director while continuing to support the company in an advisory role,” Hakim was quoted as saying.

READ MORE: Freeport seeks to dodge piling problems as stalemate shuts production

Hakim’s resignation occurred as the company, a subsidiary of United States-based Freeport-McMoRan, fights against complying with the government’s latest mining policy, which stipulates that miners must convert their current contracts of work (CoWs) into special mining permits (IUPKs) in exchange for permission to continue exporting certain mineral ores and concentrates.

Freeport, which operates the huge Grasberg mine in Papua, has repeatedly said it would not agree to the contract conversion unless the government provided assurance of long-term investment stability, consisting of fiscal and legal certainty, in accordance with its CoW signed in 1991.

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Freeport-McMoRan CEO and president Richard C. Adkerson thanked Hakim for his contributions to the company.

“We understand that this was a difficult decision for Pak Chappy to make. We appreciate his service to our company and his support. We look forward to his continued advice and counsel,” he said.

Chappy Hakim, also known as an aviation industry expert and prolific writer, was appointed as Freeport Indonesia’s top executive in November.

The company previously appointed retired military officer Air Vice-Marshall (ret.) Maroef Sjamsoeddin as president-director.

Freeport seeks to dodge piling problems as stalemate shuts production

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Headline: Freeport seeks to dodge piling problems as stalemate shuts production

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A Freeport worker monitors the mineral flotation process before the mine production crisis. Image: B. Josie Susilo Hardianto

By Viriya P. Singgih and Fedina S. Sundaryani in Jakarta

Gold and copper miner PT Freeport Indonesia, the country’s largest taxpayer and oldest foreign investor, is in for another rough ride as it struggles to fight the government’s demand to divest controlling ownership and resolve allegations of legislative contempt.

Reuters reports that all work has stopped at Freeport’s Grasberg mine and its workers are planning a demonstration against the government’s move last month that halted exports of copper concentrate to boost domestic industries, a union said.

A prolonged stoppage at the world’s second-biggest copper mine would support copper prices, near 21-month highs this week, but would also deny the Indonesian government desperately needed revenue from one of its biggest taxpayers.

READ MORE: Freeport says it hasn’t agreed on new contract

Freeport’s headache intensified last week when the Energy and Mineral Resources Ministry claimed the company had agreed to convert its contract of work (CoW) to a special mining licence (IUPK), and required it to divest 51 percent of its shares and construct a smelter.

In exchange, the government allowed the company to resume its exports of copper concentrate to prevent massive layoffs in its operations in the backwater regency of Timika in Papua, where Freeport has been operating for more than five decades.

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The government has claimed its recent policy to continue the relaxation of raw and partly processed mineral exports, which many analysts and politicians deemed as against the law, has profited Freeport because the company can continue with exports despite its questionable commitment to construct a smelter in Indonesia to process its products.

While Freeport has indicated it will fight against the share divestment while agreeing to other demands set out by the government, Energy and Mineral Resources Minister Ignasius Jonan has not blinked and insists the company has to comply.

“Why are they refusing the divestment rule? The shares will later be bought by the government or the government’s partners. What is exactly the reason behind the company’s reluctance?” Jonan said.

Freeport, a local unit of politically wired US mining giant Freeport McMoRan Inc. (FCX), said it would not agree to the contract conversion unless the government provided a long-term investment stability assurance, consisting of fiscal and legal certainties, in accordance to its CoW signed in 1991.

“Freeport Indonesia will keep working with the government to find the best possible solution for both sides. However, no agreement has yet to be made as of today,” Freeport Indonesia spokesperson Riza Pratama said.

Under the CoW, Freeport is required to sell 51 percent of its stake to Indonesian entities by 2011, or 45 percent if it has sold a minimum of 20 percent in the local stock market.

However, a string of regulations were issued along the way that eventually allowed Freeport to dodge the requirement to this date, where very few officials have made a fuss. FCX owns 90.64 percent of the company, while merely 9.36 percent is owned by the Indonesian government.

Full Freeport report

Indonesia approves Freeport, Amman contract conversion and exports continue

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Headline: Indonesia approves Freeport, Amman contract conversion and exports continue

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Dig deeper: A heavy vehicle passes gold and copper miner PT Freeport Indonesia’s mining areas in Grasberg in Papua. Image: Nethy Dharma Somba/Jakarta Post

By Viriya P. Singgih and Grace D. Amianti in Jakarta

The Indonesian government has approved the conversion of the contracts of gold and copper miner PT Freeport Indonesia and copper producer PT Amman Mineral Nusa Tenggara, allowing them to continue exports of their partly processed minerals.

As required by a revised government regulation that has partly lifted the ban on the export of raw and partly processed minerals, the two companies have converted their contracts of work (CoW) into special mining licences (IUPK).

The Energy and Mineral Resources Ministry stated that Amman Mineral and Freeport Indonesia had submitted proposals to convert their CoW into IUPK on January 25 and 26, respectively.

READ MORE: Indonesia stands firm as Freeport mine threatens to cut production

Amman Mineral has recently been taken over by local energy firm PT Medco Energi Internasional, owned by politically wired tycoon Arifin Panigoro, from the United States-based miner Newmont Mining Corp., while Freeport Indonesia is a subsidiary of another American giant mining company Freeport-McMoRan Inc.

“Today, the Energy and Mineral Resources Ministry has approved the conversion of Freeport and Amman’s CoW into IUPK,” the ministry’s mineral and coal director general, Bambang Gatot Ariyono, said on Friday.

“Furthermore, we expect those companies to immediately submit proposals for export permit extensions so that we can process them right away.”

Major export destinations for Indonesia’s copper ore and concentrates. Source: Jakarta Post file

Bambang also said the proposals needed to be submitted along with written integrity pacts consisting of commitments and detailed plans to build a smelter, the progress of which will be monitored every six months.
Last month, the government relaxed the ban on mineral exports in returns for miners’ commitment to convert their CoW into IUPK, divest 51 percent of their shares and build a domestic smelter.

“The two companies must also comply with the requirement to sell their shares,” said Bambang, declining to elaborate on the subject of divestment.

The requirements are stipulated in two ministerial decrees as derivatives of the fourth revision of Government Regulation No. 23/2010 on the management of mineral and coal businesses, which allows miners to continue exporting copper concentrates, certain amounts of low-grade nickel and washed bauxite.

Politicians and analysts have argued that the issuance of the regulation and the decrees contravene the 2009 Mining Law, which originally imposed a total ban on mineral ore exports in 2014 and mandated all miners to build smelters domestically to strengthen the processing industry.

However, up to now, Freeport Indonesia and Amman Mineral have shown no significant progress in their smelter developments.

Now that the companies have obtained their IUPK both of their CoW have automatically been annulled and they are obliged to comply with fiscal policies stipulated in the prevailing law in return for their export permit extensions.

The Finance Ministry’s fiscal policy head, Suahasil Nazara, said the government had finalized the revision of a 2014 finance ministerial decree on raw mineral export duties, with the new rates to be based on the smelter-construction progress.

Export duty revision
Under the revision, if smelter progress is between 0 and 30 percent, the export duty will be 7.5 percent, while if the progress is between 30 and 50 percent the duty will be 5 percent and for 50 to 75 percent progress, the duty will be 2.5 percent.The export duty will be 0 percent only when progress passes 75 percent.

The export duties for both lowgrade nickel and washed bauxite will be 10 percent. However, Suahasil did not detail whether the rate was linked to the progress in smelter construction.

“A miner needs to submit a proposal to get the recommendation from the Energy and Mineral Resources Ministry for its export permit. Within such a recommendation, the ministry will state the progress of the smelter development, which will be our basis for setting the export duty for the miner,” Suahasil said, while adding that the duty would last in accordance to the export permit period.

Data from the Finance Ministry show that Freeport Indonesia and Amman Mineral paid Rp 1.23 trillion (US$92.1 million) and Rp 1.25 trillion, respectively, in export duty alone to the government throughout 2016.

Freeport Indonesia said recently it had begun preparing to reduce production, which could be followed by job cuts, in a move that indirectly pushed the government to grant the company the export permit.

Freeport mining boss denies assaulting lawmaker in row over smelter

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Headline: Freeport mining boss denies assaulting lawmaker in row over smelter

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Chappy Hakim, chief executive of Indonesia’s local unit of US mining giant Freeport McMoRan, speaks to reporters outside Parliament in Jakarta last year. Image: Bernadette Christina Munthe/Jakarta Globe file

By Eko Praseto in Jakarta

Freeport Indonesia director Chappy Hakim has denied assaulting a lawmaker after a hearing with the House of Representatives’ Commission VII in Jakarta.

According to reports, the former Air Force chief-of-staff had assaulted Commission VII member Mukhtar Tompo after a hearing with several representatives of mining companies, including Freeport, which operates the giant Grasberg copper and gold mine in Papua, to discuss the government’s mining policies.

“There was no beating, unlike what has been reported in the media. Mukhtar also said I never assaulted him,” Chappy said in a written statement.

Chappy claimed after the hearing Mukhtar had approached him to ask why Freeport had recently been inconsistent in its policies. Chappy then demanded that Mukhtar prove his accusation.

The Freeport director has already apologised to the Commission VII for the kerfuffle between him and Mukhtar.

Mukhtar’s tweets trigger
Mukhtar meanwhile claimed that Chappy had yelled at him and poked him on the chest with his finger during an altercation after the hearing.

Chappy’s anger was reportedly triggered by a tweet from Mukhtar criticising the lack of progress on Freeport’s smelter construction.

“Freeport has violated Law No. 4/2009 articles 103 and 170. Their promise to build a smelter was only a play. This whole thing is a soap opera,” Mukhtar tweeted on December 7 last year.

In another tweet on the same day, he said: “Freeport Indonesia director’s statement to Commission VII today confirms they will not build a smelter if their contract is not extended. Funny.”

Freeport is supposed to build a smelter in Gresik, East Java.

According to the deal they made with the government, they will not be allowed to export anymore concentrates if they do not go ahead with the smelter construction.

Indonesia stands firm as Freeport mine threatens to cut production

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Headline: Indonesia stands firm as Freeport mine threatens to cut production

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The Grasberg copper and gold mining complex in Indonesia’s Papua province. Image: Dadang Tri/B/JP

The Indonesian government seems set to ignore threats by United States mining giant Freeport-McMoran Inc to cut production at its Papuan copper mine – the world’s second-largest — and slash its local workforce if it does not receive a permit to continue exporting copper concentrates by the middle of the month, the Jakarta Post reports.

While ministers are rushing to revise the regulations so miners that have committed to build smelters can continue to export ore concentrates, an intermediate product used to make copper, there is no guarantee that the deadline will be met.

The rules as they stand now only permit shipments of refined metal after January 11, Bloomberg reported.

Richard Adkerson, chief executive officer of Freeport-McMoRan Inc., the owner of the massive Grasberg mine in Papua province, said he was confident the issue would be resolved.

He told a conference in the US last week that without a resolution the company would have to cut back operations and potentially curb development of the underground mine where it was spending US$1 billion a year.

CRU Group, a consultancy, says the regulations will be changed.

“CRU’s view is that the rules will be revised and Freeport McMoRan will be able to continue to export Grasberg concentrates,” said Christine Meilton, principal consultant, copper supply and raw materials.

Disruption forecast
“Our base case forecast assumes that any disruption does not continue long enough to result in a cutback in production.”

Grasberg is the world’s largest mine in terms of copper capacity after Escondida in Chile, according to the International Copper Study Group.

Freeport says the deposit has the world’s biggest reserves of gold.

Any disruption could support prices of copper, which is the best performer among its peers this quarter, as banks from Goldman Sachs Group Inc. to Citigroup Inc. take a bullish view on the metal next year.

Indonesia is seeking to build a processing industry and prevent its mineral wealth from disappearing overseas.

While the rules allowed time for producers to build smelters, the government said that after three years shipments of semi-processed ores would no longer be permitted.