Indonesia Gets Closer to Taking Controlling Stake in Mine -- WSJ

By Rhiannon Hoyle in Sydney and Amrith Ramkumar in New York 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 13, 2018).

Global mining giants Freeport-McMoRan Inc. and Rio Tinto PLC have agreed to hand over control of the world's second-biggest copper mine to Indonesia, moving closer to resolving one of the world's most prominent recent battles over resource wealth.

Thursday's agreement comes after years of tense negotiations and follows moves by governments around the world, from the Democratic Republic of Congo to Tanzania, to wrest control of mines and take a bigger cut of profits. The deal also illustrates the dilemma facing large mining companies, which often sink billions of dollars into projects in far-flung places only to face unpredictable laws and yearslong battles.

Freeport Chief Executive Richard Adkerson said the agreement will finally form a partnership between the largest U.S. copper miner and the Indonesian government.

"It's a new day for Freeport, and a new day for our working with the government," Mr. Adkerson said on a call with analysts. "We'll now be working hand in hand with the government as opposed to having the sometimes difficult and contentious relationship that we've had for so many years."

Under the terms of the deal, PT Indonesia Asahan Aluminum, or Inalum, will pay $3.5 billion for an interest held by Rio Tinto in the mine's share of production, mainly from the 2020s onward. Inalum will then acquire an approximately 9% stake in the mine, called Grasberg, from Freeport for $350 million. That will increase Inalum's stake from around 10% to 51%. Freeport will end up with 49% and operate the mine.

The agreement is nonbinding, and Freeport and Rio Tinto said they expect to finalize it in the second half of the year. Freeport shares edged down 0.4% on Thursday, though they are up about 40% in the past year as investors anticipated an agreement with Indonesia. Rio Tinto shares edged down 0.1% in London.

Grasberg, the world's second-largest copper project, represents about one-third of Phoenix-based Freeport's market value, leaving the company with little wiggle room in negotiations to hand over control, analysts said. Analysts estimate Thursday's deal values Grasberg at about $10 billion to $13 billion. Other large miners such as Newmont Mining Corp. and BHP Billiton Ltd. have in recent years left Indonesia after the country imposed stricter regulations.

One of Indonesia's largest employers and taxpayers, Freeport says it has already invested about $14 billion in the mine and is now set to spend billions more to move operations underground.

The agreement follows years of new rules for miners in Indonesia going back to 2009 as resource nationalism intensified and Jakarta sought to fatten its coffers and build the country's state-owned firms into global competitors. Early last year, Indonesia introduced rules requiring foreign miners to switch from long-term contracts of work to a mining licensing system in which they said their rights were more limited.

Resource nationalism has become a common way for countries, emboldened by rising commodity prices, to renegotiate contracts and legislation, especially during times when miners are flush. Freeport's talks happened while copper prices hit a four-year high in June, though they have fallen 16% since then as the U.S.-China trade battle roils markets. Net profits of the world's top 40 mining companies more than doubled last year. PricewaterhouseCoopers, which compiled the data, forecasts a further 25% rise in 2018.

Also, Indonesian President Joko Widodo is up for re-election next April.

"This is a leap forward," Mr. Widodo told reporters ahead of the signing. "We expect we'll get bigger income from taxes, royalties, dividends" so that mining commodities "can really be enjoyed by us all. The national interest must take precedence."

The Democratic Republic of Congo drew up a new mining code this year to take a bigger slice of profits, potentially hurting companies like Glencore PLC. Miners have also been slapped with big bills in Tanzania and Zambia amid tax and revenue sharing disputes.

"We are making a lot of money, we are very profitable and therefore everybody -- communities, governments -- wants to have a bigger share of the cake," Rio Tinto Chief Executive Jean-Sébastien Jacques said in an interview on Thursday before the deal was announced.

--Ben Otto in Jakarta contributed to this article.

Write to Rhiannon Hoyle at [e-mail] and Amrith Ramkumar at [e-mail]

(END) Dow Jones Newswires

July 13, 2018 02:47 ET (06:47 GMT)

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