Freeport Eases Indonesia Tensions -- WSJ

By Anita Rachman and I Made Sentana 

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 (August 30, 2017).

JAKARTA, Indonesia -- U. S. mining company Freeport-McMoRan Inc. will give up its majority stake in the giant Grasberg copper and gold mine, in a significant step toward ending a long dispute with Indonesia, dropping from 90.64% ownership to 49%.

The agreement, announced by Indonesian and Freeport officials on Tuesday, will extend the mining company's permit until as long as 2041. It caps an important chapter in a struggle between Jakarta and foreign mining companies in recent years, as the Southeast Asian nation seeks a greater share of the wealth made from its vast mineral resources.

The agreement requires Freeport to build a smelter by October 2022 -- consistent with a goal of President Joko Widodo's government to increase domestic-processing capacity in Indonesia, but seen by mining companies as an extra cost at the same time that falling demand from China has pummeled commodity prices.

Freeport Chief Executive Richard Adkerson said the company will invest as much as $20 billion, between now and 2041, to develop what had been a largely open-air mine underground. Freeport has invested $12 billion in developing Grasberg, located in Indonesia's eastern province of Papua, since the 1970s. The company is Indonesia's largest single taxpayer.

The divestment and the agreement to build the smelter, estimated to cost $2 billion, amounted to a "major concession" from the company, Mr. Adkerson said.

"For us, the big issue is having confidence that we can make these investments and, having an agreement with the government, that we will have time to recover those investments," Mr. Adkerson said.

Freeport said in a statement released early Wednesday that the divestment will be done in a way that will leave the company in control of the mine's operations and management.

Freeport's current operating license expires in 2021 and negotiations over its renewal had been going on for years. The company had been reluctant to make new investments without an agreement in place, and labor unrest had been increasing.

Tom Lembong, chairman of Indonesia Investment Coordinating Board, called the agreement "a positive milestone" but said both parties still have to talk about details, such as pricing and fiscal terms.

Under the new agreement, Indonesia has agreed to extend Freeport's license by 10 years to 2031, and if requirements are being met, a further 10 years.

The value of the 41.64% stake that Freeport will now have to sell remains to be determined. The government and its state-owned enterprises are unlikely to have the financing to buy it in one piece, so the divestment could be spread across many holders and Freeport might retain the largest single holding, analysts said.

Bill Sullivan, a Jakarta-based legal adviser to mining companies, said foreign investors could see the agreement as a positive development -- depending on how outstanding details are resolved.

The mechanics, pricing and timing of the divestiture are critical issues, Mr. Sullivan said, which, until resolved, make it "impossible" to say whether the long-running dispute between Freeport and Indonesia is over.

This agreement lifts a government threat to ban Freeport exporting a form of unrefined copper, which was to have taken effect in October.

Copper prices rose to their best level in nearly three years in Asian trading Tuesday, largely because of falling Shanghai inventories, with the benchmark three-month price recently trading at $6,802.50 a metric ton on the London Metal Exchange.

Copper and other metals prices have been boosted recently by optimism over China. But one of the biggest drivers for copper prices has been snags in mine supplies, which might ease after the agreement between Indonesia and Freeport.

The agreement will give a boost to President Widodo, known as Jokowi, who had been determined to end what many in Indonesia see as foreign companies benefiting from generous terms agreed to under former dictator Suharto, who was overthrown in 1998.

"I think it will create an image that Jokowi is an excellent negotiator, as he's able to get results that benefit the nation's interest more than the investor's," said Wasisto Jati, a political researcher at the Indonesian Institute of Sciences.

Freeport hasn't been alone in its troubles in Indonesia. Last year, Newmont Mining Corp. and BHP Billiton sold off interests in their Indonesian units to local companies and exited the country, citing heavier regulation as a factor.

At the same time, mining revenue as a share of economic growth has dropped since restrictions were put on exports in 2014. Investment in future exploration has fallen dramatically, raising concerns about future mining prospects in the absence of new mineral finds.

Deden Sudrajat in Jakarta and Biman Mukherji in New Delhi contributed to this article.

Write to I Made Sentana at [e-mail]

(END) Dow Jones Newswires

August 30, 2017 02:47 ET (06:47 GMT)

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