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Freeport Indonesia’s JV with Rio Tinto complicates share divestment talks

JAKARTA (RambuEnergy.com) – Indonesia and US-based Freeport-McMoRan Copper & Gold Inc (FCX), which operates giant Grasberg mining site in Papua is currently in talks over 41.64% further divestment of PT Freeport Indonesia’s shares to the Indonesian government. However, Freeport’s joint venture deal with Rio Tinto earlier over production and financing could complicate the talks between the two sides.

Based on the prevailing regulation, Freeport is required to divest up to 51% of the Freeport Indonesia shares to the Indonesian government. So far, the government already holds 9.36% shares in Freeport Indonesia.

The negotiation with Freeport over the share divestment was initially scheduled to be completed at end of October. The government, however, extended the talks by three months until the end of December.

The negotiation focuses on three key issues, namely share investment, valuation, the process of the share divestment.

Deputy Minister for Mining, Strategic Industries, and Media at the State Enterprise Minister Fajar Harry Sampurno told reporters on Friday (Nov. 24) that the negotiation with Freeport is still going on, including on technical issues. One of the issues being discussed was on the joint venture between Freeport and another giant mineral producer Rio Tinto, signed in 1995 over profit-sharing of Grasberg’s mining site and financing.

“There are technical issues (being discussed) as Rio Tinto, in fact, is there. Rio Tinto has an agreement with Freeport on the financing and profit-sharing. It is very technical and detailed deal, and this is being discussed with Freeport,” he said.

Parliament members, however, noted that the JV between Freeport and Rio Tinto is an internal deal between Freeport and Rio Tinto and that the Indonesian government should not go into detail. The Indonesian government should focus on the divestment of shares.

Given that Rio Tinto holds 40% of the profit-sharing, this may mean that after the 51% divestment is completed, Rio Tinto’s stake in Freeport would deplete to 19.65 and Freeport-McMoran to 29.4%.

Grasberg, located in the province of Papua in Indonesia, is one of the world’s largest copper and gold mines in terms of ore reserves and production.

Rio Tinto does acknowledge its JV with Freeport as revealed by the company on its website

“Rio Tinto has a joint venture with FCX for a 40% share of production above specific levels until 2021, and 40% of all production after 2021,” it said.

The Grasberg underground block cave project was initially expected to come online in 2017 when the current open pit mine is expected to be depleted. This will transition the mine from primarily an open pit to a fully-underground operation. It was initially expected to ramp up to full capacity by 2022, reaching 160,000 tonnes per day of ore.

Block caving is a highly resource-efficient method of underground mining, in which large underground ore blocks are cut from beneath, allowing the ore to collapse under its own weight.

In addition, Grasberg has begun construction on the Deep Mill Level Zone block cave mine, which will produce an additional 80,000 tonnes of ore per day at full capacity, expected in 2021. Together, these two projects will supply ore to the mill at 240,000 tonnes per day by 2022.

At end of August this year, both parties have reached an understanding on a framework to support PT-FI’s long-term investment plans in Papua. This framework, which will require definitive documentation and FCX Board and partner approvals, includes the following key terms:
• PT-FI will convert its Contract of Work to a special license (IUPK) which will provide PT-FI with longterm operating rights through 2041.
• The Government will provide certainty of fiscal and legal terms during the term of the IUPK.
• PT-FI will commit to construct a new smelter in Indonesia within five years.
• FCX will agree to divest its ownership in PT-FI at fair market value so that Indonesia interests own 51% of PT-FI’s shares. The timing and process of divestment is being discussed with the Government. The divestment will be structured so that FCX will retain control over operations and governance of PT-FI.  (*)

Written by Roffie Kurniawan, email: roffie.kurniawan@gmail.com

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