Trucks operate in the open-pit mine of PT Freeport's Grasberg copper and gold mine complex near Timika, in the eastern region of Papua, Indonesia on September 19, 2015 in this photo taken by Antara Foto. Reuters/Muhammad Adimaja/Antara Foto

The enigmatic expression on Finance Minister Sri Mulyani Indrawati’s face as she sat between Mines and Energy Minister Ignasius Jonan and US-based Freeport McMoRan Copper & Gold chairman Richard Adkerson spoke volumes about last week’s purported breakthrough in contract talks between the Indonesian government and the US mining giant.

The agreement, announced at an August 27 Jakarta press conference, was anything but a final settlement to a protracted contractual dispute over Grasberg, the world’s most profitable mine based in the Central Highlands of westernmost Papua province.

Dismissed by one former Indonesian mines minister as “window dressing,” it was clearly an effort to show Indonesians that Freeport, as one headline put it, had “caved” to government demands. Freeport has worked the Grasberg, the world’s largest gold and second largest copper mine, since the late 1980s.

The optics would have pleased President Joko Widodo, a populist whose single-minded pursuit of a second term in office led him to recently change eastern Indonesia’s Masela gas-field project from an offshore to onshore development in what could be the worst economic decision of his presidency.

But as the president’s designated point-person, Indrawati knows better than anyone that while Freeport appears to have made significant concessions, the company’s shareholders will have the last word on what it can and will ultimately accept.

Indonesia’s Finance Minister Sri Mulyani Indrawati (C), Freeport McMoRan chief Richard Adkerson (L) and Energy and Mineral Resources Minister Ignasius Jonan at a news conference in Jakarta, August 29, 2017. Photo: Reuters/Darren Whiteside

So far, there has only been agreement in principle to subsidiary PT Freeport Indonesia divesting 51% of its shares, converting its current Contract of Work (COW) to a special mining license known as an IUPK, and building a new smelter to process the balance of its concentrate.

The joint announcement said they had “reached an understanding on a framework to support Freeport’s long-term investment plans” until 2041. But Adkerson made it clear there will be an uphill battle to overcome the same hurdles that have always stood in the way of a settlement.

Still to be resolved is an additional stipulation that Freeport pays more state revenue and royalties from its operations than it has done under the current 20-year contract of work, which the Indonesians want replaced with an IUPK before it expires in 2021. Freeport has long been the country’s biggest tax payer.

Analysts were left to wonder whether the accord was in fact a mechanism to put off Freeport’s threat of international arbitration, a step Adkerson is reluctant to take even if his shareholders aren’t, and give the government a reason to extend the firm’s permit for concentrate exports beyond next month’s deadline.

The government withdrew Freeport’s export permit for concentrate in January, forcing a partial closure of the mine and the retrenchment of hundreds of workers, before issuing another temporary export permit in April.

Introduced three years ago, the export restrictions on raw and semi-processed ore – designed to provide a boost to a cherished local processing industry — have put a severe dent in Freeport’s bottom line and reduced tax revenues the government needs to head off a ballooning budget deficit.

Indonesia president Joko Widodo (C) speaks in front of parliament on August 16, 2017. Photo: Reuters/Beawiharta

Widodo considers the 51% divestment sacrosanct, but whether he likes it or not the negotiation has become a bellwether for future green-field investments, which are crucial if Indonesia is to grow beyond 5% and avoid what economists fear is a looming middle-income trap.

Despite the announcement of 16 deregulation packages since Widodo came to power in 2014, foreign investment has remained sluggish in the face of contradictory nationalist-minded policies and what businessmen complain is an inexorable shift towards more state and bureaucratic control.

Valuation was always going to be the biggest problem, considering the difficulty the cash-strapped Indonesians will have in raising the billions of dollars it will cost to buy the remaining 42.64% stake in the mine. The government currently holds a 9.36% stake.

The Indonesians have put the price at US$3 billion, less than half of what Freeport sees as “fair market value”, saying on its corporate website that the deal would have to be structured “so that (Freeport) will retain control over the operations and governance” during a promised two 10-year contract extensions. Freeport values the whole mine at around US$18 billion.

But last week’s joint statement made no reference to fair market value, which is reportedly favored by Indrawati, a former World Bank managing director with extensive knowledge of how international business works, but not by State Enterprise Minister Rini Soemarno.

The government has said it will turn state-owned aluminum company PT Inalum into a holding company to purchase the stake, but it still needs to issue a regulation making it the legal umbrella for the Freeport stake as well as three state mining companies.

Indonesian protesters calling for the nationalization of Grasberg mine protest at Freeport’s headquarters in Jakarta, November 26, 2015. Photo: Reuters/Garry Lotulung

The government also continues to insist that Freeport can’t include the Grasberg’s copper and gold reserves in its valuation because under Article 33 of the country’s constitution they are considered to belong to the people of Indonesia and not to what amounts to a foreign contractor.

That position confounds investors and stock market analysts, who can hardly value a firm on simply its assets when it has spent billions of dollars to develop Grasberg and still must spend at least US$15 billion more to convert it from an open pit to an underground operation, at the government’s request.

Despite the announcement of 16 deregulation packages since Widodo came to power in 2014, foreign investment has remained sluggish in the face of contradictory nationalist-minded policies and what businessmen complain is an inexorable shift towards more state and bureaucratic control

The only way around the dilemma is to base the Freeport valuation on anticipated earnings over a set period, similar to what transpired when US-based Newmont Mining was contractually compelled by the government to divest its shares in Sumbawa’s Batu Hijau copper and gold mine in 2011.

It isn’t clear whether that concept was raised during the latest round of negotiations, but lawyers say it would likely be based on estimated earnings, less taxes and royalties, over the remaining four years of Freeport’s COW — and possibly the extensions guaranteed under that 1990 contract.

This is consistent with the recognition that CoW or IUPK holders become the owners of the minerals they extract and produce once all applicable taxes due to the state have been paid in full.

At least for now, the reference in the announcement to “Indonesian nationals” suggests the government is adamant about shutting the door on raising capital through an initial public offering because it would mean foreign investors may buy into the venture.

Officials fear that would create an opening for Freeport surrogates to ensure the company retains a controlling interest, along the lines of what Newmont did before it finally sold out to a Chinese-funded Indonesian consortium last year.

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