Indonesian police stand guard at the open-pit mine of PT Freeport's Grasberg copper and gold mine complex near Timika, in the eastern province of Papua, Indonesia. Photo: Antara Foto via Reuters /Muhammad Adimaja
Indonesian police stand guard at the open-pit mine of PT Freeport's Grasberg copper and gold mine complex near Timika, in the eastern province of Papua, Indonesia. Photo: Antara Foto via Reuters /Muhammad Adimaja

The prolonged talks between the Indonesian government and Freeport McMoRan Copper & Gold have passed another milestone with Freeport, partner Rio Tinto and state-owned holding company PT Inalum signing an agreement under which Rio Tinto will sell its stake in Papua’s fabulously rich Grasberg mine.

Coming a year after the two main parties agreed on a framework deal which President Joko Widodo’s administration over-optimistically hailed as a breakthrough, the new non-binding “Heads of Agreement” sets down a valuation of the mine’s assets and describes a pathway to Freeport’s eventual 51.2% divestment.

Politically, it is the target Widodo was anxious to reach before the end of June as he gears up for the simultaneous April 2019 presidential and legislative elections. But it doesn’t resolve the key issues of managerial control over the mine, international arbitration and newly introduced environmental regulations.

Indeed, with analysts and social media commentators this time openly skeptical about the implications of the July 12 agreement, it appears to place more pressure on the government to get the final deal done before rather than after the elections as the opposition looks for ammunition to bring down the high-flying president.

Inalum will pay US$3.5 billion for Rio Tinto’s 40% participating interest in PT Freeport Indonesia (PTFI) and another US$350 million for the 9.36% stake held by Indocopper Investama, a Freeport unit controlled on separate occasions by influential Indonesian businessmen Bob Hasan and Aburizal Bakrie, who once enjoyed close relations with storied former Freeport chairman Jim-Bob Moffett.

Rio Tinto, an Anglo-Australian mining giant, entered into an agreement with Freeport in 1996 that gave it the right to 40% of production above a certain level and 40% of all production after 2022 in exchange for investing in the Grasberg’s early underground block-caving operations that now make up more than a third of its output.

Added to the 9.36% stake the state already owns in the Indonesian subsidiary, converting Rio Tinto’s stake into PTFI shares through a subsequent rights issue will give it the controlling interest, which Widodo hailed as a “big leap forward” in allowing Indonesia to increase its income from the mine.

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

According to some reports, Inalum will receive US$5.2 billion in funding from a consortium of 11 foreign and domestic banks, including Citibank, HSBC, Standard Chartered, BPP Paribas, Tokyo-Mitsubishi UFG, OCBC, SMBC, CIMB Niaga and state-owned Mandiri, Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia (BNI).

Inalum chief executive officer Budi Gunardi Sadikan, who has said the company is putting forward US$1.5 million in equity, did not respond to an e-mailed request to confirm the amount, but the loan is still dependent on a sales and purchase agreement being executed in 30 days and reaching closure a month after that.

“Given the terms that remain to be agreed, there is no certainty that a transaction will be completed,” Rio Tinto said in a sobering statement. “Any final agreements will be subject to approval by the necessary government regulators and authorities.”

Wrapping up all the outstanding issues by early September when the 2019 presidential campaign officially gets under way will be no mean feat given the way the two sides have haggled over the one issue of managerial control for more than a year now without resolution.

Phoenix-based Freeport chairman Richard Adkerson has told negotiators from the finance, state enterprise and energy and mineral resources ministries that the company must continue to retain managerial as well as operational control to ensure conformity with the US Foreign Corrupt Practices Act.

Who will operate the mine itself is not an issue, but it is the management that will be in charge of parceling out the lucrative procurement contracts associated with the Grasberg’s current conversion from an open pit – which runs out of ore next month – to the world’s biggest underground mine with hundreds of kilometers of electric railway connecting to five different ore bodies.

An underground section of the Grasberg mine near Timika, Papua province February 14, 2015. Photo: Reuters/M Agung Rajasa/Antara Foto

Notorious for its rent-seeking practices, Indonesia scored only 37 out of 100 on Transparency International’s 2017 Corruption Perceptions Index, putting it in 96th place among 180 countries. Illustrating the slow progress that has been made in Indonesia’s so-called war on corruption, the country’s score has moved only five points in five years.

The index is mostly based on business perceptions and puts special emphasis on licensing and similar red tape issues, but Indonesia’s standing with the business community wasn’t helped by the US$173 million identity card graft case, which sent House Speaker Setya Novanto to jail for 15 years earlier this year.

Although he was later reinstated, Novanto was forced to resign as speaker in 2015 for allegedly conspiring with oil mafia kingpin Muhammad Reza Chalid to shakedown Freeport; in a secretly taped hotel conversation, Novanto was heard demanding PTFI shares in exchange for an early extension to Freeport’s contract.

Freeport has insisted on appointing the new PTFI president director, who will then assign responsibilities to the executives under him. Given the fact that an Indonesian has filled that post for decades, analysts are puzzled why the two sides can’t come up with an inventive solution that would address both their concerns.

PTFI hasn’t had a president-director since retired air force chief Chappy Hakim, reportedly a Widodo recommendation, resigned after only seven months in the job in February last year as the government sought to pressure Freeport into converting its Contract of Work (CoW) to a Special Business License (IUPK) four years ahead of its 2021 expiry date.

Nationalist politicians say with the state holding a controlling interest, Indonesia has every justification for wanting to take charge of management, although after using Freeport as a convenient scapegoat for decades that will put it in the direct firing line of Papuan activists demanding a greater share of the mine’s revenues.

Papuan students display placards during an anti-Freeport rally in front of the US giant Freeport-McMoRan office in Jakarta on April 7, 2017. Photo: Bay Ismoyo 

Also missing from the public debate is a new situation where Inalum will have to come up with half of the cost of a new US$2.7 billion smelter and also half of the US$19 billion Freeport calculates is still needed for the underground expansion of the Grasberg, which will be a hefty recurring expense for at least the next four years as the company seeks to return production to current levels.

Freeport and Amman Mineral are in talks to build a joint-venture smelter on a 160-hectare site at Amman’s Batu Hijau mine in Sumbawa, where there is already a deep-water port.

Amman purchased the country’s second biggest copper and gold mine from Newmont for US$1.3 billion two years ago, but now needs an extra cash injection to exploit an adjoining concession.

Many in the mining community believe that once Freeport is under new ownership, the implementing regulations that have still to be attached to the amended 2009 Mining Law will drop the requirement to refine the last 5% of the mine’s copper and gold concentrate, which they say has never made a lot of sense anyway.