The Jakarta Post
Sep 4, 2017
The agreement in principle between the government and Freeport-McMoRan last week requiring the American company to increase Indonesian ownership in its gold and copper mining subsidiary Freeport Indonesia (FI) in Papua from the current 9.36 percent to 51 percent by no means reflects significant progress in resolving once and for all the dispute over FI.
As “the devil is in the details,” the most difficult issues related to the valuation of the FI shares and the time frame for the divestment have yet to be negotiated. Yet this provisional deal has secured Freeport a license to operate the world’s largest gold and copper mine until 2041.
We don’t think the divestment deal will scare off other mining investors. Nor is it a sign of rising resource nationalism in the country, as several foreign analysts have observed. It instead allows FI to resume copper concentrate exports and gives it fiscal and legal certainty for the next 24 years to recoup the estimated US$20 billion in additional investment needed to expand the mine and shift much of the mining work underground.
Freeport’s commitment to divest is a pledge to no longer play games with Indonesian law. It is simply a long-delayed enforcement of the law for FI, which has operated the giant mine since 1973, generating more than 95 percent of Freeport’s consolidated gold sales and more than a quarter of its revenues.
FI’s contract of work (CoW), which was extended in 1991 by 20 years to 2021, required Freeport to divest at least 51 percent of its shares by 2011.
But this stipulation has never been enforced for various reasons, including the government’s inability and other national interests to finance the acquisition and disagreement on the share valuation.
The absence of clear-cut rules on the divestment time frame and the seemingly different opinions regarding the method of valuation could see negotiations on the divestment details drag on for years. Freeport has insisted that the shares be priced based on fair market value. Earlier reports put Freeport’s estimate of the value of the 41 percent divestment at $6.6 billion, which apparently takes into account the mine’s gold and copper reserves.
But the government valued the 41 percent equity at only $2.46 billion, arguing that the divestment price should not include the value of the reserves that will still be in the ground after the end of the contract in 2041. The share value should be based entirely on the value of the business, which also depends on gold and copper prices.
This argument makes a lot of sense, because after 2041, the whole mine will be returned to the government, and all the remaining reserves or deposits certainly will belong to the government as the owner.
Hopefully, the technical details for implementing the provisional agreement will be completed before the end of 2018. Otherwise inordinate nationalistic sentiment that will likely rise in the run-up to the April 2019 presidential and legislative elections will overshadow the negotiations.