Indonesia reaches deal with Freeport on new mining permit

JAKARTA- 29 Aug 2017: Indonesia and Freeport-McMoRan Inc on Tuesday reached an agreement that lets the U.S. miner continue operating its giant Grasberg copper and gold mine, though crucial details on a planned 51 percent divestment and new taxes remain unresolved.

Still, by agreeing to the majority divestment, Freeport is giving what it calls a “major concession” to the Indonesian government to move closer to fully resolving the dispute over Grasberg, the world’s second-biggest copper mine.

The agreement also reduces the risk of another stoppage to copper concentrate exports from Grasberg. Global prices for the metal jumped earlier this year when negotiations soured and exports were halted.

Freeport can “immediately apply” for a 10-year permit extension to mine at Grasberg beyond 2021, said Indonesian Energy and Mineral Resources Minister Ignasius Jonan, and a second extension could be proposed before 2031.

During Freeport’s five decades of operating Grasberg, in Indonesia’s eastern province of Papua, there has been frequent friction between the government and the company over revenue sharing and the mine’s social and environmental impact.

“The mandate of the president, which has been agreed to by Freeport, is that the divestment should reach 51 percent,” Jonan told a joint news conference, alongside Freeport’s Chief Executive Officer Richard Adkerson. “All that is left is to discuss the timing. The price will be negotiated later.”

Freeport will need to divest a further 41.64 percent of its Indonesian unit to comply with the local ownership rules introduced in January, on top of the 9.36 percent stake it has already divested.

Freeport has insisted on a “fair market value” for the divested stake, while the government is seeking much lower figure and said it should not include unmined copper reserves.

Last year, Freeport offered a 10.64 percent stake in Grasberg for $1.7 billion, valuing the mine at about $16.2 billion. The government counter-offered at $630 million.

“The mechanics, valuation and timing of the 51 percent divestiture are all absolutely critical issues which must be resolved before the dispute can be regarded as finally settled,” Jakarta-based foreign legal counsel Bill Sullivan told Reuters.

"MAJOR CONCESSION"

Freeport has held talks with Indonesia since 2009 to work out the shift to a new mining permit at Grasberg after a new mining law was passed that year. The talks became more urgent this year as its existing 30-year contract is due to expire in 2021 and the government demanded the mine accept the new permit or copper concentrate exports would be stopped.

The new permit would require Freeport to relinquish arbitration rights, pay new taxes and royalties, and develop a new copper smelter, among other terms.

Freeport is among the first miners to agree to new permits under the 2009 law and Energy Minister Jonan said last week this transition would be a “test case” for Indonesia’s mining sector.

Freeport had sought an agreement that ran to 2041 and would have provided the same legal and fiscal rights as its current contract. It was seeking the certainty to proceed with a multi-billion dollar plan to move mining at Grasberg underground from an open pit.

Adkerson said the existing contract of work would remain in place until everything was settled, but stressed that the company had given ground.

"I want to emphasize that our willingness on the agreement to divest a 51 percent (stake) and to build a smelter is a major concession and compromise on our part," said Adkerson, adding the company plans to invest between $17 billion and $20 billion in Grasberg through 2031.

Finance Minister Sri Mulyani Indrawati told the news conference the government was in the process of drafting new rules on taxes and royalties for miners.

Under these rules, the government expects to increase its revenues from Freeport, and the miner could maintain tax rates for "the duration of its operations," Mulyani said.