Indonesia and Freeport-McMoRan Inc announced this week a "framework agreement" on a long-term plan to allow the U.S. miner to continue operating its giant Grasberg copper mine in the eastern province of Papua.
Freeport has agreed to divest majority control of its Indonesian unit and build a second smelter under a special mining license (IUPK) that will replace its existing Contract of Work that expires in four years time.
Nonetheless, crucial elements of a final deal still need to be formalised before the latest agreement has any real impact on Freeport`s operations.Main points of the new agreement:
- Freeport will commit to build a second smelter within five years.
- Freeport will convert its Contract of Work to a special license (IUPK) providing it with a framework for long-term operating rights through 2041.
- The government will provide certainty of fiscal and legal terms during the term of the IUPK.
- Freeport will divest its ownership in PT-FI at fair market value so that Indonesian interests own 51 percent of PT-FI`s shares.How will the divestment work?
According to Indonesia`s regulation, a foreign company holding a new permit after five years of production must divest its ownership in stages so that at the 10th year Indonesia owns at least 51 percent.Who will buy the shares?
The shares should be sold to an Indonesian counterpart – either the central government, regional government, state-owned enterprises, regional government-owned enterprises or other locally owned companies.
The shares should first be offered to the central government, and then to a regional government, SOEs and privately owned national companies. The offer must be extended within 90 days after five years of production.How will the shares be valued?
This has been a major sticking point in the past and both sides said the timing and process for the divestment were still being discussed.
Freeport said it will divest its ownership at "fair market value", but the government is likely to seek a much lower figure and has said the share price 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.What are the implications of Freeport`s joint venture with Rio Tinto?
The joint venture Freeport has with Rio Tinto Plc at Grasberg gives Rio rights to 40 percent of the mine`s production above specific levels until 2022 and 40 percent of all production after 2022, so the new divestment rule could significantly reduce Freeport`s revenue from Grasberg. SOURCES: Freeport, Indonesian government regulation Jan 11, 2017, article 97.
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