Indonesia and Freeport Bargaining over 10.64% Stake
The bargaining over the 10.64 percent stake in Freeport Indonesia has begun. Whereas Freeport proposed a price of USD $1.7 billion, Indonesia's Ministry of Energy and Mineral Resources says the stake is only worth USD $630 million. Due to Government Regulation No. 77/2014 on the Implementation of Mineral and Coal Mining Business Activities, Freeport Indonesia - the local unit of US mining giant Freeport McMoRan - has to divest a 30 percent stake (to an Indonesian party) gradually up to the year 2019. Currently, the central government already owns a 9.36 percent stake in Freeport Indonesia.
The gap between both prices is huge. In January 2016 Freeport Indonesia informed the government that it valued the 10.64 percent stake in the miner at USD $1.7 billion. Indonesian authorities immediately objected to this price and took several months to come up with its own calculation. This week, Indonesia's Energy and Mineral Resources Minister announced it valued the 10.64 percent stake at USD $630 million. While the Indonesian government uses a calculation that involves the replacement cost on the cumulative investment that has been conducted since the exploration stage up to 2019 (when a 30 percent stake in Freeport Indonesia has to be divested), Freeport uses a (fair market value) calculation that includes investment up to 2041. The Indonesian government now has requested Freeport to recalculate and make a better offer.
As such, the issue of whether Freeport Indonesia will be granted a 20-year extension to operate the Grasberg mine becomes an issue again. Based on an agreement signed in the 1990s Freeport Indonesia is entitled to obtain another 20-year extension. The present Indonesian government, however, says it cannot discuss an extension as the law states that negotiations about mining contract extensions can only be started two years prior to the expiration of the existing contract. This would mean that negotiations between both sides about the 20-year extension of the Grasberg mine can only start in 2019.
In mid-2014 both sides engaged in renegotiations in order to make Freeport Indonesia's contract more in line with the controversial 2009 Mining Law, including the divestment requirement. Although this requirement was not in line with the original contract, Freeport Indonesia decided to agree to the divestment requirement in an attempt not to miss out the 20-year extension after 2021 when its existing contract expires. Although officially the government cannot confirm the extension yet, government officials have signaled that the 20-year extension will be granted. Freeport Indonesia needs more certainty, however, because it wants to invest up to USD $18 billion in underground mining facilities and other expansion plans at the Grasberg mine; an investment that is pointless in case the 20-year extension is not granted. Moreover, Indonesia is well-known for its flip-flop policies, particularly when it involves natural resources.
Freeport Indonesia operates the Grasberg mine in Papua. This mine is known as the world's largest gold mine and third-largest copper mine.
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Why doesn't the Indonesia government just take over the corporation?