Freeport Makes Major Concessions In Order To Secure Its Long Term Presence In Indonesia

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Freeport-McMoRan has announced a breakthrough in its negotiations with the Indonesian government over the long term status of its mining operations in the country. In a press release, the company stated that it had agreed upon a framework that would govern its long term presence in Indonesia, though the specifics will be worked out in due course of time. [1]

As per the provisions of Freeport’s understanding with the government, the company will convert its existing investment agreement (known as its contract of work), which expires in 2021, to a special mining license which would confer long term operating rights through 2041 on the company. [1] However, Freeport is expected to commit to the construction of a new smelter in Indonesia within five years and bring down its holding in PT Freeport Indonesia, the entity that operates the Batu Hijau mining complex, to 49% through stake sales to Indonesian interests. [1] Freeport currently holds a 90.64% stake in PT Freeport Indonesia. [2]

Freeport’s agreement with the Indonesian government should pave the way for the resumption of normal operations for the company in Indonesia, where production is expected to rise sharply in the near term, as illustrated by the chart shown below.

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However, despite a breakthrough in negotiations with the government, several concerns remain from Freeport’s point of view. Firstly, the company has had to make major concessions in the form of the planned divestment and smelter construction in order to secure the future of its operations in Indonesia. These concessions are not a part of the company’s existing investment agreement with the Indonesian government and the planned smelter construction could adversely impact the viability of the company’s operations in Indonesia. Moreover, the uncertain regulatory environment raises concerns over whether Freeport can realize fair market value for the planned divestment of its majority stake in the Indonesian operations, particularly as the Indonesian government has historically differed with the company with respect to the valuation of the Batu Hijau mine. [2] The uncertainty caused by frequent regulatory changes forced Newmont to sell off its Indonesian operations last year. However, Freeport has a considerably larger presence in Indonesia than Newmont did, and has decided to stay on in the country. Only time will tell if it is the right decision.

Have more questions about Freeport-McMoRan? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Freeport-McMoRan

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Notes:
  1. Freeport-McMoRan Announces Framework For Agreement With Indonesian Government Regarding Long-Term Operating Rights For PT Freeport Indonesia, Freeport-McMoRan News Release [] [] []
  2. Freeport makes compromise to end years of wrangling over Indonesian mining rights, Reuters [] []