- Pact is close after all the “blood, sweat and tears”: Adkerson
- He says Indonesia, miner are well into work on special license
Freeport-McMoRan Inc.’s chief executive says he’s reached “understandings” with Indonesia on every major condition in a package of agreements needed to sell part of its stake in the giant Grasberg copper-and-gold mine -- including the terms under which it will operate in the country for the next 20 years.
After all the “blood, sweat and tears,” the hardest work has been done, paving the way for a closing that will involve multiple documents changing hands simultaneously on a single day, Richard Adkerson said Thursday in a 90-minute interview.
After Freeport and Indonesia signed a “definitive” agreement last week for the U.S. miner to cede majority ownership of its local operations to a state-owned firm, the company said it was conditional on solving key points. Those included a guarantee of stable rights to mine Grasberg through 2041 and amendments to new environmental rules. Adkerson said Thursday much of that work is almost complete.
The two sides are well into the final paperwork around a new special mining license, he said, as well as changes to Freeport’s environmental obligations. While Adkerson doesn’t anticipate any problems getting consent from antitrust regulators around the world, that process will likely take the longest and could push completion to the first quarter of 2019, although he is “hopeful” it will be done this year.
Adkerson also said PT Indonesia Asahan Aluminium, the state-owned enterprise known as Inalum, is already talking to banks and financial advisers about bond issuance for its purchase of its stake in the massive mine. Inalum is “very confident” it will complete its financing, he said.
Key transactions on closing:
- Freeport will receive a special mining license, or IUPK, that will extend its right to operate in Indonesia until 2041 in two stages, Adkerson said
o The first extension is to 2031. A second extension to 2041 is contingent on Freeport having met basic requirements, including around taxation and building a smelter
o The extensions will include fiscal and legal stability
- Freeport will then terminate its existing agreement, known as a Contract of Work
- New environmental decrees around Freeport’s disposal of tailings in a local river system will be amended: Adkerson
o Freeport will monitor and report on the effects of the tailings on the environment and will try to find more uses for reclaimed tailings
o “When practical,” Adkerson says, the miner will retain more tailings in the deposition zone
o “But we have an agreement that there would not be massive changes in the systems that we’ve been operating now for 20 years”: Adkerson
- Purchase and sale agreement will be completed
Inalum expects to settle the financing shortly before the financial closing of the deal in November, and plans to have all matters relating to necessary documents and procedures cleared by then too, Rendi Witular, head of corporate communications and government relations, said on Friday.
During a wide-ranging discussion by phone, Adkerson reflected on his seven-year effort to secure new long-term rights for Freeport in Indonesia, including two years of intensive talks with multiple levels of government around divestment.
The low point came in February 2017 when the Phoenix-based company gave notice to begin international arbitration proceedings, a decision that was “not received well by the government,” Adkerson said. The “turning point” came in the summer of 2017, when the two sides struck a framework agreement in which Freeport agreed to divest a majority stake in PT-FI, its Indonesian unit, to local interests and to build a smelter.
Both were significant concessions. Adkerson says the smelter will cost $3 billion at a time when there is “a global excess of smelter capacity.” However, the sting of divestment was considerably lessened when one of its partners in the mine, London-based Rio Tinto Group, decided to sell its stake in Grasberg, he said. That allowed Freeport to divest less than 10 percent of its stake in PT-FI, instead of more than 40 percent, to bring local ownership to 51 percent.
Rio expects its own deal to exit Grasberg, and the Inalum-Freeport transaction to be both completed in the first half of 2019, the company said in a Sept. 28 statement. Rio declined to comment on Friday.
“I don’t want to sound like we got everything we wanted,” Adkerson said. “We still have to build a smelter. We still have to divest. Although from Freeport’s standpoint, this divestment was really mitigated by Rio Tinto’s willingness to sell.”
Along the way, there were multiple twists and turns, including a new environmental decree made public in April which, Adkerson said at the time, would have made Grasberg impossible to operate. Even the signing of the sale agreement last week was a “scramble,” the Freeport CEO says, as Rio was still working on the final touches to its own sales agreement when Indonesian officials started the news conference, and the 300-page Freeport document wasn’t quite ready.
Grasberg Estimated Production
Freeport will continue to operate Grasberg, but Inalum’s 51 percent interest “hugely” reduces the risk of the government taking any action that would be negative for PT-FI, Adkerson said. The two sides have found a true “partnership” structure which he believes will make it easier than ever to run “the most complicated mine in the world.”
Asked about analyst speculation that Freeport might look to sell Grasberg once the dust settles on the deal, Adkerson, 71, didn’t rule anything out. “Corporate transactions” would be allowed under its terms with Indonesia, although Inalum would have a Right of First Refusal if a buyer emerged who didn’t have experience with underground mining, he said. If that happened, “we would all sit down together and make sure that that transition was something that everybody was happy with,” he said.
While he understands the skepticism and “fatigue” of investors who have been watching the negotiations over the past few years, “this is one hell of an asset” that will generate “tremendous future cash flow” over time, he said.
“So while I’m not ruling out any direction Freeport might go in -- we’re going to do what we view to be best for shareholders -- we don’t have a plan of selling.”
Source: Danielle Bochove / Bloomberg
05 October 2018
With assistance by David Stringer, and Tassia Sipahutar