When it comes to finally reaching a deal to secure Freeport-McMoRan’s long-term right to keep mining in Indonesia, the ball appears to be firmly in Rio Tinto Group’s court.
Over an almost two-hour conference call on Thursday, chief executive officer Richard Adkerson made it clear that the company’s efforts to get a new long-term contract in Indonesia — including divesting a stake in its Indonesian unit to local interests — remain challenging. However, Rio’s apparent willingness to part with its own share of future production has changed the game.
“This issue with our joint-venture partner really changes what the divestment obligation from Freeport would otherwise be,” Adkerson said, referring to Rio. “And so that negotiation is of much less significance to us than it would be if we were having to divest 51 per cent.”
Adkerson said he spent as much time in Jakarta last year as he did in Phoenix, Arizona, where Freeport is based, after Indonesia ordered foreign miners to divest majority ownership of their operations to local interests. Despite that, Freeport and the Indonesian government have still not held talks on valuing the asset, he told analysts.
However, the final price becomes less important if Rio Tinto agrees to sell its interest in Grasberg because Freeport could then divest a much smaller stake. Adkerson isn’t directly involved in the talks between Rio and the Indonesian government but it appears a sale is the “most likely outcome,” he said.
A spokesperson for Rio Tinto didn’t immediately respond to a request for comment.
Freeport and Rio Tinto became joint venture partners at Grasberg in the 1990s. Rio was given a share of production, above certain levels, in exchange for helping to pay for an expansion at the mine. In recent years, that hasn’t amounted to anything and production has been divided between Freeport, which owns 90.64 per cent of PT-FI, and the Indonesian government which owns the other 9.36 per cent. However, earlier this month Rio said it does expect to receive a share of Grasberg’s 2017 production.
After 2022, though, Rio is entitled to 40 per cent of production and PT-FI’s share falls to 60 per cent. If Rio sells that stake to Indonesia, it would dramatically reduce the size of Freeport’s forced divestiture.
In December, Jefferies LLC analyst Christopher LaFemina speculated that Freeport would need to sell less than 10 per cent of its stake in PT-FI, its Indonesian unit, if Rio exited versus more than 40 per cent without a Rio sale. “Rio is critical,” LaFemina said after Thursday’s earnings call. “They are the key component to getting a resolution.”
Freeport had a strong operational quarter and the market will be encouraged by comments implying that reinstating a dividend is a priority, LaFemina said. The biggest risk for shareholders is that growing optimism about a resolution in Indonesia proves to be misplaced.
That said, he said Rio’s best option is to sell now rather than wait for Freeport to take its dispute to international arbitrators, potentially shuttering the asset for years. “If there’s no deal between Freeport and Indonesia, is this mine going to be operational beyond 2022? And is it going to be operated by Freeport?”
Maintaining operational control of Grasberg is crucial, Adkerson reiterated on Thursday, both for technical reasons and to control costs. Freeport will wind down pit production this year and switch to underground mining. “Without having a disciplined approach to the underground investment the value of this asset dissipates.”
Ultimately, Freeport is seeking a deal that will give it legal and fiscal certainty in the country until 2041. However, Adkerson made it clear that much of the progress so far has been conceptual. For example, there is an “understanding” among Indonesian officials that Freeport will receive fair value for any divestment based on methods of calculation that are standard in global markets, he said. Similarly, there is an understanding that the miner’s share of production will not be diminished by the Rio sale if it takes place before 2022.
“We don’t have formal agreements with the government yet and there are still issues under discussion.”