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Key Issues Facing Freeport-McMoRan’s Indonesia Operations

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Freeport-McMoRan’s Indonesia operations

Freeport-McMoRan (FCX) owns the Grasberg copper and gold mine in Indonesia (EIDO). Rio Tinto (RIO) is Freeport’s partner in this mine. RIO also owns the Oyo Tolgoi mine in Mongolia through its subsidiary Turquoise Hill Resources (TRQ).

The Grasberg mine is among the largest copper deposits in the world. As shown in the above graph, the mine is a key strategic asset for Freeport, as it is the lowest-cost mine in its portfolio. However, Freeport’s Indonesian operations have been shrouded in controversy for the last couple of years. Let’s look at the background of this issue.

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Freeport’s Indonesian woes

In 2014, Indonesia banned the exports of unprocessed minerals. Freeport and Newmont Mining (NEM) were among the companies that were negatively impacted by this ban. However, Freeport signed a memorandum of understanding (or MOU) with the Indonesian government that must be extended every six months.

Terms of MOU

Under this MOU, Freeport must make several concessions to the Indonesian government. Freeport had to increase its royalty rates to 3.75% for gold and 4% for copper. Earlier, the royalty rate was 1% for gold and 3.75% for copper. Moreover, Freeport now has to divest 30% of its stake in Indonesian mines to the Indonesian government or its citizens. According to the MOU, Freeport must construct smelting operations to process copper ore.

Another issue that Freeport faces in Indonesia regards the extension of its contract of work (or CoW) with the Indonesian government. In the next part, we’ll explore this pressing issue in more detail.

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