The Love-Hate Relationship between Freeport and Indonesia

Mohit Oberoi, CFA - Author

Nov. 20 2020, Updated 11:23 a.m. ET

Freeport and Indonesia

Previously, we looked at the timeline of Freeport-McMoRan’s (FCX) Indonesia issues. Now let’s look at the key contentious issues between Freeport and the Indonesian government. The current issues mainly boil down to the stake sale in Indonesia operations, smelter construction, and the extension of mining contracts post-2021. In this part of the series, we’ll look at the issues surrounding the stake sale of Freeport’s Indonesia operations.

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Stake sale

According to Freeport-McMoRan’s agreement with Indonesia’s government, it must divest an additional 20.6% stake in the Indonesian operations to the government or its citizens. In its 4Q15 earnings conference call, Freeport-McMoRan noted it had submitted the valuation of the Indonesia operations to the government. The company has valued the Indonesia operations at ~$16 billion.

Fair value versus replacement value

However, the Indonesian government is valuing the Grasberg mine at only a fraction of what Freeport proposed. During its 1Q16 earnings call, Freeport said that it wants the asset to be valued at fair market value, but the Indonesian government is valuing the asset on replacement cost. According to Freeport, it’s in talks with the government to settle these issues amicably. However, the company said it could look at international arbitration over this issue, as it has no obligation to divest the stake in Indonesia.

Most observers agree that copper could be in a deficit by the end of the decade. Because of copper’s better long-term outlook, miners (NANR) like BHP Billiton (BHP) and Rio Tinto (RIO) (TRQ) are looking at organic as well as inorganic opportunities in copper assets.

Furthermore, Freeport’s asset sales have helped build positive sentiment around copper assets. The company seems unwilling to sell its stake in Indonesia at a lower price, which the government wants.

Another contentious issue between Indonesia and Freeport has been related to smelter construction in the country. We’ll discuss this more in the next part of the series.


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