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Freeport-McMoRan’s Grasberg Issues: Past, Present, Future

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Grasberg issues

Freeport-McMoRan (FCX) discovered the Grasberg mine (RIO) in 1988 and began open pit mining at the site two years later. However, the last three years have been full of turmoil for the company’s Indonesian operations. In this part of the series, we’ll look at the timeline of Freeport-McMoRan’s Indonesian issues.

Freeport’s troubles began when Indonesia banned the export of unprocessed ores from the country in 2014. Mining companies such as Freeport-McMoRan and Newmont Mining (NEM) were hard hit by the country’s laws. However, Freeport managed to sign a memorandum of understanding (or MOU) with the Indonesian government.

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The MOU

Under the MOU, Freeport had to make several concessions to the Indonesian government. The above chart shows the key terms of the MOU. Freeport had to increase royalty rates to 3.8% for gold and 4.0% for copper (SCCO) (BHP). Earlier, the royalty rate was 1.0% for gold and 3.8% for copper. Freeport also agreed to divest another 20.6% of its stake in Indonesian mines to the Indonesian government or its citizens. According to the MOU, Freeport has to construct smelting operations to process copper ore.

Freeport-McMoRan also has to sign an amended contract of work (or COW) with the government of Indonesia. The current COW allows Freeport mining access only until 2021. It has to reach a deal with the Indonesian government for a new contract after 2021.

Contentious issues

To sum it up, the contentious issues between Freeport-McMoRan and the Indonesian government boil down to smelter construction in Indonesia, divestiture of an additional stake in Indonesian operations, and the extension of the mining contract after 2021.

Freeport has been able to export copper concentrates from Indonesia by getting six-month export permits from the Indonesian government. However, even this stop-gap arrangement came to a halt this year. We’ll look at this more in the next part of this series.

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