What’s the Best Outcome for Freeport in Indonesia?



Freeport’s Indonesia operations

Freeport-McMoRan (FCX) operates the giant Grasberg mine in Indonesia. Rio Tinto (RIO) (TRQ) is Freeport’s minority partner in the mine (GLEN-L). The operations have been surrounded by controversies in the last few years. Freeport has faced issues including labor impasse and disruptions associated with an armed rebel group at the site. Along with these issues, Freeport has been engaged in discussions with the Indonesian government to extend its mining permit beyond 2021.

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Last year, Freeport announced a framework with the Indonesian government. Freeport agreed to divest a majority stake in its Indonesia operations towards the Indonesian government. Freeport also set up a smelter in Indonesia (EIDO). However, the two sides haven’t been able to reach a final agreement.

Grasberg operations

In the last few years, Grasberg issues have dominated Freeport’s earnings calls. During its 4Q17 earnings call, Freeport noted that it has made “a lot of progress” in its talks with the Indonesian government. The company also made reference to Rio Tinto’s talks with the Indonesian government to sell the company’s stake in the Grasberg mine. According to Freeport, if Rio Tinto sells its entire stake in the Grasberg mine to Indonesia, it “would be the best outcome for all parties.”

If Rio Tinto sells the entire stake in its Indonesia operations, Freeport would have to divest ~5% of its stake in the Indonesian operations to meet the divestment norms laid by the Indonesian government. Freeport would have a higher stake in the Grasberg mine and it would lower any animosity that Freeport and the Indonesian government might have on the valuation part. Simply put, Freeport might not take a very hard stance on Indonesia operations’ valuation if it only divested 5%.

Next, we’ll see what Freeport’s management said about its dividend policy.


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