Freeport-McMoRan (FCX) operates the giant Grasberg mine in Indonesia. Rio Tinto (RIO) (TRQ) is Freeport’s minority partner in the mine. Freeport has been engaged in discussions with the Indonesian government to extend its mining permit beyond 2021. Freeport announced a framework last year wherein it agreed to two of the key demands made by the Indonesian government: divesting its majority stake in Indonesia operations and setting up a smelter in the country. However, a final solution is still pending.
According to Reuters, citing Indonesia’s energy minister, Ignasius Jonan, “President Joko Widodo has instructed his administration to complete negotiations over the purchase of a majority stake in Freeport-McMoRan Inc’s local unit by the end of April.”
During its 4Q17 earnings call, Freeport made reference to Rio Tinto’s talks with the Indonesian government about selling 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.” We should remember that if Rio Tinto decides to sell its entire stake in Grasberg, Freeport would have to divest only about 5% of its stake in the Indonesian operations to meet the divestment norms. Freeport might not take a very hard stance on Indonesia operations’ valuation, which has been one of the contentious issues between the two parties, if it has to divest only 5%.
The worst-case scenario for Freeport could be a situation where it fails to reach an amicable solution with the Indonesian government and the two parties head for arbitration. In the next article, we’ll look at Freeport’s valuation and compare it with other copper miners including Southern Copper (SCCO) and Antofagasta (ANTO).