Last week, Freeport-McMoRan (FCX) announced a “Heads of Agreement with the Indonesian state-owned enterprise PT Indonesia Asahan Aluminium (Inalum) and PT Freeport Indonesia’s (or PT-FI) joint venture partner Rio Tinto.” The agreement was preceded by a “Framework” that Freeport announced in August 2017.
Under last year’s “Framework,” Freeport agreed to construct a smelter in Indonesia and divest 51% stake in PT-FI towards Indonesian interests. In return, Freeport-McMoRan said that it would convert its existing contract of work to a special license referred to as “IUPK” that would provide Freeport-McMoRan operating rights through 2041. Back then, Freeport noted that “the government will provide certainty of fiscal and legal terms during the term of the IUPK.”
Heads of agreement
Moving forward to 2018, Freeport-McMoRan has announced a “Heads of Agreement.” However, the agreement is more than a final resolution of the long-standing impasse between Freeport and Indonesia, it’s another step towards a final agreement. The most important takeaway from the agreement is the transaction price for the stake sale that has been a key bone of contention between the two parties.
Under the agreement, Rio Tinto (RIO) would receive $3.5 billion from Inalum for its 40% stake in PT-FI. Freeport-McMoRan will receive only $350 million for roughly a 5.5% stake in PT-FI. Freeport-McMoRan also said, “In addition, Rio Tinto will forego in favor of FCX an amount equivalent to Rio Tinto’s share of Joint Venture cash flows received since January 1, 2018 through closing.”
Next, we’ll see what the Indonesian government (EIDO) has achieved from the agreement.