By: Our Correspondent

Freeport-McMoRan Inc, the US-based mining giant, has come out swinging publicly against plans by the Indonesian government to take over a controlling interest in its Grasberg Mine, the world’s largest gold mine and the second largest copper mine, located on high on the side of a remote mountain in the province of Papua.

The Phoenix, Arizona company owns 90.64 percent of PT Freeport Indonesia, the principal operating subsidiary. The Indonesian government currently owns the remaining 9.36 percent.

In a Sept. 28 letter to the secretary general of Indonesia’s finance ministry, Rick Adkerson, Freeport’s chief executive, said the company, which has operated the mine since 1972, “has worked to be responsive to the government’s aspirations for 51 percent ownership but has been consistently clear that the divestment is conditional upon the transactions reflecting fair value of the business through 2041 and that Freeport retain management and governance control.  These are non-negotiable positions.”

 “There was a lot of celebrating of the framework agreement (ratifying the divestiture) by Indonesians,” said a western business executive. “But they seem to think still they can get Freeport to sell at a steep discount. This was always going to get very messy. For decades vested interests have been trying to take Freeport. This move seems no different. It is a bellwether case for international investor sentiment.”

Indonesian private interests for decades have coveted the mine, which in 1988 was estimated to have reserves of gold, silver and copper worth US$40 billion. Freeport McMoRan was Indonesia’s first major international investor under then-leader Suharto. President Joko Widodo is said to have been the impetus for the divestiture, asserting that the country has a right to its own mineral resources. 

The mine is located 4,100 meters above sea level in one of West Papua’s most remote areas. Nonetheless, it has been the focus of a long series of violent ambushes starting in 2002. Another series of attacks took place in 2009 and continued for more than five days, culminating with a mine employee being shot and killed as he sat in the back of a car. In 2011, two Freeport employees were killed when their car was said to have been fired by unknown gunmen. That incident sparked protests by hundreds of Freeport employees. The environmental impact of the mine has also sparked protests.

In March, it was reported that international shareholders were pressuring Freeport to stand up to Indonesia over the proposed changes. As Asia Sentinel reported, Adkerson told a Florida mining conference that the government’s new demands are “in effect a form of expropriation of our assets and we are resisting it aggressively.” 

The government is requiring the company’s local subsidiary PT Freeport Indonesia to convert its 1991 contract of work – its compact with the government to operate – into a special mining license in return for an export permit extension.  The new agreement would require the company to divest 51 percent of its shares to Indonesian interests. The contract of work isn’t due to expire until 2021 but Freeport wants guarantees that it will be extended on the company’s terms before it invests a promised US$18 billion in the mining operation.

In late August, Freeport agreed to the 51 percent divestment under a framework agreement. The government has demanded that the divestment take place by Dec. 31, 2018.

Freeport, however, is arguing that the initial divestment take place through an initial public offering, that full divestment take place in stages over a period of years and that any divestment must reflect the fair market value of the business through 2041, which the Phoenix, Arizona-based company maintains is its contractual right under the Contract of Work, as the overall agreement is known.

Freeport argues that its contract of work signed in 2011 gives it the right to operate for 30 more years and that “the government will not unreasonably withhold or delay such approval.  The company, Adkerson said in the letter, “has obtained legal opinions from highly regarded Indonesian counsel supporting its rights to 2041.  Furthermore, Freeport has invested $14 billion to date and plans to invest an additional $7 billion in underground development projects through 2021, which benefit the operations through 2041.  The government has approved its long-term plans through 2041 through the AMDAL and other document submissions.

The company’s international shareholders,  Adkerson argued, “will not accept any transaction that does not reflect the fair value of the business based on our contractual rights through 2041. Although the government argues that divestment would be entirely taken over by an Indonesian participant,  Freeport said it would conduct the divestment through the sale of shares owned by the US-based parent, traded on the New York Stock Exchange as FCX.N.

The parent, Adkerson said, “has recently provided the Minister of Finance with proposed structures upon which it would be prepared to discuss divestment.  Freeport is prepared to discuss a path forward but cannot negotiate on the basis of the government’s September 28 proposal.  Until such time as a definitive agreement is reached through these negotiations, Freeport will continue to honor and abide by the COW and fully reserves its rights thereunder.”

In 2015, Freeport was the subject of a spectacular scandal when Setya Novanto, the speaker of Indonesia’s House of Representatives, was caught on tape using Jokowi’s name and that of Vice President Jusuf Kalla in a meeting with Maroef Sjamsoeddin, the president director of the Indonesian unit of Freeport, in requesting a bribe of 20 percent of the shares in the Grasberg mining operation. Setya was forced to resign from the speakership although he emerged largely unscathed from that scandal. He has since become enmeshed in another scandal over implementation of the country’s smart ID card.