2) Why It Took 50 Years for Indonesia to Control Its Own Gold Mine
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1) Indonesia a step closer to controlling Grasberg mine
New agreement values mine's assets and provides a path for US miner Freeport's divestment but issues of management, arbitration and environment are still unresolved
JAKARTA, JULY 17, 2018 5:10 PM (UTC+8)
Indonesian police stand guard at the open-pit mine of PT Freeport's Grasberg copper and gold mine complex near Timika, in the eastern province of Papua, Indonesia. Photo: Antara Foto via Reuters /Muhammad Adimaja
The prolonged talks between the Indonesian government and Freeport McMoRan Copper & Gold have passed another milestone with Freeport, partner Rio Tinto and state-owned holding company PT Inalum signing an agreement under which Rio Tinto will sell its stake in Papua’s fabulously rich Grasberg mine.
Coming a year after the two main parties agreed on a framework deal which President Joko Widodo’s administration over-optimistically hailed as a breakthrough, the new non-binding “Heads of Agreement” sets down a valuation of the mine’s assets and describes a pathway to
Politically, it is the target Widodo was anxious to reach before the end of June as he gears up for the simultaneous April 2019 presidential and legislative elections. But it doesn’t resolve the key issues of managerial control over the mine, international arbitration and newly introduced environmental regulations.
Indeed, with analysts and social media commentators this time openly skeptical about the implications of the July 12 agreement, it appears to place more pressure on the government to get the final deal done before rather than after the elections as the opposition looks for ammunition to bring down the high-flying president.
Inalum will pay US$3.5 billion for Rio Tinto’s 40% participating interest in PT Freeport Indonesia (PTFI) and another US$350 million for the
9.36% stake held by Indocopper Investama, a Freeport unit controlled on separate occasions by influential Indonesian businessmen Bob Hasan and Aburizal Bakrie, who once enjoyed close relations with storied former Freeport chairman Jim-Bob Moffett.
Rio Tinto, an Anglo-Australian mining giant, entered into an agreement with Freeport in 1996 that gave it the right to 40% of production above a certain level and 40% of all production after 2022 in exchange for investing in the Grasberg’s early underground block-caving operations that now make up more than a third of its output.
Added to the 9.36% stake the state already owns in the Indonesian subsidiary, converting Rio Tinto’s stake into PTFI shares through a subsequent rights issue will give it the controlling interest, which Widodo hailed as a “big leap forward” in allowing Indonesia to increase its income from the mine.
According to some reports, Inalum will receive US$5.2 billion in funding from a consortium of 11 foreign and domestic banks, including Citibank, HSBC, Standard Chartered, BPP Paribas, Tokyo-Mitsubishi UFG, OCBC, SMBC, CIMB Niaga and state-owned Mandiri, Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia (BNI).
Inalum chief executive officer Budi Gunardi Sadikan, who has said the company is putting forward US$1.5 million in equity, did not respond to an e-mailed request to confirm the amount, but the loan is still dependent on a sales and purchase agreement being executed in 30 days and reaching closure a month after that.
“Given the terms that remain to be agreed, there is no certainty that a transaction will be completed,” Rio Tinto said in a sobering statement. “Any final agreements will be subject to approval by the necessary government regulators and authorities.”
Wrapping up all the outstanding issues by early September when the 2019 presidential campaign officially gets under way will be no mean feat given the way the two sides have haggled over the one issue of managerial control for more than a year now without resolution.
Phoenix-based Freeport chairman Richard Adkerson has told negotiators from the finance, state enterprise and energy and mineral resources ministries that the company must continue to retain managerial as well as operational control to ensure conformity with the US Foreign Corrupt Practices Act.
Who will operate the mine itself is not an issue, but it is the management that will be in charge of parceling out the lucrative procurement contracts associated with the Grasberg’s current conversion from an open pit – which runs out of ore next month – to the world’s biggest underground mine with hundreds of kilometers of electric railway connecting to five different ore bodies.
Notorious for its rent-seeking practices, Indonesia scored only 37 out of 100 on Transparency International’s 2017 Corruption Perceptions Index, putting it in 96th place among 180 countries. Illustrating the slow progress that has been made in Indonesia’s so-called war on corruption, the country’s score has moved only five points in five years.
The index is mostly based on business perceptions and puts special emphasis on licensing and similar red tape issues, but Indonesia’s standing with the business community wasn’t helped by the US$173 million identity card graft case, which sent House Speaker Setya Novanto to jail for 15 years earlier this year.
Although he was later reinstated, Novanto was forced to resign as speaker in 2015 for allegedly conspiring with oil mafia kingpin Muhammad Reza Chalid to shakedown Freeport; in a secretly taped hotel conversation, Novanto was heard demanding PTFI shares in exchange for an early extension to Freeport’s contract.
Freeport has insisted on appointing the new PTFI president director, who will then assign responsibilities to the executives under him. Given the fact that an Indonesian has filled that post for decades, analysts are puzzled why the two sides can’t come up with an inventive solution that would address both their concerns.
PTFI hasn’t had a president-director since retired air force chief Chappy Hakim, reportedly a Widodo recommendation, resigned after only seven months in the job in February last year as the government sought to pressure Freeport into converting its Contract of Work (CoW) to a Special Business License (IUPK) four years ahead of its 2021 expiry date.
Nationalist politicians say with the state holding a controlling interest, Indonesia has every justification for wanting to take charge of management, although after using Freeport as a convenient scapegoat for decades that will put it in the direct firing line of Papuan activists demanding a greater share of the mine’s revenues.
Also missing from the public debate is a new situation where Inalum will have to come up with half of the cost of a new US$2.7 billion smelter and also half of the US$19 billion Freeport calculates is still needed for the underground expansion of the Grasberg, which will be a hefty recurring expense for at least the next four years as the company seeks to return production to current levels.
Freeport and Amman Mineral are in talks to build a joint-venture smelter on a 160-hectare site at Amman’s Batu Hijau mine in Sumbawa, where there is already a deep-water port.
Amman purchased the country’s second biggest copper and gold mine from Newmont for US$1.3 billion two years ago, but now needs an extra cash injection to exploit an adjoining concession.
Many in the mining community believe that once Freeport is under new ownership, the implementing regulations that have still to be attached to the amended 2009 Mining Law will drop the requirement to refine the last 5% of the mine’s copper and gold concentrate, which they say has never made a lot of sense anyway.
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2) Why It Took 50 Years for Indonesia to Control Its Own Gold Mine
Posted On 17 Jul 2018
After 50 years of operation, Indonesia now finally controls majority of stake at Grasberg copper and gold mine
Jakarta, GIVnews.com – The government and many Indonesians are in a great mood these days. Last Thursday (12/7), world mining giant Freeport-McMoRan Copper & Gold Inc. and Indonesia’s state-owned PT Indonesia Asahan Aluminium (Inalum) signed a deal for the Indonesian government to acquire the controlling ownership of PT Freeport Indonesia (PT FI).
The agreement, which stipulates the divestment by Freeport-McMoRan of 51 percent of its share in PT FI, brought to an end of decades of acrimonious public demand for the government to take over the whole copper and gold mine in Papua, currently 90-percent owned by mining giant Freeport-McMoRan. PT FI is Indonesia’s largest mining venture which has been operating a large copper and gold mine in Papua’s Timika District over the past decades.
Public anger over the fact that Indonesia still owns only a 10-percent stake in PTFI had led political opponents of President Joko ‘Jokowi’ Widodo to demand him to stop Freeport-McMoRan’s control of its mining venture in the country’s easternmost province. Some even claimed that PTFI and its Grasberg mine is a symbol of American imperialism and questioned why the government had done nothing to put it to an end.
Following is part of GIV’s English translation of an opinion article that was published by Kompasdaily (14/7) and was written by Ginandjar Kartasasmita, who is former minister of energy and mining (1988 – 1993) under the leadership of then President Suharto. Entitled Memahami Kontrak dan Divestasi Freeport (Understanding Freeport’s Contract and Divestment), the piece tried to explain why Indonesia had remained in a so weak position vis-à-vis Freeport-McMoRan. Also under Suharto, Ginandjar served as head of the National Development Planning Agency (Bappenas) and the speaker of the Regional Representative Council (DPD-RI) that was established after Suharto’s fall. Then coordinating minister for the economy, Ginandjar reportedly played a key role in encouraging Suharto to resign.
Understanding Freeport’s Contract and Divestment
by Ginandjar Kartasasmita
Freeport’s Grasberg mine is a large project that impacts the interests of many people. Accordingly, debates about Freeport’s contract extension have been so healthy and at the same time are highly necessary. However, such debates should be based on adequate knowledge about the Freeport issue. This writing is aimed to help support such knowledge and understanding.
Ginandjar Kartasasmita (Photo source: Beritasatu.com)
Freeport’s Working Contract (KK) was made based on Law No. 1 Year 1967 on Foreign Capital Investment. This contract was effective for 30 years from 1973 when the company started to formally operate in Indonesia. As such, the contract would expire in 2003.
Then, in accordance with the contract, in 1988, or 15 years before it expired, Freeport submitted a requested to extend its contract. It reasoned that there was an indication of mineralization on a new site, or Grasberg, which is part of its operational area. Freeport planned to invest about US$ 2 billion for the planned new project. As the $ 2 billion was quite a big amount, Freeport submitted its request for contract extension 15 years before its KK expired in 2003.
However, the government at that time viewed that the 1967 law contained weaknesses and was more favorable for Freeport. They included the fact that the company was listed in Delaware in the United States and accordingly was subject to American laws. Freeport had no obligation concerning the environment. On taxation, Freeport did not follow existing tax laws in Indonesia in terms of tax types and structures. Freeport had no ‘community development’ obligation. As a result, the presence of Freeport in Indonesia did not have direct impacts on the local community. In addition, the contract did not stipulate ownership transfer to Indonesian, the use of local workers and domestic processing of copper and gold.
Opportunity for correction
Accordingly, the government viewed Freeport’s request for KK extension as providing a good opportunity for making correction over the contract’s weaknesses. This was why the government decided that the ‘KK of Generation I’ be replaced with a new contract that was called ‘KK of Generation V’. Indeed, at that time the concept of the ‘KK of Generation V’ was being drafted. That is why it is not true to say that Freeport’s 1967 contract had been extended. What actually happened had been the annulment of the KK and the application of new contract stipulations.
Then, what followed were negotiations on all aspects of the new KK. Those negotiations resulted in the correction of a number of contract stipulations and this provided more benefits for the Indonesian state and nation. Those corrections included the stipulation of Freeport’s obligation to operate as a PT (Perseroan Terbatas), or a limited liability company that was listed in Indonesia. Accordingly, with such a new status, Freeport was obliged to abide by Indonesian laws; follow all the financial systems currently applied in Indonesia; and follow the country’s prevailing rules on environment protection.
In addition, the new contract obliged Freeport to divest up to 51 percent of its shares to Indonesian companies/nationals within a period of 20 years. And, five years after the contract was signed, 20 percent of Freeport shares must have been owned by Indonesian companies/nationals. Also, the mining firm was obliged to conduct community development for the welfare of the local people; build a smelter (currently one is already in operation in Gresik, East Java); optimally use local workers and goods/products; and set higher tariffs of averaged royalties.
Freeport accepted all those conditions and – after several rounds of negotiations which involved various government agencies and with House (DPR) approval and an approval letter from the President – KK of Generation V was put into effect by the end of 1991. Consequently, the premature annulment of Freeport’s KK of Generation I exactly benefit Indonesia because it stopped the mining firm’s excessive profits.
Government’s negligence?
Since the beginning the KK of Generation I the government had owned only about 9 percent share in Freeport. The company actually wished to divest another 20 percent but the then minister of finance decided that the government would buy only another one percent. This was because the government was financially unable to acquire another 10 percent as initially designed. The minister then proposed that the 10 percent share be sold to national private investors. And so Freeport divested the 10 percent to a national company. But, based on government regulation (PP) No. 20/1994, Freeport bought back the 10-percent share. As such, Indonesia’s share in Freeport is currently 10 percent, which is government-owned.
At this time, some people have questioned why the government had not just taken over Freeport’s Grasberg mine. Previously, there had been question why the Indonesian government had been so negligent that it created the 1967 KK, which benefitted Freeport so abundantly.
In fact, Freeport was the first foreign capital investor (PMA) in Indonesia. It entered Indonesia exactly when the country was trying to get out of its economic crisis in the 1960s. As Indonesia had run its administration and mobilize its economy, it was forced to fully rely on foreign assistance. The World Bank then placed Indonesia among the poorest countries in the world. It is in this context that we should now judge government policies in the past.
You may also be interested in this article: Digging the World’s Largest Gold Mine, What is Freeport?
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