Grasberg Ownership Question Grinds Over Horizon

Base Metals Investing

Rio Tinto, Freeport and the Indonesian government have signed a non-binding agreement outlining the details of a new ownership structure, which would see Jakarta control 51 percent of the world’s second-largest copper mine.

The three parties around the behemoth Grasberg copper mine in Indonesia have signed a Heads of Agreement on the future ownership of the mine.

Mine operator Phoenix-based Freeport McMoRan (NYSE:FCXannounced on Thursday (July 12) that its partner Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) would be selling its stake in the mine for an eye-watering US$3.5 billion to the Indonesian government as part of a restructure.

The agreement is non-binding with months of negotiations ahead.

Earlier this month, Jakarta had extended the mine’s operating permit while the time-consuming negotiations continued. Talks over the mine have been carrying on for over a year now.

Rio’s stake in the mine amounts to a right to 40 percent of production above a pre agreed level and 40 percent of all production after 2022.

Under the terms of the non-binding agreement, in addition to Indonesia’s PT Inalum acquiring 100 percent of Rio’s stake, the Indonesian company will also pay Freeport US$350 million.

Currently, Freeport has a 90.64-percent interest in the mine, with the remainder owned by PT Inalum, a government-backed miner. Under the deal, Freeport would be left with 49-percent ownership.

In the release today, Freeport explained how the arrangement would lead to Inalum reaching 51-percent ownership.

“Inalum will contribute the Rio Tinto interests to PT-FI (the Grasberg JV company), which will expand PT-FI’s asset base, in exchange for a 40-percent share ownership in PT-FI, pursuant to arrangements that will enable FCX and existing PT-FI shareholders to retain the economics of the revenue and cost sharing arrangements under the joint venture.

“At closing, Rio Tinto will receive US$3.5 billion, and FCX will receive US$350 million, in cash proceeds from Inalum. 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.”

President and CEO of Freeport Richard C. Adkerson said that the agreement marked a “significant milestone” in the path towards stability for the mine’s operations.

“Through this transaction, the government will achieve its ownership objectives in a manner that preserves the long-term value for FCX shareholders and the people of Indonesia through 2041,” he added.

In its release, Freeport said the transaction was expected to close in the second half of this year, but there’s plenty more work to do between now and closing, with changes to environmental demands, which sprung on the mine earlier this year, still unresolved.

In Rio Tinto’s release on the agreement, the company noted that there was “no certainty that a transaction will be completed” given the complexity of the terms that were yet to be agreed on.

Grasberg is the second-largest copper mine in the world, producing 478,000 tonnes of copper in 2017.

Stability is important for the mine going forward as it requires massive investment to proceed with underground mining in the future.

As of 12:30 p.m. EST on Thursday (July 12), shares of Freeport McMoRan were trading up 0.63 percent at US$17.54 on the New York Stock Exchange, while on the Australian Securities Exchange, shares of Rio Tinto were trading down 0.26 percent at AU$78.95 at close.

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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.

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