The tough deal with Freeport
The Jakarta Post
The ministers of Energy and Mineral Resources, State-Owned Enterprises and Finance held another big-bang news conference on Thursday to announce the conclusion of a heads of agreement (HA) for the government’s acquisition of the controlling ownership of PT Freeport Indonesia (FI).
The media blitz was similar to that of August last year, when the government announced an initial agreement to acquire 51 percent of FI, a subsidiary of Freeport-McMoran (FCX), which has owned and operated the world’s largest gold and copper mine in Grasberg, Papua, since 1972.
Now, one year later, the government and FCX have only been able to conclude an HA. That shows how complex and tough the negotiations have been.
The ministers did not provide details about the HA, apparently due to confidentiality. Referring to the definition used by most lawyers, an HA is usually not legally binding and is only part of the process of further negotiating the technical details of a busines transaction before a fully legally binding contract is closed. We are rest assured though by Finance Minister Sri Mulyani Indrawati’s statement that the HA was binding for both parties specifically in terms of the value of FI’s shares ( US$3.85 billion) in the upcoming divestment and the organizational structure of the firm.
This means that the hardest part of the process has been completed and the remaining negotiations will cover mostly technical and administrative matters for the management and mining operations, the fiscal treatment, the conversion of the contract of work into a special mining license based on the 2009 Mining Law and the building of a smelter.
Yet more encouraging is that most of the financing for the share acquisition will be provided through loans from foreign banks, thereby lending credibility and a third party endorsement to the otherwise controversial acquisition.
The share valuation is one of the key terms and the most complex one because of the method of valuation. FCX, which had reportedly asked for $6.6 billion, seemed to agree with the government demand that the divestment price could not include the copper and gold reserves of the mine.
This also shows that FCX is really serious about closing the deal, because as a publicly traded company in the United States, its shares have virtually been in limbo due to the uncertainty of its operational status. But controlling ownership will not automatically mean bigger benefits to the people, especially the Papuans. The main challenge for Inalum, as the commissioner of FI at least during the transition period within the next few years, is to build up a comprehensive understanding of the mining operations, since the bulk of the mine’s reserves is now underground.
As the controlling owner, it is the government, through Inalum, that will decide on FI corporate policies, such as a business plan, management and dividend payouts. Inalum should be able to prove by good corporate governance and high standards of transparency and accountablity that an Indonesian-owned Grasberg mine will produce more benefits than under American corporate control.
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