Ignasius Jonan (JP/Dhoni Setiawan)

After recently sealing a framework agreement with Freeport McMoRan (FCX) to determine its future operations in the country, the Indonesian government is set to wage another round of battle with the politically wired United States mining giant.

The Energy and Mineral Resources Ministry had led what local pundits paraded as a political victory when FCX agreed to compromise on Indonesia’s demand late last month that it should sell its controlling stake in PT Freeport Indonesia (PTFI).

Now, the next battle will be fought on the negotiation table between FCX and the State-Owned Enterprises (SOEs) Ministry and the Finance Ministry.

Energy and Mineral Resources Minister Ignasius Jonan told The Jakarta Post on Tuesday that he would not grant PTFI a contract extension to operate the world’s biggest integrated gold and copper mine in Papua until it sealed deals with the two ministries.

He said FCX had to deal with the SOEs Ministry for the divestment of its shares in PTFI to allow local entities to own at least 51 percent in the Timika-based company, and with the Finance Ministry to negotiate taxes, royalties and non-tax revenues that PTFI would have to pay if it wanted to continue its operations.

“The President has assigned [SOEs minister] Ibu Rini Soemarno and [finance minister] Ibu Sri Mulyani Indrawati to help realize Freeport’s divestment phase; when it [FCX] will do it, at what price and how,” Jonan said.

“I have set up the framework [agreement]. So what I will do now is coordinate the process, as instructed by the President.”

FCX and Indonesia reached an understanding on a framework for PTFI’s long-term operations on Aug. 29. Under the framework, FCX will agree to divest its ownership in PTFI at fair market value so that Indonesian interests own 51 percent of PTFI’s shares.

At present, FCX owns 90.64 percent of PTFI, while 9.36 percent is owned by the government.

PTFI will also convert its contract of work (CoW) to a special mining license (IUPK), which will provide PTFI with long-term operating rights through 2041 after its CoW expires in 2021. The company will also commit to constructing a new smelter in Indonesia within five years.

Jonan assured that FCX and PTFI would have no room to avoid implementing the commitments.

“President Joko ‘Jokowi’ Widodo’s commitment has already served as profound assurance. That is the most important thing right now,” he said. “If Freeport does not comply with our terms, we will revoke its concessions, end of story.”

The government previously estimated that FCX’s to-be-divested stake of 41.64 percent would be worth US$2.46 billion, while PTFI’s was estimated at $6.6 billion, taking into account Grasberg’s reserves.

Complicating the matter, the divestment process also concerns Rio Tinto. The world’s second biggest miner has a stock option in PTFI under an unincorporated joint venture with FCX.

In 1996, FCX and Rio Tinto established an unincorporated joint venture, paving the way for the latter to control 40 percent in PTFI’s CoW and the option to participate in 40 percent of future exploration projects in Papua.

Under the agreement, Rio Tinto has a 40 percent interest in certain assets and future production exceeding specified annual amounts of copper, gold and silver through 2022 in Grasberg’s Block A, and, after 2022, a 40 percent interest in all production from Block A. All of PTFI’s proven and probable reserves and all its mining operations are located in the block.

In response to the Rio Tinto factor, Jonan brushed off concerns that their involvement would make the divestment process complicated as it was an internal affairs issue between FCX and Rio Tinto.

“That is FCX’s internal matter. We do not care about how they resolve it as long as Indonesia gets that 51 percent,” Jonan said.

Jonan said that if the 51-percent divestment was sealed immediately, Rio Tinto’s right to 40 percent in PTFI in 2022 would only be calculated based on FCX’s remaining shares in the company.

“So Rio Tinto’s 40 percent will not be from the shares of 100 percent in PTFI, but from the 49 percent of FCX’s expected remaining shares,” said Jonan.

Indonesia will assign a state-owned mining holding company, the formation of which is ongoing and will comprise several state miners, to purchase the stake based on the price stated by an independent valuator.

The planned holding company will form a consortium that will include local governments taking up the stake.

Jonan has his own reasoning as to why Indonesia should immediately acquire majority stakes in PTFI, instead of waiting for PTFI’s contract to expire.

“Indonesia has the natural resources, but Freeport owns the machineries. If we just sit and wait, Freeport will take all the mining equipment along with them,” said Jonan. “The mining infrastructure is costly and we do not even know how much [it costs]. We won’t be able to operate it ourselves and we will lose time in reconstructing the mining infrastructure.”

The Post contacted PTFI spokesman Riza Pratama for comment, but no explanation was given.

“We are sorry to say that we are still in negotiations, and we cannot yet give any statements,” he said.

PTFI, Indonesia’s first foreign investor and biggest taxpayer, operates the mine in Indonesia’s poorest province, Papua, generating 98 percent of FCX’s consolidated gold sales and around 23 percent of its revenue.