FCX Freeport McMoRan Inc

By Ben Otto and I Made Sentana 

JAKARTA, Indonesia -- Indonesia assumed control of one of the world's largest copper and gold mines Friday from U.S. miner Freeport-McMoRan Inc., closing a nearly $4 billion deal that marks the end of decades-old contracts from the Suharto era but adds to concerns for foreign investors in the resource-rich nation.

The deal is a rare economic win for President Joko Widodo when resource nationalism is rising in Southeast Asia's largest economy, with new rules forcing foreign miners to divest to minority shares and the state oil company taking advantage of expiring contracts to assume control of major projects from the likes of Chevron Corp. and Total SA. Mr. Widodo is up for re-election in April and has positioned the takeover of Freeport's Grasberg mine as a major accomplishment in his first term.

With $3.85 billion in payments made to Freeport and Australian miner Rio Tinto, Indonesia now controls about 51% of the mine. Arizona-based Freeport, which has developed the site since the late 1980s, holds 49%, while Rio Tinto, which held an operating interest and took the lion's share of the payment, is exiting the venture.

The deal caps a yearslong effort by politicians to wrest control of the mine from Freeport, seeing it as a legacy of the murky rule of longtime dictator Suharto, who was ousted in 1998. Freeport, historically Indonesia's largest investor and taxpayer, agreed to the partnership after years of facing problems obtaining export permits and fielding requests for new taxes and royalties, as well as government demands that it divest a greater share of the mine to the state.

The closing of the deal underscores a weakened foreign investment climate in commodity-dependent Indonesia, where foreign direct investment relative to its trillion-dollar economy lags behind regional peers Vietnam, Malaysia and the Philippines. Budget shortfalls and weak exports have pushed the country's currency near its lowest level in two decades.

Under the deal, Freeport remains operator at Grasberg and can move forward on capital expenditures that have been delayed amid the wrangling. The miner had been seeking a 20-year contract extension from 2021 that would allow it to invest $20 billion and take operations at the nearly depleted open pit to huge deposits underground. People involved in the new venture said that the investment will drop to $13 billion, leaving aside a major deposit unless longer-term mining rights for Freeport are guaranteed.

"We needed to clear out the uncertainty of our right to operation," Richard Adkerson, chief executive of Freeport-McMoRan Copper & Gold Inc., said at a ceremony with Indonesian mining officials. "We now have clarity that we will have rights to operate through 2041" and will have greater stability because of the government's involvement through Inalum, he said. "The economics are very good. We're really happy."

The deal follows new rules for miners going back to 2009 as resource nationalism intensified and Jakarta sought to fatten its coffers and build state-owned firms into global competitors. The Grasberg deal turned on the transformation of an Indonesian state miner -- PT Indonesia Asahan Aluminum, or Inalum -- that under the hand of a former banker has turned itself into a massive holding company intended to attract global partners.

"The Freeport transaction will be the first test case" to see whether Indonesia can build a sustainable win-win partnership with large international players, Budi Gunadi Sadikin, who left a position at Indonesia's largest state-owned bank to take the reins at Inalum, said in an interview.

To partner with Freeport, Inalum built up its global credentials this year, securing investment-grade ratings from the Moody's and Fitch ratings agencies for a $4 billion global bond offering last month. In its rating, Fitch cautioned that Inalum would have a "weak financial profile over 2019-2020" with weak ability to cover its debts -- but that "robust banking relationships, especially with state-owned domestic banks, support Inalum's liquidity, despite its weak coverage metrics."

Mr. Sadikin said Inalum and Freeport would fund the pending expansion through profits at the mine, with plans forecasting pretax profits to rise from $1.3 billion in 2019 to $4.5 billion in 2023, reflecting operations starting up at new deposits.

Industry analysts have welcomed the certainty the deal brings to Grasberg, where production has undergone stoppages in recent years because of holdups with export permits and other issues. But they also cautioned that using the deal as a model for other mega-partnerships would prove difficult.

"Inalum's 'model' is proving workable so far in the Freeport situation only because of Freeport's unique characteristics," said Kevin O'Rourke, a Jakarta-based policy analyst. "Financing was available for a giant, proven, lucrative mine, but funding new projects will be different and probably impossible."

Analysts caution that Mr. Sadikin will face political pressure to release the mine's profits to the government in the form of dividends instead of using it to invest in the expansion. Mr. Sadikin said the deal would give Freeport certainty and that his position embodied "the best insurance against political instability."

Write to Ben Otto at ben.otto@wsj.com and I Made Sentana at i-made.sentana@wsj.com

(END) Dow Jones Newswires

December 21, 2018 07:58 ET (12:58 GMT)

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