If the difficult talks between the Indonesian government and American-owned Freeport McMoRan Copper & Gold over the future of Papua’s Grasberg mine drag on beyond mid-year, they might well be postponed until after next year’s legislative and presidential elections.
Analysts believe that as much as he wants to reach an overall settlement in the next two months, President Joko Widodo will not be keen for the negotiations on such key issues as valuation and managerial control to become a distraction ahead of or during the campaign period, which formally begins in mid-September.
Government sources say the president’s main concern is to secure funding commitments for the majority stake Freeport agreed to divest in its Indonesian subsidiary so he can show that progress is being made in implementing the framework agreement the two sides signed six months ago.
That means the pressure is on Budi Gunadi Sadikin, chief executive of state-owned holding company PT Inalum, to come up with the offshore bank loans needed to cover the cost of the acquisition, even if the valuation of the Grasberg has yet to be agreed. The Grasberg is the largest gold and second largest copper mine in the world.
It is widely believed Widodo will effectively turn over much of the running of the government to Vice President Jusuf Kalla in August or September, leaving some of the outstanding issues to be resolved after the simultaneous elections are held in April 2019.
Characterized as a “love-hate” relationship by one government official, the two leaders appear to have come to an accommodation in the year since Kalla openly opposed the re-election of former Jakarta governor Basuki Purnama, a Widodo ally who lost the race and is now serving a jail term for blasphemy.
The president is clearly intent on making progress on other fronts now that it is clear his government’s restrictive policies across a range of business sectors are proving to be a barrier to the foreign investment needed to boost the country’s gross domestic product (GDP) growth beyond 5%.
Widodo wants Kalla to take charge of improving the long-criticized work permit system, preparing a package of tax incentives for foreign investors and reviewing the so-called ‘Negative List’ that closes several sectors of the economy to outside investment.
Given the already low percentage of foreigners in the Indonesian labor force, the tighter work permit rules imposed in the early days of Widodo’s rule have seemed to be more about populist protectionism than preserving jobs for domestic workers.
Kalla will also seek to delay the implementation of a potentially disastrous law, passed in the final days of the Susilo Bambang Yudhoyono administration, that requires Islamic law compliant halal certification for everything from foodstuffs to cosmetics to pharmaceuticals to clothing to even car-seat covers.
Widodo has reportedly vowed not to sign the implementing presidential decree while government legal experts work on a revision to the law, which the Health Ministry and businessmen alike say isn’t workable and an invitation to rampant corruption.
The government is seeking to put a similar brake on proposed Islamic law influenced changes to the Criminal Code that would impose a sweeping ban on same-sex relations, pre-marital sex, cohabitation among couples, sex education and condom distribution.
If the Freeport impasse is shuffled into the “too hard to resolve” basket, it would still hang over any new administration given the strength of the country’s nationalist lobby and the way the issue has become a test case for Widodo’s value-added policy.
How the government treats the much-maligned company, often regarded by Indonesians as ‘corporate enemy No 1’ despite being the country’s top taxpayer, is also under scrutiny from foreign investors already nervous about over-regulation and legal uncertainties.
Valuation, management control and a financial stability agreement remain the main obstacles as Freeport chief executive Richard Adkerson shuttles between Phoenix and Jakarta for meetings with senior Indonesian officials led by Mines and Energy Minister Ignasius Jonan.
The two sides are far apart on a fair market value of the Grasberg, though the gap might be closing. The government is offering US$3 to US$4 billion for the rest of a controlling stake, while Freeport has countered with a figure that leaves about US$1.5 to US$2 billion outstanding.
Currently the owner of 9.36% of Freeport Indonesia, the government is looking to acquire another 41.64% in a scheme involving Freeport’s Anglo-Australian partner, Rio Tinto, which has options on 40% of the Grasberg after 2022. That stake would potentially be converted to shares through a rights issue.
While there is agreement Freeport will continue to run the mine’s operations until 2041, the government insists that as the majority shareholder it should take over management control after Freeport’s current contract expires in 2021.
Freeport and Rio Tinto have so far spent about US$7 billion on an underground expansion of the mine because the open pit is running out, but another US$20 billion investment is still required, including US$2.2 billion to pay for a new smelter under Jakarta’s value-added policy.
For all that, however, industry sources claim the smelter could cost as much as US$8 to US$10 billion in lost revenues and subsidies over the remaining life of the mine, with treatment charges expected to double to 60-65 US cents a pound.
It is still not clear whether the smelter will be built in East Java, close to an existing Mitsubishi-run facility, or whether it will be moved to Sumbawa as part of a shared venture with Indonesian-owned Amman Mineral, which operates the Batu Hijau copper and gold mine.
The harder ore encountered underground, along with hundreds of kilometers of electric railway, will also require an additional 130 megawatts (MW) of coal-fired power generation, boosting the Grasberg’s overall capacity to more than 500MW.
The government has shelved a planned 300MW hydro-electric plant, 100 kilometers west of the Grasberg, which would have served both the mine and the coastal logistics center of Timika, whose 200,000-strong population is starved for electricity.
Freeport estimates the Grasberg’s open pit will be exhausted of the last of its high-grade copper and gold ore within the next 12 months. While the transition to a purely underground mine will happen by early next year, it is expected to bring a significant fall in revenues.