Freeport-McMoRan (NYSE:FCX) is on the verge of losing what is arguably its most important asset, as Indonesia prepares to strip ownership from it of the massive Grasberg copper and gold mine. If the two sides can't come to an agreement over the government's new rules banning the export of raw minerals, politicians will seize the mine and turn it over to a government-owned entity to operate.
While both sides have slightly softened the war of words recently, the problem remains unresolved and at best the crisis will flare up again in the future.
Resource nationalism fever
The problem arose because like so many mining countries a few years ago, Indonesia was swept along by resource nationalism after the commodities boom sent metal and mineral prices soaring. From Barrick Gold and Kinross Gold to Southern Copper and Goldcorp, these miners have felt the grasping impact of government overreach.
New, usurious taxes were often imposed, or more stringent mandates implemented that made it difficult if not impossible to continue operating in the country. Barrick has subsequently idled its Pascua-Lama mine in Chile, Kinross walked away from Fruta del Norte in Ecuador, while Southern Copper and Goldcorp said the higher taxes Mexico imposed meant they would likely not invest new capital in the country. This past January, Goldcorp sold its Los Filos mine in the state of Guerrero.
Freeport peer Newmont Mining (NYSE:NEM) became so disaffected with Indonesia's unwillingness to honor long-standing contracts and ultimately sold its 48.5% stake in the Batu Hijau copper and gold mine last year for $1.3 billion to a consortium of investors backed by government-owned banks. Newmont's partner in the mine, Sumitomo, which owned a 24.5% position, exited as well. The miners had been under pressure by the government to sell their assets for some time.
Changing the rules of the game
The situation in Indonesia came to a head as the government sought to boost its domestic smelting industry by banning the export of unprocessed ore. Companies that violated the ban would face steep taxes and risked having their licenses revoked.
But Freeport-McMoRan and Newmont Mining had operated Grasberg and Batu Hijau under contracts of work that had been in place for decades and were not due to expire for several years. They claimed the new rules did not apply to them because their contracts expressly prohibited changes being made prior to their expiration in 2020, a concession for the massive investments the miners had made in the country. Jakarta, though, simply ignored that provision and rewrote the law.
Some 98% of the gold Freeport mined last year came from Grasberg along with 25% of its copper, selling 1.05 billion pounds of copper last year and 1.05 million ounces of gold. Despite the problems, it still was able to report unit costs of just $0.83 per pound.
Both miners subsequently tussled with the government, each experiencing work stoppages and had their operations shut down several times for noncompliance as they clashed with the ministers overseeing the negotiations. That's what led to Newmont's eventual withdrawal, but Indonesia escalated the confrontation last month when the country's deputy minister for mining said a government-run company had been cleared to acquire a majority stake in Grasberg.
Under the new contract Indonesia wants Freeport to sign, but which the miner has thus far refused to without assurances it will have protections such as those that were built into its previous one, Freeport-McMoRan would be required to begin divesting its ownership position in the mine to local aluminum producer PT Indonesia Asahan Aluminium until the government owned 51% of it. The divestiture would be completed within 10 years time.
Bloomberg quoted the mining minister as saying, "We're ready. Once the holding company is formed, they will immediately work on it."
Freeport-McMoRan is naturally outraged at the theft of its assets, and CEO Richard Adkerson called it "a form of expropriation of our assets, and we are resisting it aggressively." It says that if the matter is not resolved by June 17 it would go to arbitration. When Newmont had threatened to go to arbitration, Jakarta threatened to revoke its mining license and seize Batu Hijau.
Although the two sides are careening toward a final showdown, Reuters recently said the situation has softened a bit. The energy minister reportedly said Freeport would receive a temporary "special mining permit" that would allow the miner to resume operations and begin exporting ore for the next six months while negotiations continued.
Unless Freeport-McMoRan gets the legal assurances it's looking for, however, it doesn't seem to resolve anything and merely delays when the conflict comes to a head again.