Freeport Indonesia May Pursue Initial Public Offering (IPO)
Chances are big that Freeport Indonesia will conduct an initial public offering (IPO) on the Indonesia Stock Exchange to comply with the divestment requirement. Freeport Indonesia, the local unit of US-based Freeport-McMoRan Copper & Gold, operates the vast Grasberg mine in Papua. This mine is the world's largest gold mine and third-largest copper mine. The Indonesian government's divestment requirement is one the demands for starting contract extension negotiations in 2019.
Based on an agreement made in 1991 Freeport is entitled to another 20-year extension to operate the Grasberg mine (after the existing contract expires in 2021). However, there are a number of problems related to this extension. Firstly, under Indonesian law negotiations between the miner and the Indonesian government about the extension of the contract can only be started two years prior to expiration of the existing contract (this would be in 2019). This situation is difficult: Freeport currently needs to engage in much-needed and costly investment in the underground mining facilities (because open pit resources are reaching depletion). However, without certainty the company is hesitant to invest.
Secondly, in line with the Indonesian government's New Mining Law (2009), the government demands Freeport Indonesia to divest a 30 percent stake to an Indonesian party/parties. Without this divestment the government will not start contract extension negotiations in 2019. Although this demand (based on the New Mining Law) is not in line with Freeport's longstanding Contract of Work, it did eventually agree to the demand in order to safeguard its future in Indonesia. Currently, Freeport McMoran controls a 90.64 percent stake in Freeport Indonesia, while the remaining shares are owned by the central government.
Chappy Hakim, President Director of Freeport Indonesia, announced on Wednesday (23/11) that Freeport and the Indonesian government agree on the IPO. Previously, Freeport suggested to IPO on the Indonesia Stock Exchange to fulfill the divestment requirement. The Indonesian government, however, disagreed and insisted Freeport to offer the 30 percent stake to either the central government, local government or state-owned companies.
In April 2016 Freeport Indonesia offered a 10.64 percent stake to the Indonesian government at a price of USD $1.7 billion. However, Indonesia's Ministry of Energy and Mineral Resources said the stake was only worth USD $630 million, implying there existed a huge gap between both sides and thus the deal failed to materialize.
Although it is not 100 percent certain yet that Freeport Indonesia will list on the local bourse, the miner will start preparing all technical aspects (including the valuation) for this corporate move.
Former Freeport Indonesia Head Maroef Sjamsoeddin resigned in January 2016 for "personal reasons". However, this decision was most likely related to a scandal that had emerged previously. Sjamsoeddin had secretly taped a conversation with House of Representatives (DPR) Speaker Setya Novanto in which Novanto requested shares in Freeport Indonesia in exchange for his support in the process of contract extension talks. This tape led to the resignation of Novanto last year. This episode shows the presence of corruption in Indonesia, specifically when it involves the extraction of natural resources (and thus has a high degree of government involvement).
Poll Indonesia Investments:
What is your opinion on Indonesia's New Mining Law (Law No. 4/2009)?
Voting possible: -
Results
- It's a mistake as protectionism scares away much-needed foreign investment (53.1%)
- It's good because it brings Indonesia more benefit from its own mining sector (23.5%)
- It's good but requires time to bear fruit as commodity prices have plunged (16.3%)
- I don't know (7.1%)
Total amount of votes: 98