Mining in Indonesia: Government Eager to Raise Its Stake in Freeport Indonesia in 2041

One may remember that in 2018, the Indonesian government, under former President Joko Widodo, managed to acquire a 40 percent stake from British-Australian mining company Rio Tinto and an additional 9.36 percent from US-based Freeport-McMoRan.This deal was completed for a total of USD $3.85 billion and gave Indonesia, through a state-owned enterprise and the regional government of Papua, a majority 51.23 percent stake in Freeport Indonesia, giving the state strategic control over one of the world's largest gold and copper mines.

This was a great achievement because Freeport Indonesia is a major contributor to the Indonesian economy. It generates billions of dollars in revenue for the state through taxes, royalties, and export duties. The company’s operations also provide tens of thousands of direct and indirect jobs and are a major driver of economic growth in the province of Papua.

However, from a strict contractual standpoint, the events in 2018 were can be regarded as a breach of contract (and example of resource nationalism). Freeport's original "Contract of Work" gave Freeport-McMoRan the legal right to operate the mine until 2021 and included provisions for two ten-year extensions (up to 2041). However, the Indonesian government took a different view. The government argued that the original Contract of Work, signed in the 1960s, was no longer relevant to modern Indonesia. They asserted their sovereign right to control the country's natural resources and passed new mining laws that required all foreign mining companies to switch to a new type of permit (IUPK) and divest a majority stake to Indonesian entities.

The government's actions placed Freeport in a difficult position: face a legal battle that could result in them losing their operating permit, or negotiate a new deal. They choose the latter, thereby granting Indonesia the majority stake. The Indonesian government also required Freeport to construct a smelter as part of the agreement to extend its mining permit. This smelter was built in Gresik (East Java), with its initial phase of operations having started in mid-2024.

Currently, Indonesian government officials are already discussing the extension of Freeport Indonesia's operating permit in 2041. It is important to start negotiations well before 2041 as all involved sides need certainty before investing heavily in the Grasberg mine. The most significant reason for the large capital spending at this mining site is the strategic shift from the historic open-pit operation to a completely underground mining system. The open pit has reached the end of its life, and Freeport Indonesia is therefore now building a series of huge underground mines beneath it.

Danantara CEO Rosan Roeslani stated that the target is to gain another 10-12 percent through state-owned (mining holding) Mineral Industri Indonesia (MIND ID). This would push Indonesian control to over 63 percent. Roeslani also hopes that this extra stake can be acquired without burdening state finances.

The Grasberg mine is situated in the remote, rugged highlands of Papua, a location that poses significant operational challenges. Its operations have also faced decades of controversy and resistance due to their large-scale environmental impact, particularly concerning mining waste disposal, as well as ongoing tensions with local Indigenous communities over land rights and resource benefits.

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