The Indonesian government and US mining giant Freeport-McMoRan Copper & Gold Inc are entering the final stage of the divestment process after both sides signed the Head of Agreement on Thursday (12/07). The agreement means that state-owned mining company Indonesia Asahan Aluminum (Inalum) will obtain a 51.23 percent stake in Freeport Indonesia via a series of complex deals worth USD $3.85 billion.
First, Inalum will buy Anglo-Australian mining group Rio Tinto's entire interest in the Grasberg mine, the world's second-largest copper mine, for USD $3.5 billion (based on the participation agreement that was signed on 11 October 1996, Rio Tinto has a right to 40 percent of production above a pre-agreed level and 40 percent of all production after 2022).
Then, after a rights issue done by Freeport Indonesia's parent company Freeport-McMoRan Copper & Gold Inc, the stake of the parent company in Freeport Indonesia will decline from 90.64 percent to 80.64 percent. However, this 80.64 percent stake includes the 40 percent stake of Rio Tinto that will be acquired by Inalum.
Afterwards, Inalum will acquire the 5.6 percent stake of Indocopper Investama (which dilutes through the rights issue from an originally 9.36 percent stake) in Freeport Indonesia.
According to sources with knowledge of the matter, Inalum will secure a total of USD $5.2 billion in financing from 11 foreign and local banks, partly to be used in the purchase of the majority stake in Freeport Indonesia. Meanwhile, Budi Gunadi Sadikin, President Director of Inalum, said the company still has USD $1.5 billion in internal cash reserves.
A statement was released on the official website of Rio Tinto stating that "all parties have committed to work towards agreeing and signing binding agreements before the end of the second half of 2018. Given the terms that remain to be agreed, there is no certainty that a transaction will be completed. Any final agreements will be subject to approval by the necessary government regulators and authorities."
In the July 2018 edition of our monthly research report, which is to be released in early August, there will be an in-depth story on the Freeport Indonesia deal.