FOCUS: Mid-1990s deal means Indonesia won’t own Grasberg copper any time soon

Indonesia will have to wait until 2023 to see a share of copper from Grasberg, despite having agreed to pay $3.85 billion to gain a majority stake in the mine.

Indonesian state mining and manufacturing firm Inalum is set to complete the purchase of 51% of Grasberg copper mine later this year, buying out Rio Tinto’s 40% shareholding and paying current majority holder Freeport for the remainder.

But a joint venture deal struck between Freeport and Rio Tinto in 1995 means that Freeport will have ownership of the entirety of Grasberg’s copper output through to 2023, according to production forecasts made by the company.

Under the deal, which lasts until 2041, Freeport takes home 100% of all copper produced at Grasberg up to an agreed level every year, at which point Rio Tinto receives 40% of all extra material mined. In mid-2022 and onward, the deal’s structure dictates that Freeport and Rio will share all output in a 60-40% split.

Rio received a paltry 6,000 tonnes of copper from Grasberg in 2017, a year in which the world’s second largest copper mine produced 446,000 tonnes.

The framework of this 23-year-old deal will continue under the new ownership, Freeport executives said in an earnings call on Thursday July 26.

“The economics of the Rio Tinto deal [mean the] joint venture will carry forward under the new structure. So there’s a certain quantity of metal as you know that is 100% for PT-FI’s [Freeport Indonesia] interest and then the increment produced above that is shared,” Freeport chief financial officer Kathleen Quirk said on an earnings call with analysts.

“The existing shareholders of PT-FI would continue to have the 100% of specific volumes whenever they’re produced. And currently that’s expected to be produced by the end of 2022,” Quirk said.

Rio Tinto confirmed to Metal Bulletin that under current agreements, the first full year of a 40% share would come in 2023.

The Inalum takeover comes at a time when Grasberg is set to transition from an open-pit to underground mining; output will take a drastic hit in 2019 and 2020.

This means that under the joint venture offtake share, Inalum will not receive Grasberg copper tonnages until 2022 and not meaningful amounts until 2023, because the mine is expected to be producing under the offtake threshold until this date.

“The economics of the Rio Tinto JV will be replicated and incorporated in a new shareholders agreement. This will result in FCX and the other current 9.36% shareholder of PT-FI retaining the cashflows that they would have been entitled to under the current structure,” Freeport-McMoRan spokesman Erik Kinneberg said in a statement to Metal Bulletin.

Investment incentive
Rio’s share of Grasberg copper was set up to guarantee over $100 million of investment per year to help underwrite the development of underground mining there.

Originally the 60-40% split was set to come into play in 2019, before the move underground was delayed, in part due to the Indonesian government’s growing ambitions to take control, embodied by repeated delays in granting export permits.

“It’s good for Freeport, because you have the same amount of cashflow coming in,” a Canadian equities analyst who declined to be named told Metal Bulletin.
However, Freeport told analysts yesterday that access to the DMLZ mining shaft, a key component in Grasberg’s underground transition, is becoming more difficult due to hard rock and seismic activity.

The current projections on mine production mean that when the more equitable offtake split comes into play, Freeport will maintain its high level of copper concentrates production due to markedly higher output at Grasberg.

But in a scenario where delays push deep ore mining back to later years, Freeport could be left having to a smaller share of smaller Grasberg tonnage and less ability to dictate annual copper concentrate treatment charge negotiations, which it traditionally leads.

“The question now is if there are some issues with the DMLZ, does that mean that Freeport loses out?” the analyst said.

As part of the deal to take on Grasberg, Inalum bought Rio’s shares in the mine, some of Freeport’s and also became a minority shareholder of PT Freeport, allowing it to take a financial benefit while ensuring Freeport does not dilute its ownership more than necessary.

Indonesia hopes that by ensuring the long-term future of Freeport’s investment in Grasberg, it will finally ensure the country has a second copper smelter that is built within the next five years, ensuring it domestically captures as much of the copper value chain as possible.

Freeport gained a gross income of $1 billion from Grasberg in the first half of 2018 and, with the mine expected to last for at least another two decades, both companies will benefit from its expansion in the future.

Indonesia will just have to wait a little while longer.

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