Indonesia almost certainly controls 51.23 percent stake in PT Freeport Indonesia (PTFI). Praise for the success of acquiring Freeport will end soon as a number of difficult homework is waiting for Inalum after the acquisition of shares, which is targeted to be completed by the end of this year. It includes the obligation to build smelter, handling waste problems, and efforts to maximize Freeport’s contribution to state revenue.
The transfer of majority ownership of PTFI shares was signed late last month by PT Inalum, Freeport McMoRan Inc (FCX), and PT Rio Tinto Indonesia. Inalum President Director Budi G. Sadikin carried out the signing of agreements together with FCX Chief Executive Officer (CEO) Richard Adkerson and Rio Tinto representatives. It was witnessed by the Energy and Mineral Resources Minister Ignasius Jonan, Minister of State-Owned Enterprises (SOE) Rini Soemarno, and Finance Minister Sri Mulyani Indrawati.
Several agreements were signed at the time, including PTFI share divestment, sale and purchase of Rio Tinto-Inalum shares, PTFI shareholder agreement, and takeover of PTFI shares. Some are advanced steps from the signing of Head of Agreement (HoA) or the principle of share divestment between Inalum and FCX on 12 July 2018.
Through a series of agreements, Inalum bought 40 percent of the management rights (Participating Interest/PI) of Grasberg mine in Papua from Rio Tinto for US$ 3.85 billion. The PI will later be converted to 40 percent of PTFI’s shares. Coupled with the current state-owned shares and PT Indocopper Investment shares that are also acquired, the total shares of Inalum in Freeport Indonesia will reach 51.38 percent. Inalum will pay US$ 3.85 billion (Rp 56 trillion), which will be settled before the end of 2018.
The government really utilised the share takeover as an important success of President Joko Widodo era. However, difficult homework are waiting after Indonesia took over PTFI. The handling of environmental issues is one of the homework, which had surfaced in the meeting between Inalum and the House of Representatives (DPR) on Wednesday (10/10).
According to Chairman of the House of Representatives Commission VII Gus Irawan Pasaribu, Inalum will bear the state losses on environmental damage done by Freeport Indonesia if the share purchase transaction is carried out before the environmental issues are resolved. “If we buy a company, we will enjoy its assets, but we also have to bear its obligation,” he said.
This environmental problem is related to the findings of the Supreme Audit Agency (BPK) last year. The BPK found potential state losses of Rp 185.58 trillion due to Freeport’s operations in Papua. This related to a number of environmental violations committed by the US mining company. First, the use of protected forest areas in the Freeport mine operations of 4,535.93 hectares without permission. As a result, the country has the potential to lose around Rp 270 billion.
Second, the excess disbursement of Freeport reclamation guarantees worth US$ 1.43 million (Rp 19.4 billion). Third, Freeport has not paid the post-mining fund placement obligation to the government for the 2016 period worth US$ 22,286 million (Rp 293 billion). Fourth, the negative impact of the disposal of waste from mining operations (tailings) in rivers, forests, estuaries, and marine areas in the amount of Rp 185 trillion.
Fifth, the mining operations of Deep Mill Level Zone (DMLZ) and extension of the west and east embankments were done without environmental permits. DMLZ is one of Freeport's underground mining areas. Sixth, the supervision of the Ministry of Energy and Mineral Resources and the Ministry of Environment and Forestry on Freeport's environmental management has not been carried out in accordance with existing regulations, one of which led to land subsidence due to Freeport’s underground mining activities.
The government has targeted the handling of tailings and mine waste problems to be completed within the next year. The Inspector General of the Ministry of Environment and Forestry Ilyas Assad said the ministry would also prepare a roadmap for handling the environment in the Freeport mine area. “In the near future, the roadmap will be about its arrangement [waste and environmental problems],” he said.
Apart from environmental issues, the Energy and Mineral Resources Minister Ignasius Jonan said the government would replace Freeport Indonesia’s Contract of Work (KK) with a Special Mining Business License (IUPK) after the company officially becoming a subsidiary of Inalum. The IUPK has a maximum operating period of 2x10 years until 2041.
“The IUPK permit that will be given to PTFI is part of the government’s commitment in maintaining the investment climate so that it provides certainty and security for foreign investors to invest in Indonesia,” Jonan said.
However, Freeport Indonesia is still obliged to build a copper smelter with a capacity of 2-2.6 million tons per year. The government will continue to monitor and evaluate the development of the smelter construction, so it can be completed in less than five years.
Freeport Indonesia Corporate Communication Vice President Riza Pratama said the construction of the smelter was approved to be one package with the divestment process and negotiation for the IUPK extension. Therefore, there must be a certainty in granting mining permits after the contract expires in 2021.
Once there is certainty, Freeport will begin the smelter physical construction. “Progress is there, but the physical development awaits certainty about the continuity of operations up to 2041,” Riza said in Jakarta, Monday (1/10).
On the other hand, Freeport continues to conduct several studies regarding the smelter construction, including smelter in Gresik, East Java. In addition, the company has a cooperation memorandum for the study of smelter construction with PT Amman Mineral Nusa Tenggara Barat, resulting an option to build a smelter in West Nusa Tenggara.
Riza hopes the location of smelter construction will not change from Gresik. “Hopefully, there is no need to move its location. It is still being studied. Gresik is currently the most advanced,” he said.
Until 30 September 2018, the progress of the new smelter construction reached 2.5 percent, below the target of 5.18 percent set in August. In September, there was also no progress. The smelter construction progress was only in the form of a US$ 150 million deposit and studies on Environmental Impact Assessment (EIA and construction design as well as soil consolidation.
SOE Minister Rini Soemarno said she would continue to boost Freeport Indonesia to do downstream production after the completion of the divestment process. “It does not stop at the copper smelter construction, but it would continue with the processing of anode sludge as the smelter by-product into gold,” Rini said.
There are many benefits that Indonesia can obtain by becoming a majority shareholder of Freeport Indonesia. State revenue from taxes, dividends and royalties will increase. Last year, the company had contributed taxes, royalties, export taxes, dividends and other levies of US$ 756 million to Indonesia.
From 1992 to 2017, Freeport has contributed US$ 17.3 billion to the country in the form of taxes, royalties, dividends and other levies. In fact, it is one of the largest taxpayers in Indonesia. PTFI’s mining wealth, consisting of gold, copper and silver, is worth at least Rp 150 billion or more than Rp 2,000 trillion.
The government will ensure that state revenue can be higher after the completion of the PTFI share divestment process and the change of Contract of Work (KK) into IUPK. “PTFI will contribute to a larger state revenue in aggregate than the amount of revenue at the time the KK was still applied," Finance Minister Sri Mulyani said.
Not just nationally, Freeport’s presence in the Grassberg Mine contributed 48 percent to the Gross Regional Domestic Product (GRDP) of Papua Province and 95 percent to the economic growth of Mimika Regency. Freeport Indonesia is the largest gold producer of Freeport-McMoran Inc. Of the total 1.08 million ounces of Freeport gold sales in 2016, around 98 percent came 7from mining activities in Grasberg, Papua.
Until March 2018, Freeport Indonesia directly employed 7,028 workers. From that number, 2,888 workers were Papuans. The project actually has the capacity to provide 29,000 jobs. The company has also committed to provide one percent of total revenue for the development of local communities in its operational areas this year. It donated US$ 44 million last year and US$ 33 million in 2016.
Researchers from the Institute for Development of Economics and Finance (INDEF) Abra P.G Talattov predicts the presence of Grassberg underground mine could open 230,000 job opportunities nationwide. Around 122,000 workers in Papua and 108,000 outside Papua. “In terms of labour, the Papuan is 35 percent. Foreign workers are not even too dominant,” he said.