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Freeport Indonesia Divestment and Freeport McMoran Crisis

Universitas Riau - Azhari Setiawan Alumni International Relations University of Riau - On 14 January 2016, multiple explosions and gunfire were reported near the Sarinah shopping mall in central Jakarta, Indonesia, at the intersection of Jalan Kyai Haji Wahid Hasyim and Jalan MH Thamrin. One blast went off in a Starbucks cafe and one went off at a police post outside the mall.

The attack occurred near a United Nations (UN) information center, as well as luxury hotels and foreign embassies, including France's. The United Nations Environment Programme (UNEP) confirmed that a Dutch UN official was seriously injured in the attacks. It was reported an armed stand-off took place on the fourth level of the Menara Cakrawala (Skyline Building) on Jalan MH Thamrin. At least eight people—four attackers and four civilians (three Indonesians and an Algerian-Canadian)—were killed and 23 others were injured due to the attack. Allegedly, this attack was one of ISIS operations in Indonesia, coordinated by Bahrun Naim touted by numbers of journalists, analysts, police chief, etc as one of the most influential figure of ISIS in Indonesia and South-east Asia. This attack has seized all Indonesians’ attention not only the civilians but also numbers of academicians, politicians, journalists, etc.

On the same day—that we all may not know that—Indonesia has reached a new agreement with Freeport Mcmoran about Freeport Indonesia stake divestment share price. Freeport McMoRan Inc's Indonesian unit has submitted a divestment price to the Indonesian government for an additional stake in one of the world's biggest copper mines. 

The Indonesian government plans to increase its stake in Freeport Indonesia, the local unit of US gold and copper miner Freeport-McMoRan, to 20 percent by October in a move to benefit more from the country’s natural resources. Energy and Resource Mineral Minister Sudirman Said said that Freeport-McMoRan has agreed to divest 10.64 percent of Freeport Indonesia in October. The central government currently has 9.36 percent of Freeport Indonesia.

This divestment of stake is also referring to the Law no. 4/2009 about the mining of mineral and coals. In this Law, the divestment is a mandatory thing for the business license holder in the mining business. Freeport Indonesia is currently 90.64 percent owned by Freeport McMoran and 9.36 percent owned by the Indonesian government. To meet the government’s requirement, the company must offer another 20.64 percent of its shares to Indonesian shareholders based on 4/2009 mining law. According to the current schedule, Freeport Indonesia must divest a further 10.64 percent of its shares in October. 

By referring to the mining regulation, Freeport should have offered the divested stake at the end of last year. The divestment must also be turned into cash if Freeport wishes the government to renew the contract, which will expire in 2021. 

However, even after the year was over, Freeport had not made any offer. The government must sent letters to Freeport twice to remind them about their obligation, which occurred in November and December. And, still referring to the previous Government Regulation, the government gave Freeport a 90-days period to make an offer, which ends on January 14th 2016. 
When the deadline approached on January 14th 2016, Freeport Indonesia by McMoran had finally offered the divestment shares to the government. The US-based mining company sent a letter to the Energy and Mineral Resources (EMR) Ministry about the 10.64 percent divestment of the share ownerships. Freeport stated that the stake that is about to be divested stands at US$ 1.7 billion, or at IDR 23.5 trillion, which is only 10 percent of Freeport’s total stake value at US$ 16.2 billion.

I personally believe that this divestment agreement has a connection to Freeport McMoran and other mining companies share prices falling.

Freeport McMoran, actually had a stock collapse since 2011 and in December 2015, fell down to 34.98 % with $21 Billion debt total according to Bloomberg News' mining reporter, Danielle Bochove. This forced Freeport into assets sale corner. Freeport may need to take drastic steps to shore up balance sheet and avoid the assets sale. The other mining companies also have the same rough time. Glencore is planning to sell as much as $4 billion in assets, including its Lomas Bayas and Cobar copper mines, as part of a $13 billion debt-reduction plan. Freeport is looking at various options to reduce its debt, including selling minority interests in certain mining assets. 

Freeport shares fell 9 percent to $3.74 on 13 January, after 12 January reaching $3.65, the lowest since 2000. The stock touched an all-time low of $3.38 in November of that year. Freeport climbed 8 percent to $4.04 at 9:44 a.m. in New York on 14 January.

Freeport may need to mull asset sale. The company is in a situation where they might have to reconsider which assets are core and which are non-core and eligible for divestiture. The company has a broad set of natural resource assets that provide alternatives for future actions to enhance its financial flexibility. 

Until now, Phoenix-based Freeport's strategy has been to expand production at its "supermines" which offer the highest copper reserves and the lowest cash costs, Garrett Nelson, a Richmond Va, based analyst at BB&T Capital Markets. The five such sites are: Indonesia's Grasberg, Arizona's Morenci, Peru's Cerro Verde, Chile's El Abra and Tenke Fungurume in the Democratic Republic of Congo. Those assets will probably remain off the table for sales.

Divestment could be a strategic policy for McMoran. Following to McMoran crisis and stock collapse, US$ 1.7 Billion from Indonesia is quite beneficial for McMoran to solve crisis and avoid asset sale. The divestment also leads to the bigger accomplishment for McMoran, Freeport Indonesia contract extension.

This (Freeport Indonesia’s share) is also beneficial for Indonesia to strengthen the market penetration, so that Indonesia has a stronger capital market by listing it in stock market. Having Freeport’s share can reduce market volatility. But, there are still some problems that we must consider related to Freeport investment in Papua. Indonesia government should pay attention to 1) Papua’s economic growth and its social welfare; 2) Indonesia’s foreign investment management; and 3) Papua security related to Indonesia territorial integrity fighting against “Organisasi Papua Merdeka” as a separatist movement that threaten Indonesia and all foreign investment. At least, there must be an increasing chart after the divestment.

About the Author
Azhari Setiawan is academician at Postgraduate Program of International Relations Department, Universitas Indonesia. He is also a researcher at Center of ASEAN Community Studies, Universitas Riau.

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