ETF Securities Research Blog

Indonesia secures majority stake in Grasberg mine

After months of negotiation, Freeport-McMoRan – the operator of the world’s second largest copper mine – has caved-in and agreed to sell a majority stake in the Grasberg mine to the Indonesian government.

The Grasberg mine shut operations for most of February 2017 as the Indonesian government failed to renew the company’s ore export licence. Although a temporary export licence was awarded, Freeport and the Indonesian government have been embroiled in a bitter battle to control the mine. We argued in Copper – strong fundamentals and improving sentiment that the ongoing negotiations posed a threat to further disruptions at Grasberg.

This deal partially eases our concerns about further mine disruption this year at Grasberg. However, we note that key elements of the deal have yet to be thrashed out. Freeport values Grasberg at US$16.2bn. The government only owns about 9% of the mine at the moment. Purchasing another 42% (to get to 51%), could cost the government US$6.8bn. Based on discussions early this year, it does not appear that the Indonesian government shares the same valuation, insisting unmined copper reserves should not be included. Until details are agreed on, the threat of further disruptions linger.

If the deal goes ahead, it will remove one of the road-blocks to Freeport making further investments in the mine. As a large part of the open-pit mine has been exhausted, the miner will need to deeper into the rock beneath it. Freeport is expected to invest between US$17bn and US$20bn in Grasberg through to 2031 and will be awarded operating rights until 2041. It will also need to build a new smelting facility as part of the deal. Given the dearth of investment by miners over the past 3 years, the new commitment from Freeport will be welcome in securing future supply.

Copper prices have continued to rally despite the news of the agreement, indicating the market shares some of our scepticism of the success of the deal.

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