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Government defends Freeport deal amid criticism

Jakarta Post - January 2, 2019

Stefanno Reinard Sulaiman, Jakarta – The government has been fending off criticism questioning its recent deal with United States mining giant Freeport-McMoRan (FCX) to acquire majority shares in its subsidiary PT Freeport Indonesia's (PTFI) Grasberg copper and gold mine in Papua for US$3.85 billion since the deal was signed on Dec. 21.

Critics have questioned the acquisition of the world's second-largest copper and gold mine, asking why the government did not wait until PTFI's current contract ended in 2021 – by which time it could simply take over the mine without paying a single rupiah.

Finance Minister Sri Mulyani Indrawati, one of the key figures involved in finalizing the deal, has personally come forward in defense of the deal through her official Facebook account.

She explained that PTFI's previous contract of work (CoW) stipulated that the government would extend the company's contract after it ended in 2021.

"In the 1991 KK [CoW], the government is scheduled to grant PTFI a mining rights extension until 2041, and we would not be able to terminate it without reasonable cause," she said in a lengthy Facebook post shared last week.

She assured that the negotiators, which comprised officials and executives from various government institutions and firms, only had one intention, which was to "fight for the country's interests, including the interests of the people of Papua".

The former World Bank managing director acknowledged that the negotiations were challenging, with the involved parties often engaging in heated debates. However, she praised the negotiators and expressed pride at sealing the deal with FCX.

Although Indonesia closed the deal, the country may need to wait another four years before it can fully benefit from PTFI's operations.

A recent statement from FCX revealed that the company was still entitled to a larger share of PTFI's production, as the former is set to retain its economic interest of 81.28 percent in PTFI until 2022.

Therefore, FCX is entitled to the majority of production derived from the prized Grasberg mine, whether it is copper, gold or silver.

"The arrangements provide for FCX and the pre transaction PTFI shareholders to retain the economics of the revenue and cost sharing arrangements under the joint venture," FCX said in a statement issued shortly after closing the deal.

Commenting on the matter, Institute for Development of Economics and Finance economist Abra PG Tallattov said such an arrangement subsisted because of a previous arrangement with Anglo-Australian mining giant Rio Tinto.

"PTFI had an agreement back in 1996 with Rio Tinto for a 40 percent share of Grasberg's production only after 2022," he said.

In 1996, Rio Tinto signed a participation agreement with PTFI for a 40 percent interest in PTFI, making the former entitled to 40 percent of production above specific levels until 2022 and 40 percent of all production starting 2023.

The government, through state-owned mining holding company PT Indonesia Asahan Aluminium (Inalum) paid $3.5 billion for Rio Tinto's 40 percent participating interest in PTFI. The remaining $350 million was paid to FCX.

Legally, Abra said, the arrangement was not a problem as it was based on a previous agreement.

Nevertheless, he said it was unfortunate as it would affect Inalum's revenue from PTFI at least until 2022. "The economic interest should be equivalent to the equity interest," he added.

PTFI spokesman Riza Pratama declined to comment. Meanwhile, Inalum head of corporate communications Rendi Witular could not be reached for comment.

Source: https://www.thejakartapost.com/news/2019/01/02/government-defends-freeport-deal-amid-criticism.html