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The devil is in the detail

Jakarta Post Editorial - November 21, 2023

Jakarta – The government and the major shareholders of PT Vale Indonesia nickel company, namely state-owned mine holding company MIND ID, Vale Canada Ltd (VCL) and Sumitomo Metal Mining, seem to have realized the vital importance of a smooth and credible process in the foreign shareholders' divestment to maintain foreign investors' confidence in the country, especially its mining industry.

After a wave of political noise by politicians at the House of Representatives and outcry by three provincial governors in Sulawesi over the past year, the three major shareholders finally signed a heads of agreement on the divestment in San Francisco, the United States, on Friday, or Saturday Jakarta time. The presence of President Joko "Jokowi" Widodo, who attended the APEC summit in the US city, to witness the signing demonstrated the strong commitment on both sides to complete the process of making MIND ID the largest shareholder in Vale Indonesia.

Under the 2020 Mining Law, Indonesian interests must be the controlling owners of Vale Indonesia as a prerequisite to the extension of its mining concession in 118,000 hectares in South, Southeast and Central Sulawesi, which will end in December 2025. MIND ID is the most qualified, politically and financially, to become the controlling owner.

Under the agreement, Brazil's Vale subsidiary VCL and Sumitomo will divest their equity in Vale Indonesia by approximately 14 percent to make MIND ID the largest shareholder with 34 percent ownership, thereby allowing for the extension of Vale Indonesia's mining concession under a special mining business permit for the next 20 or 30 years.

But as the saying goes "the devil is in the detail". The road to the final contract for the share acquisition could still be bumpy, depending on the goodwill and good faith of the parties involved in the negotiations.

The caveat is that a heads of agreement is often referred to as a letter of intent or a memorandum of understanding or a pre-contractual deal that has not yet stipulated the key terms and conditions of the final transaction. The official press release did not elaborate on the terms of the final contract, but only says "Detailed transaction mechanisms are to be finalized in the form of definitive agreements and the transaction is expected to be completed in 2024 and is subject to customary closing conditions."

We are confident the negotiations for the final divestment deal with Vale Indonesia will not be as turbulent as those between the government and US-based McMoran for the Freeport copper company's divestment. Vale Indonesia's reputation is nationally and internationally perceived to be good, unlike McMoran which was then notorious for its hostile attitude. Moreover, the size of the deal with Vale Indonesia will be very small, only several hundred million dollars, compared with the US$3.85 billion acquisition of Freeport.

The Freeport divestment was finally closed in late December 2018, five months after the signing of the heads of agreement in July 2018 but only four months before the April 2019 presidential and legislative elections.

Generally, the most difficult aspect of a share acquisition is the pricing of the assets. But since 20 percent of Vale Indonesia shares have been listed on the Indonesian stock exchange since 1990, the pricing issue would unlikely be so complex.

The most sensitive aspect of the Vale Indonesia divestment is related to the interests of the provincial and regency governments in the three provinces in Sulawesi. In the case of the Freeport divestment, the final deal was closed almost one year after the conclusion of the agreement in January 2018 between the central government and the provincial government of Papua and Mimika regency, whereby these regional administrations would get 10 percent of the Freeport shares.

However, the deal on the division of Vale Indonesia shares between the central government (MIND ID) and the regional administrations will be much more complex and tough given the larger number of provincial and regency administrations involved and the lack of financial capacity of these administrations.

Source: https://www.thejakartapost.com/opinion/2023/11/21/the-devil-is-in-the-detail.htm