Freeport rejects government?s share valuation method

Petromindo|Thomas

US-based Freeport McMoRan Inc, the parent of gold and copper giant PT Freeport Indonesia (PTFI), has rejected the share valuation method proposed by the government of Indonesia in relation to the PTFI mandatory divestment program.

In a letter sent to Secretary General of the Ministry of Energy and Mineral Resources, in response to the government of Indonesia?s September 28 letter regarding its five-point positions in relation to the divestment program, Freeport CEO Richard D. Adkerson said that the valuation of the PTFI shares must include the economic value the company would obtain until 2041.

?Freeport has worked to be responsive to the Government?s aspirations for 51 percent ownership but has been consistently clear that the divestment is conditional upon the transactions reflecting fair value of the business through 2041 and that Freeport retain management and governance control. These are non-negotiable positions,? Adkerson said in the letter, which leaked to the press on Friday.

The government of Indonesia has proposed for the share valuation to be based on the business value of the company only until 2021 when its current contract expires.

But Adkerson argued that based on the company?s existing Contract of Work (COW), it holds the rights to extend its operation until 2041. In addition, the company has to date spent US$14 billion, and plans to spend another $7 billion through 2021 for underground mine in Papua Province which would provide economic benefits for the mining operation through 2041.

He pointed out that Article 31 of the COW states: ?this Agreement shall have an initial term of 30 years from the date of the signing of this Agreement; provided that the Company shall be entitled to apply for two successive ten year extensions of such term, subject to Government approval. The Government will not unreasonably withhold or delay such approval. Such application by the Company may be made at any time??

?The Government (of Indonesia) has approved its long-term plans through 2041 through the AMDAL and other document submissions,? Adkerson said. ?Freeport?s international shareholders will not accept any transaction that does not reflect the fair value of the business based on our contractual rights through 2041.?

PTFI is obliged to divest up to 51 percent shares to Indonesian investors, according to existing regulation. The government currently holds 9.36 percent shares in the company, meaning that PTFI will be required to divest another 41.64 percent shares.

The government also demanded Freeport to complete the divestment by the end of 2018 at the latest. The government said that based on Article 24 number 2 of the PTFI Contract of Work (COW) the shares divestment until the ownership of Indonesian participants reaches 51 percent should have been completed in 2011, therefore the implementation of this divestment is an implementation of postponed PTFI?s divestment obligation.

Adkerson responded in the letter that there are no current divestment obligations under the PTFI COW. Article 24 indicates that: ?If after the signing of this agreement then effective laws and regulations or Government policies or actions impose less burdensome divestiture requirements than set forth herein, such less burdensome divestiture requirements shall be applicable to the parties to this Agreement.?

The mandatory divestment forms part of key points of negotiations between Freeport and the government of Indonesia, which have started since April of this year to help resolve disputes following new regulations introduced by the government in January, which require mineral mining firms including PTFI to meet certain conditions to be able to continue export of mineral concentrates including converting the current contract of work into IUP mining business license and developing domestic smelter, as well as divestment of 51 percent shares (for foreign miners) to local investors.

The negotiation was supposed to be concluded by October 10, but Minister of Energy and Mineral Resources Ignasius Jonan said on Wednesday that the deadline may be missed, adding that the government would approve request from Freeport for an extension of the deadline. He, however, expected negotiations to be finally concluded by the end of this year.

Elsewhere, Adkerson in the letter also responded to three other positions of the government of Indonesia as follows.

Government Position:
Divestment is conducted by the issuance of new shares (right issue) by PTFI which will entirely taken over by Indonesian participant.
? According to the Contract of Work Article 24 paragraph 2.e the divestment may be conducted by the issuance of new shares.
? Divestment by the issuance of new shares is expected to increase PTFI?s capacity to conduct capital expenditure investment in the future.

Freeport Response to this position:
Freeport will conduct divestment through the sale of shares owned by FCX and its Joint Venture partner and will discuss PTFI?s capitalization to ensure that the company can conduct capital investment in the future.
? The issuance of new shares will require a larger investment by the Indonesian participant to reach 51 percent and will result in overcapitalization of PTFI and an inefficient capital structure.
? Freeport will review with the government plans to fund capital expenditures.

Government Position:
After the divestment, the government must obtain its rights in its entirety (51% of the total production from all of the areas which included in the IUPK).
? FCX must conclude the Participation Agreement and other agreement similar and/or in relation with the existing arrangement with Rio Tinto before the divestment is conducted.
? Through such divestment, the government must obtain 51% of the total production from all of the areas which are included in the IUPK.

Freeport response to this position:
The government approved the Participation Agreement with Rio Tinto. Freeport has advised Rio Tinto of its divestment requirements (based on the proposed framework terms) such that the government will obtain rights to 51 percent of the production areas. However, Freeport and its partners will require that any divestment be conducted on the basis of fair market value of the business through 2041.

Government Position:
PTFI is requested to immediately respond to the due diligence request from the Ministry of State Owned Enterprise (SOE) including providing convenience to access data.
? The parties remain to support that the implementation of the due diligence is able to immediately concluded for the smoothness of IUPK issuance.

Freeport Response to this position:
Freeport is preparing a data room to enable the government to conduct due diligence.
?We view the September 28 proposal to be entirely inconsistent with our discussions and understanding with the Government and this proposal does not reflect the ?Win/Win? spirit in which the Framework was reached,? Adkerson said in the letter.
?Freeport has recently provided the Minister of Finance with proposed structures upon which it would be prepared to discuss divestment. Freeport is prepared to discuss a path forward but cannot negotiate on the basis of the Government?s September 28 proposal. Until such time as a definitive agreement is reached through these negotiations, Freeport will continue to honor and abide by the COW and fully reserves its rights thereunder,? the letter ended.

Editing by Reiner Simanjuntak