Behind Freeport Mining Deal, Newly Minted Minister and US Mining Legend

Indonesia's chief economics minister Chairul Tanjung, right, talks with his colleague during a meeting at his office in Jakarta Aug. 20, 2014. (Reuters Photo/Beawiharta)

Jakarta. As negotiations to resolve an increasingly bitter dispute over Indonesian mining rules teetered on the brink of collapse, the chairman of Freeport-McMoRan James “Jim Bob” Moffett flew to Jakarta for last-ditch talks.

Indonesia‘s chief economics minister, Chairul Tanjung, said he had got to a point where he felt only talking directly to the 76-year-old US mining legend might break a deadlock in the six-month row, which had already cost Indonesia more than $1 billion and put thousands of jobs at risk.

In less than two hours the two men had reached an agreement, setting the stage to resume exports and restore badly needed government revenue to the world’s fourth most populous nation.

“I just convinced him that this was the maximum the government can give,” Tanjung said in an interview. “He believed me, I believed him and we shook hands. Very simple.”

Tanjung, one of Indonesia‘s richest businessmen, was appointed minister in May and made reaching a deal to get mining exports going again a priority to revive an economy suffering its sharpest slowdown since the global financial crisis.

But a looming presidential election had made it even harder to reach a politically unpopular compromise with foreign miners.

Aside from any chemistry between the two successful businessmen, the breakthrough came because Moffett had taken a more flexible approach, said Tanjung.

The dispute with Freeport had centred on its refusal to pay an escalating mineral concentrate export tax and its bid to extend its mining contract. The meeting was only attended by a small number of Indonesian officials and Freeport, and according to Tanjung the solution was to focus on what the two could agree on to get exports restarted and set other issues aside for now.

Freeport agreed to a $115 million downpayment for a smelter, to pay higher royalties and divest more of its Indonesian unit.

Indonesia in return substantially cut the concentrate export tax for Freeport and other miners building smelters.

Moffett is a likeable and larger-than-life Louisiana businessman, known for his Elvis impersonations during lighter moments, but also a shrewd deal maker.

Starting his career as a wildcat prospector in Louisiana, Moffett founded McMoRan Oil & Gas Co with two of his partners in 1969 and put together the merger with Freeport 12 years later.

With a 47-year history in Indonesia, Freeport’s fortunes were transformed by the discovery of the Grasberg minein Papua, one of the world’s biggest deposits of gold and copper.

Helped by Moffett’s ties to late autocratic President Suharto, Freeport won the right in 1988 to mine Grasberg, which has been a lightning rod for grievances over its impact on the environment, security arrangements and revenue sharing.

The recent talks did not touch on Freeport’s controversial links to the Suharto family or environmental issues, said Sukhyar, director general for coal and minerals at the ministry, who played a role in the negotiations.

High stakes

In January, Indonesia introduced a mineral ore export ban and the escalating tax on metal concentrate shipments in a bid to force miners to process raw materials to lift their value.

But the tough measures in some cases backfired as miners such as Freeport and Newmont Mining Corp said the rules breached their contracts and exports stopped.

The stakes were high on both sides.

The Grasberg complex in Papua provided around a fifth of Freeport’s global revenue last year.

In Indonesia, the company employs 24,000 including contractors, and is one of the country’s largest tax payers.

Freeport believed the new mining rules, particularly the export tax, violated its contract. The company refused to pay the tax and invest in a copper smelter unless the government provided assurances it would be allowed to continue operating after its contract expires in 2021.

Freeport wanted certainty to spend more than $15 billion to build what would be the world’s biggest underground mine, while the government said it could not renegotiate until 2019, two years before the contract expired.

Freeport Indonesia CEO Rozik Soetjipto said the breakthrough came when the new minister arrived with a business background.

“He understood that it is impossible for a company to continue such huge investments if there are no legal guarantees for the long term continuation and fiscal certainty.”

A trained dentist, Tanjung, 52, was ranked as Indonesia‘s fifth-richest man by Forbes with a net wealth of $4 billion. His company CT Corp now operates two of the country’s top five TV stations and has retail and banking interests.

Dengue fever

Freeport had sent its chief executive, Richard Adkerson, to Jakarta in June to focus on negotiating a deal.

Despite weeks of talks, which included meeting at a Jakarta hospital after a senior negotiator fell ill with dengue fever, the two sides remained deadlocked.

“Adkerson was here for a month. He was running from pillar to post and nothing was happening,” said a senior industry official with knowledge of the negotiations, who declined to be named due to the sensitivity of the issue.

According to the minister, Adkerson, an accountant by training, wanted to stick very closely to the terms of Freeport’s contract.

“He wanted to continue their Contract of Work. He wanted to keep paying the same royalties – the old rate,” Tanjung said.

Freeport’s Soetjipto said Adkerson’s contribution in reaching a deal was “very important.”

Requests for comment from Moffett and Adkerson sought via a spokesman at Freeport’s head office in Phoenixwere declined.

An emailed statement said: “the Company and its executives have sought to engage in constructive discussions and to maintain good relations with Indonesian officials including the President, Ministers, Parliamentary representatives, and local officials of each respective administration.”

 Bigger picture

By the end of June, talks were at a breaking point and some were questioning whether Freeport had a future inIndonesia.

“I told them, ‘If they want to continue business here I don’t want to discuss it with Adkerson any more,’” Tanjung said. “I want to talk with the chairman.”

At the same time, negotiations with Indonesia‘s second-biggest copper producer Newmont also reached an impasse and the US miner decided to file for international arbitration.

The move soured relations and the government threatened to terminate Newmont’s contract if the company did not withdraw its legal challenge.

Freeport chose a different path and decided instead to keep negotiating, with Moffett flying to Jakarta.

At the private meeting in Jakarta in early July, Tanjung and Moffett agreed to leave the most contentious issues over contract renegotiations to the next government and instead focus on getting exports restarted.

Tanjung told Reuters he felt he needed to bring Moffett in because “as a chairman you can see a bigger picture.”

A memorandum of understanding that was initially 90-pages long was whittled down to just 10 pages, the bare bones of what the two sides could agree on, said an industry official with knowledge of the matter, who declined to be named.

The government also agreed to a framework valid for at least six months that could be used to renegotiate the contract under the next administration.

The final step left was for the cabinet and President Susilo Bambang Yudhoyono to approve the MOU, though the unfolding presidential election delayed ratification and there were concerns the deal could still fall through.

But finally drawing a line under the near seven-month dispute, a shipment of 10,000 tonnes of copper concentrate left Indonesia for China on Aug. 8.

Reuters

  • Tom

    The headline to this article is very misleading implying a connection between the minister’s wealth and the deal. I don’t mind a cheeky headline, but with a sensitive topic like this I can’t help but feel you could’ve been a little more honest.

  • prodopo

    Moffet is an old hand, an authority on Indonesian under the table deal making and a regular sultan of baksheesh. The US has a foreign corrupt practices law for organizations like his, but the thing is none of them ever do hard time. Even when there is a conviction, a fine results that looks like a lot to us but is peanuts to them. Although there is much moralizing about corruption, the world runs on it. Millions are deprived of their rights and/ or condemned to poverty so corporations like Freeport can pay dividends to their shareholders. Come on Jokowi, Kick them out!

  • prodopo

    One other thing- how on earth can a dentist be the best person, the peerless authority on mining technicalities, ready to fight Indonesia’s corner in these negotiations? Looks like more of “it ain’t what you know, it’s who…”.

  • http://www.asmartrock.wordpress.com N. Mark Castro

    My concern on this issue reflects more on the short-term solutions: 24,000 employees are secured, shipments finally leaving the country, both parties receiving their due benefits. Indeed, the path has been opened for the succeeding administration to discuss further what could be done next.

    It’s not a sustainable solution but it’s a step forward in what is still a transparent negotiation better than what has happened in the past.

    Nobody promised a rose garden but at least operations can resume and it’s up to the people to decide what happens next. Tempered vigilance is very much needed.