Indonesia extends Freeport operating permit for Grasberg

Indonesia has extended a short-term operating permit for Freeport McMoRan’s (NYSE:FCX) vast Grasberg copper-gold mine until the end of July, while discussions over granting the government a majority ownership in the operation are finalized.

Coal and Minerals Director General Bambang Gatot Ariyono told The Jakarta Post that the extension had been given based on four key issues that still needed fine tuning: contract extension, divestment, smelter construction and fiscal and legal certainty for Freeport's planned long-term investment.

Freeport has been trying to secure long-term operating rights at Grasberg ever since Indonesia introduced new rules last year aimed at giving Jakarta greater control over the nation’s resources.

The country and the Phoenix, Arizona-based miner had initially agreed last year that up to a 51% stake in Freeport’s local unit, PT Freeport Indonesia (PTFI), would be given to “Indonesia interests,” based on a new mine licence replacing existing contracts.

But negotiations related to Freeport securing long-term operating rights at Grasberg, the world’s second-largest copper mine and fourth largest gold one, have dragged on. A bone of contention has been worries over the mine’s environmental impact in the eastern Indonesian province of Papua.

The country’s Supreme Audit Agency (BPK) recently revealed the ecological damage related to Freeport’s mining operations in Papua had caused the state about $13 billion in losses, according to The Jakarta Post article.

Freeport’s partner in Grasberg, Rio Tinto (ASX, LON:RIO) and state-owned PT Indonesia Asahan Aluminium, known as Inalum, are also involved in negotiations, as the Melbourne-based mining giant plans to sell its stake in the mine to the country’s mining holding for $3.5 billion.

Rio’s deal with Freeport was struck in 1995 and entitles it to a 40% share of production when certain output levels are hit. But as a result of strikes and other disruptions and as the open pit at Grasberg nears the end of its life, the company hasn’t seen any benefit since 2014.

Chief executive Jean-Sebastien Jacques publicly questioned Grasberg's place in Rio’s future back in February 2017. He followed in June with a remark about the mine being a world-class copper deposit, which might not be a world-class mining investment.

Once signed, the final agreement between Freeport and the Indonesia is expected to put an end to mounting public rage over foreign ownership of the nation's biggest copper asset. It could also bring closure to years of disagreements between the US miner and the South East Asian country, which curbed output at the mine, impacting metals prices worldwide.

Grasberg has transitioned to a fully underground operation, set to reach full capacity by 2022, when it will produce 160,000 tonnes per day of ore.

The additional Deep Mill Level Zone block cave mine, currently under construction, is projected to contribute an additional 80,000 tonnes per day of ore once at full capacity, expected in 2021.