Freeport-McMoRan Inc. FCX announced that it has completed the transaction with the Indonesian government regarding PT Freeport Indonesia’s (PT-FI) long-term mining rights and ownership.
Per Freeport, the completion of this deal reflects a “win-win” outcome for all parties and establishes the beginning of a new long-term partnership between the company and the Republic of Indonesia.
PT Indonesia Asahan Aluminium (Persero) (PT Inalum), the enterprise fully owned by the government of Indonesia, wrapped up the earlier announced $3.5 billion cash acquisition of all of Rio Tinto's interests related to its joint venture (JV) with PT-FI. It also completed the $350 million cash acquisition of full interests of Freeport in PT Indonesia Papua Metal dan Mineral (earlier known as PT Indocopper Investama), which owns 9.36% of PT-FI.
Regarding the transaction, the interests of the JV are being merged into PT-FI in exchange for a 40% share of ownership in PT-FI. As such, PT Inalum and the provincial or the regional government’s ownership share of PT-FI is roughly 51.2% and Freeport's ownership is around 48.8%.
The deal enables Freeport and the PT-FI shareholders (before the transaction) to maintain their economics of the revenue and cost sharing arrangements under the JV. As such, Freeport’s economic interest in PT-FI is likely to be roughly 81.28% through 2022. Moreover, Freeport will continue to manage the operations of PT-FI.
Mining Rights Extension
PT-FI was granted a new special mining license (IUPK) by the Indonesian government to replace PT-FI’s Contract of Work. The move enables PT-FI to conduct operations in the Grasberg minerals district through 2041.
Per the terms of the IUPK, PT-FI was granted a mining rights extension through 2031 along with rights to extend the mining rights through 2041. However, the extension is subject to PT-FI’s completion of building a new smelter and satisfying its fiscal obligations to the Indonesian government.
The key fiscal terms include a corporate income tax rate of 25%, a 10% profits tax on net income and royalties of 4% for copper and 3.75% for gold. The IUPK and related documentation provide investment protection and legal assurances for Freeport and PT-FI.
PT-FI is likely to build a new smelter in Indonesia within five years of the closing of this deal. Moreover, it is starting front-end engineering and design and also plans to pursue commercial, financing and potential partner arrangements for this project. PT-FI’s shareholders will bear the economics for PT-FI’s share of the new smelter per their respective ownership stakes.
The Ministry of Environment and Forestry (“MOEF”) of Indonesia and PT-FI have set up a new framework for continuous improvement. The framework allows PT-FI to comply with site-specific standards and enables monitoring by the MOEF.
Freeport’s shares have lost 36.1% in the past six months compared with the industry’s 31.2% decline.
Zacks Rank & Stocks to Consider
Freeport currently carries a Zacks Rank #3 (Hold).
A few better-ranked stocks in the basic materials space are Seabridge Gold, Inc. SA, The Mosaic Company MOS and Cameco Corporation CCJ, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Seabridge Gold has an expected earnings growth rate of 71.4% for the current year. The company’s shares have moved up 9.4% in the past year.
Mosaic has an expected earnings growth rate of 75.2% for the current year. The company’s shares have gained 11.9% in the past year.
Cameco has an expected earnings growth rate of 66.7% for the current year. Its shares have gained 14.7% in a year’s time.
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