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Calculating Freeport's benefits for Indonesia

Reporter: Andri Indradie, Herry Prasetyo, Silvana Maya Pratiwi, Tedy Gumilar | Editor: Tri Adi

This year has been a tough year for the Freeport-McMoran Inc (FMI) business. The decline in copper, oil and gas (oil and gas) prices and soaring debt prompted the company coded FCX on the New York Stock Exchange to tighten its belt.

In addition to having to revise the credit agreement due to the sloping expansion plan in oil and gas production, FMI, which is also the parent company of PT Freeport Indonesia alias PTFI, plans to cut capital expenditures in the mining (non-oil and gas) business this year, from US $ 2.7 billion to US. $ 2 billion.

FMI reduces capital expenditure (capex) mining operations in North America and South America which annually produce 113,398 tons of copper and 9,071 tons of molybdenum each year.

In fact, FMI plans to completely close the Sierrita mine in Arizona. Termination of employment (PHK) was forced to be a way of efficiency for FMI at the Grant County mine, which employs about 1,600 mine employees.

As for the oil and gas business, FMI has set capex this year and 2017, amounting to US $ 1.8 billion and US $ 1.2 billion, respectively. In fact, usually, FMI sets a capex of around US $ 2 billion per year.

This year, FMI is targeting eight new wells operated by Freeport-McMoran Oil & Gas in Holstein Deep, Horn Mountain, and King Projects in the deep sea of ​​the Gulf of Mexico to be “on”. These projects are estimated to be able to reduce the total cost of oil production from US $ 19 per barrel of oil equivalent last year to US $ 16 barrels of oil equivalent this year and 2017 later.

Freeport in Indonesia
These business plans surfaced after FMI’s financial books “caught fire” over the past year. FMI has an obligation to convince its shareholders that this year’s performance can be better.

Just to remind you, in October 2015, based on its latest financial report, FMI recorded a loss of US $ 3.8 billion in the third quarter. This red report card finally triggered a stock sell-off and depressed FCX’s share price. Understandably, a few months after the announcement of the poor performance, investors were shocked by the cancellation of the dividend distribution of US $ 0.2 per share.

Indeed, the postponement of dividends announced in December could inflate FMI’s pockets by increasing US $ 240 million and strengthening the company’s liquidity in facing the market. However, the plan was not sufficient to prevent investors from selling off.

December 2015, perhaps a record drop in FCX ​​shares. In that bleak month at the end of 2015, FCX’s shares fell 18.73% from US $ 8.33 per share to US $ 6.77 per share.

Throughout 2015, FCX’s share price dropped 70.92%, opened at US $ 23.28 per share on January 2, 2015 and closed at US $ 6.77 per share on December 31, 2015.

FMI’s situation became increasingly out of control when its boss and founder James R. Moffet left his position as CEO. Last week, Thursday (14/1), FCX’s price was around US $ 4.04 per share.

Well, coincidentally or not, FCX’s share price is slowly rising along with the news of PTFI’s share offering to the Indonesian Government, Thursday (14/1). FCX’s share price moved green at the last figure of US $ 4.15 per share and is still climbing.

What is clear, according to Fahmy Radhi, a researcher at Gadjah Mada University, the FCX business in Indonesia has left a poor track record in the last three years. PTFI sold around 891 thousand ounces of gold and 549 million pounds of copper (see table).

From these data, with the assumption that the average gold price in 2015 is US $ 1,149 per ounce and a Copper price of US $ 2.45 per pound, PTFI will pocket around US $ 2.36 billion from the sale of the two commodities. Sadly, it turns out that the income that Indonesia gets from there is only US $ 539 million.

This income comes from royalties and taxes. “Meanwhile, dividends have never been paid in the last three years,” said Fahmy.

Seeing PTFI’s performance and its contribution to Indonesia, Fahmy argued, the divestment price of 10.64% worth US $ 1.72 billion or around Rp 23.91 trillion with an exchange rate of Rp 13,900 per share, is too expensive. This is not to mention the cost of environmental damage and human rights violations of the Papuan people.

Marwan Batubara, Director of Indonesia Resources Studies, added that the price of FCX’s shares, which fell to US $ 4.31 per share, is a sign of the company’s bankruptcy. “Especially, amidst the current condition of mining and oil and gas commodity prices, which continue to fall,” he said.

Marwan continued that the current condition seemed to be the lowest point of FCX’s performance. It is known, in the 2010–2011 era, FCX’s price touched US $ 60 per share.

Fit mechanism
Fahmy said, in order to gain greater benefits from PTFI, the government should gradually increase their ownership so that they become the majority holders. However, buying through a divestment mechanism costs a lot to achieve majority ownership.

In addition, taking over the majority of FCX shares means taking over Freeport’s debt. In fact, now Freeport’s debt is bigger than its own capital. Their percentage of debt to total ratio is -189.09%.

For this reason, Fahmy suggested that the government look at two other alternatives so that it could become the majority owner. First, nationalization. Second, the takeover is carried out when the contract ends in 2021.

The choice of nationalization will be tough, because besides having to face international arbitration, the Indonesian government can also be isolated from other countries. So, the most likely alternative is to take over shares when the CoW ends in 2021.

The state can take this step through the Revision of the Mineral and Coal Law. One of the articles of the law states that there is no extension for mineral and coal mining companies that have been operating for more than 50 years. Thus, two years before the PTFI CoW ends in 2019, whoever the president is must formally decide to take over PTFI. “Furthermore, it is possible that the management of Freeport is fully entrusted to State-Owned Enterprises in which 100% of the shares are controlled by the state,” said Fahmy.

We wait.

Main Report
Minggguan Cash No. 17-XX, 2016

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