Freeport and SOEs in Mining

After the signing of the head of agreement and sale purchase agreement on September 27, 2018 with Freeport Indonesia (FI), the state-owned mining company, PT Indonesia Asahan Aluminium (Inalum), has become a magnet for local and global market players.

These two series of corporate actions are the important stages of Inalum to control 51 percent of FI shares. If in the next six months it can fully pay US$3.5 billion (Rp 56 trillion), Inalum officially controls 51 percent of FI shares as mandated by the 1945 Constitution: strategic mining must be controlled by the state for the welfare of the people. Nevertheless, the effort of Inalum to buy 40 percent of Rio Tinto\'s participation rights to control 51 percent of FI shares is questioned. Why doesn\'t Inalum directly buy Freeport McMoRan (FCX) shares in the FI?

According to the writer, if Inalum buys FI shares through FCX, it would not benefit Indonesia. Open-pit and underground mining sites at Grasberg are mines that suck up large investment costs. In 1995, Freeport did not have funds for the mine\'s operations. It was Rio Tinto, which at that time had financial capital. With the power of money, Freeport and Rio Tinto entered into a joint agreement operation in 1996. Through the agreement, Rio Tinto was willing to pour hundreds of millions of dollars into the development of the Grasberg mine and is responsible for mining operations, technical exploration and tailing waste processing techniques.

Corporate Mechanism

Guarantees for Rio Tinto, which has developed the Grasberg mine, are not shares, but having 40 percent participating interest in the Grasberg mine and is entitled to 40 percent of Freeport\'s total copper and gold production at Grasberg. After 2021, Rio Tinto automatically controls 40 percent of production. It means, Inalum and Freeport can only control 30:30 percent of Grasberg\'s production if they buy Freeport shares through FCX.

It cannot also be said because it is an agreement between Freeport and Rio Tinto, then the one that has to resolve the problem is Freeport and Rio Tinto. The Joko “Jokowi” Widodo government actually carries the innate burden of Soeharto regime, which also agreed to the Freeport-Rio Tinto agreement. The clause in the Freeport contract of work (COW) also hints that if the contract expires in 2021, Freeport automatically receives 2x10-year contract extension.

Whatever the mechanism, what is important is that Indonesia has controlled 51 percent of FI shares. FI has agreed to convert Rio Tinto\'s 40 percent participating interest into shares despite being diluted by 5 percent to 35 percent. The remaining five percent was taken from Indocopper\'s shares in Freeport to reach 51 percent. The question is, are the state and state-owned enterprises able to buy 51 percent of FI shares and what are the benefits for the SOEs in mining?

President Jokowi cares about the fate of SOEs in mining, including restoring the mine sovereignty. Divesting FI shares is not easy for Jokowi. Besides the difficulty of negotiations with FI, which does not want to turn the CoW into a special mining business license (IUPK), Jokowi faces a budget deficit due to the large amount of oil and gas imports (gasoline). The House of Representatives (DPR) does not support

the transfer of shares of foreign companies to SOEs because the injection of capital into SOEs drains the State Budget. In fact, closing the State Budget deficit is the work of the DPR and the government. The DPR does not have constitutional politics in the divestment so the President and the ministers carry ou the divestment with the corporate mechanism.

Before buying 51 percent of FI shares, the SOEs in mining had consolidated by forming a holding company (PT Timah Tbk, PT Aneka Tambang Tbk, and PT Bukit Asam Tbk/PTBA). If combined, Inalum\'s total assets are Rp 86 trillion. That facilitates Inalum to get bank loans and expand business. Added with the cash flow of its subsidiaries (Rp 4.45 trillion in PTBA in 2018, Rp 1.29 trillion in PT Timah), it is easier for Inalum to buy FI shares. If it can fully buy 51 percent of FI shares, Inalum\'s total assets will be Rp 180 trillion. Loan funds to buy FI shares will be covered by FI\'s net profits, which average above US$2 billion per year after 2022. Moreover, the underground mining (93 percent of total FI reserves is underground) begins production in 2019.

Inalum\'s market value will reaches $15 billion, if it successfully controls 51 percent of FI shares. That is enough to put Inalum on a par with the world\'s mining giants, such as Freeport McMoRan, which has a market value of $20.9 billion, although far below the world mining giant, Rio Tinto Plc with the market value of $86.55 billion. Inalum has a large space for expansion. State-owned mining companies get benefits from the enactment of Law No. 4/2009 on Mineral and Coal, which instructs foreign mining companies that have already produced 10 years to divest 51 percent of shares to domestic parties. Inalum has the opportunity to buy the remaining 20 percent of PT Vale Indonesia\'s shares, which have not been divested to domestic parties. Vale operates a nickel mine in Sorowako (South Sulawesi) and Morowali (Central Sulawesi). Vale also controls the domestic nickel market and is one of PT Antam\'s main competitors. If it is successful to acquire Vale, Inalum\'s market value will rise.

Indonesia is blessed with abundant mineral reserves. Iron ore reserves are estimated in Kalimantan at 39,964,006 tons and bauxite 125,008,311 tons and in Sumatra the iron ore reserves are 2,432,000 tons. Nickel reserves in Maluku are 354,466,592 tons and Sulawesi 529,224,638 tons, while copper reserves in Papua are 2,574,744,000 tons.

Not controlling natural resources

Neverheless, those who controll the nickel, bauxite, copper and coal markets are foreign companies and large local groups that were given privileges by Suharto through COW and coal mining permits (PKP2B). Vale Indonesia, for example, controls nickel concessions from Sorowako to Morowali, Freeport controls a concession of 215,000 hectares (ha) at Grasberg. Soeharto also gave concessions to domestic entrepreneurs, such as PT Kaltim Prima Coal (KPC) 90,938 ha and Arutmin 70,153 ha. If combined, KPC and Arutmin are capable of producing 90 million tons of coal; PTBA is only 25 million tons.

State-owned mining companies mine in "dry" areas. Antam, for example, can only get bauxite concessions in Tayan, West Kalimantan (34,360 ha), nickel mines in Asera and Molawe, Southeast Sulawesi (16,920 ha). Meanwhile, PTBA has coal concessions in Tanjung Enim, South Sumatra (66,414 ha) and Tabalong in East Kalimantan 3,145 ha. The exception is on PT Timah which has extensive concessions and controls the tin market in the country. PT Timah controls concessions of 116,983 ha in Lintas, Bangka Belitung, and Riau (19,594 ha). There, many circles are sneering, SOEs are only the dairy cows of the ruling elites.

The risk is that the SOEs are weak to compete. Let along to compete with global giants, (Rio Tinto and BHP Billiton), competing with domestic coal mining companies, such as KPC, Arutmin, Adaro Energi, the SOEs are just clumsy. The SOEs in mining cannot boost state revenues due to small and unprofitable dividends. Foreign-domestic corporations even the ones which support state revenues from the mining sector, including determining the delay in the realization of the downstream mineral project. The government seems not to consistently prohibit the exports of raw minerals. FI, for example, is still permitted to export minerals.

The SOE in mining, therefore, lack control over the market. At the bauxite and nickel mines, Vale and Cita Mineral still control market forces rather than ANTM. Meanwhile in coal, PTBA is far below Arutmin and KPC, whose production has been 90 million tons and Adaro Energy 60 million tons in 2018. The SOEs in mining currently only control 7-20 percent of the mineral market share. In coal, PTBA only controls 10 percent. In fact, Director of Inalum Budi G Sadikin said, if it wants to control the global market, Inalum must control 15-20 percent of the domestic mineral market.

Controlling domestic mineral concessions is the initial stage to enable SOEs in mining to control the global market, including taking over several mining concessions inherited from foreign mining companies. Antam is expected to win the auction of land concessions left by Vale in Bahodopi, Morowali. Antam does provide more than Rp 1.8 trillion to get several blocks that Vale has reduced in work areas in Sua-Sua, Latao, Kolonodale and North Bahodopi. Likewise, the land abandoned by COW and PKP2B companies. Adaro Indonesia, for example, has a concession area of 148,148 ha (reduced by 12 percent), KPC 90,938 ha (reduced by 6.6 percent), and Arutmin 70,153 ha (reduced by 4.7 percent). By controlling the concessions, the SOEs in mining can control the upstream sector, which enables them to move freely downstream (smelter construction).

Without any mineral supply from upstream, the construction of a smelter designed by Inalum\'s subsidiary will be suspended. Antam is building a smelter grade alumina (SGA) in Mempawah, West Kalimantan, to produce 2 million tons of alumina per year. This SGA project is an effort by Inalum and Antam to integrate the upstream aluminum industry with its downstream industry, an aluminum ingot factory in Kuala Tanjung.

By controlling 51 percent of FI\'s shares, Inalum\'s ambition to dominate the global market is not difficult. FI has large concessions and copper-gold reserves. FI and Inalum can realize the copper and gold smelter project, which is planned to be built in Gresik, East Java. The construction of a copper smelter project is easier if the subsidiary of Inalum, PTBA, ensures the supply of electricity because PTBA owns

coal and operates several steam-fired power plant PLTU Mulut Tambang projects. Thus, we hope that revenues of the SOEs in mining will reach $22 billion in 2025.

Inalum will be the main competitor of the global mining giants if the state provides the opportunity for the mining companies to control the upstream mining sector. From there, SOEs in mining will be able to easily control the domestic-global mineral market. The SOEs can also increase state revenues provided they are managed professionally, transparently and accountably. (Ferdy Hasiman, Researcher at Alpha Research Database, Indonesia)