Friday, February 10, 2006

Freeport Fracas

Indonesia government steps up pressure on PT Freeport Indonesia. This time Vice President Jusuf Kalla disclosed a plan to investigate Freeport's operation, including its gold transaction. Kalla, who is also Golkar Party Chairman, was suspicious on Freeport's gold and copper transaction saying the country should have received revenues three times of what the company actually paid.
Last month, House Speaker Agung Laksono, who is also deputy chairman of Golkar Party, rejected pressures from NGOs to close down Freeport.
Former Assembly Speaker Amien Rais who has been the main spokes person of anti-Freeport movement in the last few weeks, successfully mounts pressure through Partai Amanat Nasional (National Mandate Party), the party Amien co-found. He even urged government to close down Freeport's operation. According to Amien, and this seems to be accommodated by government, Freeport conducted three major crimes: Environmental problems, production and reserves data cover up, and unfair revenue sharing.
The government-sanctioned team would likely focus its investigation on Amien's accusations. I'm not surprised if the government wouldn't investigate the corruption involving the military officers. But why Amien put the military corruption issue behind?
Forget about that. Suppose that the team will find irregularities, what's gonna happen? The weakest punishment might be fines, rehabilitation program, community development program an so forth. The strongest could be kicking Freeport out of the mine completely.
Whatever would be the recommendation, all have its price. In the last 52 weeks of trading, Freeport's share price hit the lowest in May 2005 at US$31.52 and the highest last month at US$65. Recently the FCX price dropped to US$56.83 (Thursday, February 9). I'm not sure whether the political pressure in Indonesia had something to do with the significant drop of almost 15% in Freeport's share price.
Those who want to buy Freeport Indonesia or Indocopper Investama (100% owned by Freeport McMoRan, 9% shares in Freeport Indonesia) clearly expects more pressure. So many parties have interests in acquiring Freeport. But if Freeport would be to difficult to be acquired (including by force, considering US influence in the country), Indocopper would be OK.
The divestment of Freeport shares is a complex issue. The working contract signed in 1991, paragraph 24 states that FCX is obligated to divest 51 percent of the shares in Freeport and to be fully complied within 20 years. During the first stage, between 1991 and 2001, Freeport was obliged to divest 10 percent and to be followed with additional 41 percent between 2001 and 2011. Ironically, in the same paragraph, FCX is also given the escape clause.
In July 2004, FCX was given a maximum of 180 days until the end of January 2005 to carry out the divestment. But nothing's happened. Even president Susilo Bambang Yudhoyono failed to pave the way for divestment when he was energy minister under Abdurrahman Wahid administration.
How about Indocopper?
In November 2004, Tempo magazine reported that four financial institutions were prepared to back up the Papua government in its bid to purchase Indocopper. It was the late Papua governor JP Solosa who raised the issue. But he didn't mention the financiers.
Indocopper is still a mystery. Aburizal Bakrie (owner of Bakrie Group, currently coordinating minister for people's affairs) disclosed to prosecutors in 1998 that he got the approval to acquire Freeport through Indocopper from energy department on December 30, 1991. Director General for Mining Kosim Gandataruna signed the approval letter. Former energy minister Ginandjar Kartasasmita (currently chairman of Regional Council at People's Consultative Assembly) has been the target of accusations on profiting from the Bakrie-Freeport deal.
Bakrie claimed he bought Freeport at US$228 million (US$55 million in cash and US$173 million loans from Chemical Bank, USA). Six years later, Bakrie Group made US$315 million prior to 1997 crisis when PT Bakrie & Brothers and PT Bakrie Investindo decided to sell ther shares 49% and 2% respectively in PT Indocopper Investama to PT Nusamba Minerals, a subsidiary of Nusamba Group controlled by Mohammad 'Bob' Hasan, Soeharto's golf buddy. Indocopper owned 9.4% shares in PT Freeport Indonesia. Freeport McMoRan (FCX) also owned 49% shares in Indocopper that time.
Initially then president director of Bakrie & Brothers Tanri Abeng (former minister of state-owned enterprises under BJ Habibie and currently president commissioner of listed PT Telkom Tbk) claimed that all payments from Nusamba would be in cash. But according to FCX report, Nusamba only paid US$61.6 million in cash and financed the remaining US$253.4 million of the $315.0 million purchase price with a variable-rate commercial loan from a syndicate of commercial banks, including JP Morgan Chase Bank as agent, which was to mature in March 2002.
FCX guaranteed the Nusamba loan for the purpose of continuing minority Indonesian ownership of PT Freeport Indonesia. FCX also agreed to lend to Nusamba any amounts required to cover any shortfalls between the interest payments due on the commercial loan and dividends received by Nusamba from PT Indocopper Investama.
Through December 31, 2002, FCX loaned Nusamba US$68.9 million to cover such shortfalls and charged to expense US$7.3 million of this amount because the loans exceeded Nusamba’s initial cash investment.
In discussions shortly after December 31, 2001, Nusamba informed FCX that it did not expect to be able to repay the bank loan or FCX’s loan at maturity, which would obligate FCX to pay the bank loan.
On February 27, 2002, FCX repaid the bank loan as provided for under the terms of its credit facilities and acquired Nusamba’s ownership in PT Indocopper Investama. For accounting purposes, the transactions were deemed effective as of December 31, 2001. As a result of FCX’s payment of the Nusamba bank loan, FCX’s ownership interest in PT Freeport Indonesia increased to 90.6 percent from 85.9 percent. Indonesia government owns 9.4% shares in the company.
Last year, state-owned mining company PT Aneka Tambang Tbk announced its plan to acquire government' shares in Freeport. State-Owned Enterprises Minister Sugiharto had pledged support for Antam's plan. The company appointed HSBC to give advice on the acquisition.
Antam was prioritizing the 9.36% stake of PT FI owned by the government rather than the 9.36% stake held by Indocopper, even though both options will be considered as part of the financial due diligence. Since then, no news from Antam until last week's story published in Bisnis Indonesia that a merger between two Bakrie affiliated companies (PT Bumi Resources Tbk and PT Energi Mega Persada Tbk) might be followed with acquisition of Freeport.

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