Tuesday, October 3, 2023

Freeport to Start Talks With 15 Banks to Finance Unprofitable, but Politically Important New Smelter

Dion Bisara
May 28, 2019 | 10:38 am
Freeport Indonesia is currently burning through cash as it needs billions of dollars in investment to shift its operations at the Grasberg mine in Papua from open-pit to fully underground. (B1 Photo/Primus Dorimulu)
Freeport Indonesia is currently burning through cash as it needs billions of dollars in investment to shift its operations at the Grasberg mine in Papua from open-pit to fully underground. (B1 Photo/Primus Dorimulu)

Jakarta. Freeport Indonesia, the country's largest gold and copper mining company, will start discussions after Idul Fitri next month with 15 local and foreign banks interested in financing its $2.8 billion unprofitable smelter project, senior executives said.

Freeport has an obligation to build the smelter as part of its deal with the government to extend its permit for the Grasberg mine in Papua until 2041. 

"To be honest, I would rather build a 1,000-megawatt power plant in Papua than build the smelter," Freeport Indonesia president director Tony Wenas said late on Monday.

"Whichever way we make it, it would be best if we can get zero [percent] as the smelter's IRR," Tony said, referring to the internal rate of return, an estimation of the profitability of an investment.

Orias Moedak, Freeport Indonesia's vice president director, said the company would talk with banks from Japan, France, Britain, the United States and several local state-owned banks to discuss the financing scheme. 

"Because the project itself is unprofitable, we would likely have to opt for corporate financing instead of project financing," Orias said. 

That means loan repayments would come from Freeport's operations, which would reduce the dividends paid out to shareholders, instead of being contained within the project.

Still, the smelter project is far from disastrous for Freeport Indonesia, Orias said. "It only means that our future income would be reduced by the $2.8 billion [we will put into the smelter]," he said. 

The company is now burning through cash as it needs billions of dollars in investment to shift its operations from open-pit to fully underground. Freeport Indonesia expects its interest, taxes, depreciation and amortization to dip to $1.3 billion this year due to the shift, before returning to its usual level of around $4 billion by 2022. 

The company estimates that the government, which now owns 51 percent of Freeport Indonesia, still stands to pocket about $40 billion over the next 21 years from dividends taxes and royalties. 

Not Economics, It's Political

Indonesia passed a law in 2009 that requires all mining resources to be processed in the country before export. This later became a highly contested point in the Freeport contract extension. 

Tony said the smelter only adds 5 percent value to Freeport Indonesia's copper concentrate before export, and that many smelters abroad can do it at a much lower cost. Illustrating his point, Tony said Freeport Indonesia's existing copper smelter arm, known as Smelting, which processes about 1 million tons of concentrate per year in Gresik, East Java, has only paid a dividend once since starting operations in 1997. 

But since the company had agreed to the government's terms on building a smelter, Orias and Tony both acknowledged that the project was no longer about the economics.

"This smelter is not a profitable project, but it has become our commitment and obligation under the law. Until now, we have spent $122 million on smelters, so there is no reason to step back," Tony said, adding that it also politically important for Indonesia to see the realization of the smelter. 

Freeport Indonesia commissioned Japan's Chiyoda Corporation to construct the smelter. The company has so used some of the money to acquire and prepare 100 hectares of land in the JIIPE industrial complex in Gresik.

The new smelter will process 2 million tons of concentrate per year, Tony said. It will produce copper cathode and several byproducts, including sulfuric acid for fertilizers. 

The company has set a target for the new smelter to be operational by 2023 – just in time for its underground mining activities to hit full throttle. 

The smelter will require 2,000 workers during the construction phase, but only 500 once it is operational.

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