Rio Tinto might abandon its interests in the Grasberg copper and gold mine in West Papua, Indonesia, underscoring the uncertain Indonesian political environment in which mining companies must navigate. Rio Tinto has a joint-venture interest in the mine with PT Freeport Indonesia, which owns and operates the mine and is a subsidiary of Freeport McMoRan Copper & Gold.
- On 8 February, Rio Tinto CEO Jean-Sebastian Jaques acknowledged the global significance of Grasberg—it has some of the earth’s largest copper and gold deposits—but indicated that recent decisions from Jakarta jeopardized whether the mine represented a sound investment decision, according to The Australian.
- In mid-January, Jakarta ceased allowing exports of copper concentrate as part of the country’s comprehensive change to mining regulations and ownership rules, according to Mining.com.
Indonesia’s policy toward foreign mining operations has been inconsistent since 2009, when Jakarta passed a law banning exports of mineral ores; the law was not implemented until early 2014, under former Indonesian President Susilo Bambang Yudhoyono. The stated intent of the law was to encourage foreign mining firms to invest in smelters and refineries, according to The Economist.
- Since the law’s implementation in 2014, Jakarta has exempted copper exports from the ban, probably because of the significant tax revenues copper generates for Jakarta and also because smelting adds relatively little value to copper, according to The Economist. It is not clear why Jakarta decided to institute the ban last month.
Exit from Grasberg Would Impact Rio Tinto’s Revenues Marginally
Rio Tinto’s possible exit from the Grasberg mine would have minimal impact on the company’s revenues. The joint-venture entitles Rio Tinto to 40% share of production above specified levels until the end of 2021 and 40% of all production after 2021, according to Rio Tinto’s 2015 Annual Report.
- From 2012-2016, Rio’s total mined copper production reached 2.811 million tones. Of this, production at Grasberg accounted for 0.014 million tons, according to the company’s fourth quarter reports from 2013-2016.
- From 2012-2016, Rio’s total mined gold production reached 1.79 million ounces. Of this, production at Grasberg accounted for 0.002 million ounces, according to the same fourth quarter reports.
The outcome of the Jakarta governor election, scheduled for 15 February, could portend further political uncertainty over mining operations, and foreign investment in general. The current governor, Basuki Tjahaja Purnama, commonly known as Ahok, is an ally of Indonesian President Joko Widodo, commonly known as Jokowi, and his defeat in next week’s election would embolden Jokowi’s political opponents and potentially derail his initiatives, which tend to be more pro-business when compared to his political opponents.
- Since his election in 2014, Jokowi has embarked on a number of economic reforms, to include reducing the number of restrictions in place that prohibit foreign investment, according to Global Risk Insights.