Indonesia’s loss: Freeport dividend can’t even cover interest payment

Gede Sandra People Sovereignty Movement (Pergerakan Kedaulatan Rakyat) Analyst

IO – The government deserves to be proud if it is really true that it will receive US$200 million in dividends in 2021. It’s about time because in the first two years (2019 and 2020), it got nothing.

Had the negotiation been conducted with a stronger spirit of nationalism two years ago, Indonesia would be able to fully control Freeport’s concession in 2021. But unfortunately, that did not happen, the country only owns 51% of the shares, with the operational reign still in the hands of Freeport. And we only reap dividends in the third year (2021).

Suppose Indonesia will consistently receive US$200 million in dividends every year – but how much debt did Inalus incur to purchase 51% of PT Freeport Indonesia’s (PTFI) shares in 2019? As much as US$4 billion (the divestment was valued at US$3.85 billion). The global bonds consisted of four categories – US$1 billion with a 3-year tenor, US$1.25 billion with a 5-year tenor, US$1 billion with a 10year tenor, and US$750 million with a 30-year tenor. So, in total, the principal plus interest Inalum will have to pay is US$5.98 billion. With the US$200 million annual dividend, it will take the country 30 years to fully pay off this debt. The question is, can anyone guarantee that the mineral reserve will not be exhausted in the next 30 years?

Moreover, Inalum needed to borrow again in 2020 to cover the first installment, because a dividend is yet to be received. The loan, made in May 2020, cost another US$2.5 billion on the Company’s balance sheet.

According to Inalum’s President Director, they have to pay US$250 million in interest every year. This means a deficit of US$50 million! In other words, the dividend from Freeport is too small, not even enough to pay the interest charge. (While it is projected that in 2022 the dividend might go up to US$500 million, there is a lot of uncertainty in this).

Indonesia should’ve bought 51% of FCX shares, instead of those of PTFI

In 2019 PT Freeport Indonesia (PTFI) only posted a net profit of US$166 million, and US$366 million in 2020. And we spent US$3.85 billion for Rio Tinto’s 40% participating interest in PTFI.

Had the Indonesian government refused to extend PTFI’s contract, Rio Tinto’s participating interest would be worthless. In fact, if we had had the courage to exercise our sovereign right, Indonesia could own 100% of PTFI’s shares just by sitting back until the contract expires in 2021.

But that’s all moot now: the option taken was to purchase the shares of PTFI. But even though we opted to go down this road, we should’ve been smarter. The Indonesian government, through Inalum, should have chosen to buy Freeport-McMoRan Copper & Gold Inc. (FCX), the parent company’s shares instead.

This could have been done when the price was hitting rock bottom, so we could have owned a larger share of the Company. For example, in 2016, when the notorious “Papa minta saham” (“Daddy wants company shares”) scandal, involving former Speaker of the House Setya Novanto, erupted (early 2016), FCX shares plunged to US$3.98 per share (currently they are trading at US$37.8 per share).

In 2020, FCX recorded a profit of US$1.47 billion. That’s four times PTFI’s. So, if Inalum then bought FCX’s shares instead, the dividend payment could be at least four times what it currently received, or about US$800 million dollars per year.

Other losses often overlooked

Other than the missed financial opportunities, the nation has also suffered other humiliating losses:

1. Failure to build smelter In the last contract of work, Freeport was supposed to complete the smelter construction in 1996. But it failed to deliver – a nonperformance. To date, the smelter in question has not been fully realized by Freeport. Since the contract was renewed in 2018 until September 2020, smelter construction in the Java Integrated Industrial and Port Estate (JIIPE) Gresik, East Java, was still at 5.86 percent.

2. Environmental loss

Up to now, Indonesia has never received a penalty payment from Freeport for the environmental damage it has caused. In 2018, the Supreme Audit Agency (BPK) published its estimate of losses suffered by Indonesia due to ecosystem destruction during the five decades PTFI has been in operation: a staggering Rp185 trillion! And to this moment Indonesia has yet to receive a penny in compensation.