Mining giant Rio Tinto has just sold its 40% of the world’s second-largest copper mine. The buyer is basically the government of Indonesia, where the Grasberg mine is located. This will leave partner Freeport MacMoRan with 49% of the project and the responsibility of operating the mine.
Indonesia is paying $3.5 billion through a state-owned enterprise, so we can’t call this expropriation. But the government had long been pushing Grasberg’s owners to build smelters in Indonesia and do other things that made no business sense to Rio and Freeport. The pressure tactics included bans on concentrate exports that could have shut the mine down and dealt a major blow to both companies.
So, no, not expropriation—but it looks a lot like extortion.
The writing was on the wall. I’m not surprised to see Rio bow out. And with Grasberg contributing almost half of Freeport’s cash flow, I’m not surprised to see it hang on. Even if the company could get a good price for its 40% (which I doubt would happen), it’d be impossible to replace that production quickly.
It’s still bad news for Freeport. Yes, they are “allowed” to remain operators and get $350 million in cash, but now they’re the minority partner to a government that is interested in many things besides the profitability of the mine. Governments around the world can be counted on to turn large businesses like this into sources of unnecessary jobs and to use them as political footballs. It’s never good news for the bottom line.
On the other hand, now that the government owns 51% of Grasberg, they’re unlikely to shut it down. That means this important supply of copper isn’t likely to go offline anytime soon. Instead, it’s likely to underperform more and more over time.
Bottom line: long-term bad news for copper supply and bullish for copper prices.
Normally, an event affecting a single mine wouldn’t be all that important, but this is a huge one, and threats against this mine have in the past indeed moved copper prices.
More important is that this transaction fits part of a larger pattern. We call it “resource nationalism”—but it’s really just extortion and theft. Governments around the world see miners as easy prey for higher taxes, larger carried interests, and yes, expropriation. Since mining is reviled in most of the world, politicians see double benefits in such moves; they gain money and popularity.
The higher commodity prices go in the future, the greater this risk will be.
Watching for early warnings of this sort of this is why I am not invested in any Indonesia plays. My global network of sources helps me keep up with such “country risk” on an ongoing basis.
I’ll do what I can to share any early warnings I get here in this free service, the Speculator’s Digest. Stay tuned, because the risk never goes away, not even in the most pro-mining parts of the world.
