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Viewed from above, Grasberg mine stands out amidst Indonesia’s Sudirman mountains, akin to an indentation made by a giant power drill.

Sitting at an altitude of 14,000ft, amid snow-topped highlands and misty peaks, the surrounding area of the Papua province is one of undeniable beauty.

Nonetheless, Grasberg, one of the world’s largest copper and gold mines, has been the subject of intense arguments over recent months, which has threatened to turn ugly at times.

The players in this particular dispute are US miner Freeport-McMoRan and the Government of Indonesia. The bone of contention? Majority ownership of one of the crown jewels of the country’s mining industry.

After much wrangling, an agreement of sorts has been reached. Freeport, which has been mining copper in the region since 1972, has agreed to hand over 51% ownership of the mine to the Indonesian state.

It forms part of new regulations due to come into play in the South East Asian nation, which require all foreign investors to strip their interests down to 49% over a ten-year period.

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By GlobalData

Unquestionable relief can be felt from both sides. PT Freeport Indonesia, the Phoenix-based group’s Indonesian subsidiary, is now free to continue its copper shipments from Grasberg, which it had not been able to do since January when Indonesia imposed a freeze on exports.

Under the terms of a ‘special licence’, Freeport will be allowed to operate the mine until 2041.

For Indonesia and its President Joko Widodo, a victory for sovereignty has been scored. Viewed through such a lens, Grasberg has been wrested from the control of foreign interests and rightfully restored to the state.

Lapsing shares and strikes: A tough year for Freeport

However, Freeport has had its fingers burned by this recent experience. Thanks to a special licence agreed with Indonesia in the 1970s, the group had been conducting its operations at Grasberg with relative ease, protected by several legal and fiscal assurances for nearly half a century and, during the impasse, the firm fought to retain this deal.

But, while Freeport chief executive Richard C Adkerson said the Indonesian Government has agreed to provide “certainty of fiscal and legal terms”, it is unclear what this will actually constitute.

Freeport’s shares have also vacillated as a result of such uncertainty. Upon the announcement of a deal being reached on 29 August, group shares on Wall Street fell away by as much as 5.7%, despite copper prices having surged this year on the back of strong demand in China, tightened supply and the weak dollar.

A continuing industrial dispute – starting in May when Freeport laid off 10% of its Indonesian workforce in a bid to cut costs – has added to the US Company’s woes. Around 5,000 Grasberg workers are reported to still be on strike.

A question of principle: What do we know about the divestiture?

Details around Freeport’s divestment remain murky and have many analysts scratching their heads as to how and when a deal will be set in motion.

“From my reading of the announcement made on 29 August, Freeport has agreed to a 51% divestiture in principle, but we are yet to hear anything on the mechanics, pricing or timing,” says Bill Sullivan, a lawyer at Christian Teo and Partners in Jakarta.

“These are absolutely critical issues,” he adds, “which, unless and until they are resolved, make it impossible to say that the long-running dispute between Freeport and the Indonesian Government is over. Both parties have clearly decided to kick the can down the alley.”

As referred to by Sullivan, the sides are yet to agree a price for the divestment of PT Freeport Indonesia, which will likely protract matters even further, though Freeport stated it will be at a “fair market value”.

Foreign investors with an interest in Grasberg and the Indonesian mining industry will no doubt be watching closely to see how events pan out. And they are unlikely to have been heartened by what they’ve seen so far, says Sullivan.

“Savvy foreign investors are likely to focus on the dramatic decline in the value of their investment suffered by Freeport’s shareholders during the period of the dispute,” he says.

“They will also be concerned by the heightened political risk that all foreign- owned mining projects in Indonesia clearly face, and the consequent need to insist upon a much higher return on investment for any proposed mining industry investment in Indonesia in order to compensate for such a risk.”

As part of the agreement, Freeport is required to convert its existing contract of work (CoW) into a new operating licence, known as an IUPK, which would allow the company to export copper concentrate through to 2022.

Freeport is said to be willing to covert to an IUPK, but is holding out on an investment stability agreement similar to that found in its existing CoW. Sullivan, though, has his doubts that such a deal will come to fruition.

“I am dubious over the value of Indonesia’s promised investment guarantee for all mining companies operating in the country, including Freeport,” he says. “The existing CoW already provides for an investment guarantee, but the government has not honoured the same by forcing the renegotiation of all CoWs.

“Therefore, how can one have any confidence that the government will honour the promised new investment guarantee, if and when it forms the view that the new investment guarantee is no longer in its best interests?”

Politics at play: President Widodo sends out a message

The timing of Indonesia’s hard-line tactics might also be motivated by high politics, suspects Kevin O’Rourke, a political analyst, based in Jakarta. With elections to take place in 2019, President Widodo is keen to prove himself as a leader who is unafraid to make tough changes that support the country.

“Success in securing an in-principle agreement from Freeport for should help Widodo in his campaign rhetoric,” he argues. “And with fundamental questions still unresolved, the divestment process will be protracted and laborious, which will distract policymakers from addressing far more worthwhile priorities.”

O’Rourke also has his doubts that the state will truly see the benefits of Grasberg being back in government hands. Highest-bidder private-owned entities might be too lucrative to refuse, he believes.

“The economic rationale for the state to invest in Freeport is weak,” he says. “And if the divestment goes instead to private interests, the process will be vulnerable to abuse and malfeasance.”

This is pure hypothesis, of course. But with the path of negotiations still far from clear, at present there is little more to go on.