Rio advancing along Grasberg exit road

By Kristie Batten* / May 23, 2018 / www.mining-journal.com / Article Link

Bloomberg reported overnight that Rio was close to agreeing a sale of its stake to PT Indonesia Asahan Aluminium (Persero), known as Inalum, for US$3.5 billion, citing people familiar with the negotiations.

Rio acknowledged the report and confirmed the discussions between it, Inalum and Grasberg operator Freeport McMoRan, including price talks.

"No agreement has been reached, and there is no certainty that binding agreements will be signed," the company said in a statement.

Rio has a joint venture with Freeport for a 40% share of production above specific levels until 2021, and 40% of all production after 2021.

The Grasberg underground block cave mine is expected to ramp up to full capacity by 2022, reaching 160,000 tonnes per day of ore, with the additional Deep Mill Level Zone block cave to contribute an additional 80,000t of ore per day at full capacity.

Freeport remains in talks regarding the divestment of a substantial stake in Grasberg to the Indonesian government.

In late January, Deutsche Bank said its un-risked net present value valuation for Rio's 40% stake in Grasberg was around US$6 billion with EBITDA and cashflows picking up materially from 2022/23 as its share of production stepped up to a full 40% and the underground mine hit nameplate.

"We think a cash sale for above $3.5 billion, while NPV-dilutive, would likely be well received by the market considering the country risk; there is currently very little in the Rio share price for Grasberg, in our view, and there is virtually no earnings contribution from the asset 2017-20," DB said back then.

"Rio's $1.1 billion book value for the 40% stake is substantially below our $6 billion NPV and if historical cost is the government's starting point for negotiations there could be a very wide valuation gap between the parties."

Speaking at the Bank of America Merrill Lynch Global Mining, Metals & Steel Conference last week, Rio CEO J-S Jacques said "all options" were open in relation to Grasberg.

"There is a fundamental difference between a world-class resource and a world-class business," he said.

"And depending on the outcome of the discussion that are led by Freeport with the government of Indonesia, as far as Rio is concerned, then we'll take a decision should we stay or should we go.

"For us, it's all about protecting value for our shareholders. I can't make it more explicit. If the best value for us is to say we'll stay, if the best value for us is to exit with a good cash consideration, we'll go for it.

"So that's where we are. And I can assure you as soon as we have a clear outcome on it, we will update the market accordingly."

Speaking later that day, Freeport boss Richard C Adkerson disagreed with Jacques comments about Grasberg's status as a world-class asset and business.

"You wouldn't expect me to say otherwise," he said.

"It's a remarkable asset. I mean, to have high grades of copper and gold in the same ore, it's unique in terms of an ore body of that size.

"I think this year, it's the second largest copper mine in the world in terms of production, the largest gold mine."

But Adkerson acknowledged that the mine was located in a "challenging physical situation".

"Everything about the operation is complicated. I feel comfortable saying it's the most complicated mine in the world," he said.

"And then, you have the issues of Indonesia has changed in such a dramatic way politically over the 50 years that we've been there, and Papua has changed and the environmental issues are challenging.

"I understand when J-S says that about affecting the business side of it, and particularly, the challenges we faced in recent years with the government and protecting our contract, and the government adopting a new mining law that it feels obligated to address.

"And so, I mean, I understand his comment. They're a different sized company than us. They would also be faced with investing half of their joint venture interest if they don't sell at all, so it would drop to 20% versus 40% beginning in 2022. So, I think the right answer for all of us is to see success in these negotiations."

Rio shares opened 0.6% higher at A$85.09.

*Kristie Batten is editor of www.miningnews.net

Mining Journal is again running its World Risk Survey as part of its World Risk Report, which is aiming to provide risk ratings for more than 100 jurisdictions worldwide. To contribute to this research and rate one or more jurisdictions, please click here to take the survey.

Recent News

Uranium volatility after Russia's US export restrictions

November 25, 2024 / www.canadianminingreport.com

Gold stocks rebound on metal bounce and equity rise

November 25, 2024 / www.canadianminingreport.com

Crypto market size continues to catch up with gold

November 18, 2024 / www.canadianminingreport.com

Crypto stealing some of gold's thunder

November 18, 2024 / www.canadianminingreport.com

Gold stocks drop on metal price decline

November 11, 2024 / www.canadianminingreport.com
See all >
Share to Youtube Share to Facebook Facebook Share to Linkedin Share to Twitter Twitter Share to Tiktok