RTZ, Freeport-McMoRan partnership in Indonesia

An agreement with Freeport-McMoRan (NYSE) and its offspring, Freeport-McMoRan Copper & Gold (NYSE), sets the stage for RTZ (NYSE) and its subsidiary, RTZ America, to become involved in exploration and development programs in Indonesia’s foremost copper and gold mining district. The partnership is expected to help Freeport-McMoRan fund its ambitious programs in the island republic, including the Grasberg expansion in the province of Irian Jaya.

Under the terms of the partnership, RTZ America will acquire 21.5 million shares (10.4%) of outstanding common stock of Freeport-McMoRan Copper & Gold (FMCG) at a market price of US$450 million. RTZ America has an option to acquire a further 3.5 million shares for another US$75 million. Together, these amount to about 12.2% of the outstanding common stock of FMCG. Furthermore, RTZ America will, if asked by Freeport-McMoRan, make a cash tender for the outstanding 6.5% convertible subordinated notes of the parent company.

As a part of the considerable restructuring involved with this deal, Freeport-McMoRan plans to spin off the bulk of its shareholdings in FMCG to its shareholders.

If all goes according to plan, RTZ America’s interest in FMCG will rise to beyond 18% of the outstanding common stock at a total cost of US$875 million. The RTZ subsidiary would also hold about a 12% equity interest in the remainder of Freeport-McMoRan.

This infusion of capital from RTZ comes at a welcome time for FMCG. While copper production more than doubled and gold production increased even more dramatically during the past five years, net earnings have remained steady. (In fact, earnings declined in the past two years.) At the end of 1994, earnings were reported to be US$78.4 million, whereas total liabilities stood at US$431.5 million.

Currently, FMCG is in the midst of expanding its Grasberg facilities at a cost of US$700 million. Daily milling rates are expected to increase to 115,000 from 66,000 tonnes of ore, which should boost annual production to 500,000 tonnes of copper and 1.5 million oz. gold. The expansion is expected to be completed by late June or early July.

In addition to the large transfer of shares, RTZ and FMCG will jointly explore and develop targets within Irian Jaya, where the potential for more discoveries is described as excellent.

Work areas will be contracted to two subsidiaries of FMCG, namely P.T. Freeport Indonesia (PTFI) and Eastern Mining (EMC). RTZ will acquire a 40% beneficial interest in the work area held by EMC, 40% in the area known as Block B and held by PTFI, and another 40% in certain expansion projects within Block A, which include current mining operations.

For those expansion projects in Block A in which it chooses to participate, RTZ has agreed to provide 100% of defined costs up to US$750 million. The company will then receive all the incremental cash flow attributable to the projects until it has recouped the amount it provided, plus interest. Subsequent cash flow and expenditures will be split 40%/60% between RTZ and PTFI, respectively.

Under the joint-venture arrangements, RTZ will fund the first US$100 million of exploration expenditures, to be approved by a joint exploration committee. Further costs will be likewise split 40% to RTZ and 60% to PTFI. Meanwhile, in Spain, RTZ has agreed to buy a 25% stake in the Huelva copper smelter owned by Rio Tinto Minera, a wholly owned subsidiary of FMCG. The price of the acquisition has yet to be determined and is not, at present, included in the overall transaction. The smelter is being expanded to 270,000 tonnes of copper per year. In addition, RTZ will also assume a 25% interest in the Spanish exploration program.

After spinning off its copper and gold holdings, Freeport-McMoRan will limit itself to its large phosphate and sulphur fertilizer business.