Indonesian state miner Inalum will pay US$350 million to Freeport McMoRan to increase its stake in Grasberg, pictured, to 51 per cent. Courtesy of Freeport McMoRan

Rio Tinto plans to sell its interest in the Grasberg gold and copper mine in Indonesia to Inalum, Indonesia’s state mining company, in a tentative US$3.5-billion deal announced Wednesday.

In addition, Inalum will pay US$350 million to Freeport McMoRan. The two deals will increase Inalum’s stake in Grasberg to 51 per cent, up from 9.3 per cent, leaving Freeport with 49 per cent ownership.

Grasberg, the world’s largest gold mine and a major copper mine as well, produced more than 1 million ounces of gold and 468,000 tonnes of copper in 2016.

Indonesian legislation introduced last year requires all mines in the country to be majority-owned by the government, as an attempt to retain more of the profits from domestic mining operations. The legislation forced a temporary 15-day shutdown at Grasberg before negotiations with the government began. Talks have been underway since last August.

Under an agreement from 1996, Rio Tinto had a right to 40 per cent of Grasberg’s annual copper production above 450,000 tonnes and 40 per cent of all production after 2022. Rio Tinto’s share of the copper output was 5,700 tonnes in 2017.

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“This agreement marks a significant milestone toward establishing a new long-term partnership with [Indonesia] to provide long-term stability for PT Freeport Indonesia's operations,” said Freeport CEO Richard Adkerson. “Through this transaction, the government will achieve its ownership objectives in a manner that preserves the long-term value for FCX shareholders and the people of Indonesia through 2041.”  Adkerson also thanked Rio Tinto for its 20 year-long partnership.

There are still many details to be negotiated, such as how much Inalum will invest in the mine to fund future development and expansion.

Rio Tinto’s rights sale will not be finalized until it has been approved by government regulators and Freeport shareholders. The parties have said they hope to finalize the agreement by the end of 2018.