Rio Tinto looking at exit from giant Indonesia mine

By Fergus Jensen

JAKARTA (Reuters) - Rio Tinto is considering walking away from its interest in the huge Grasberg copper mine operated by Freeport McMoRan Inc in Indonesia, amid uncertainties over the future operation of the mine.

The world's No.2 copper mine is facing a stoppage in its copper concentrate exports and permit issues with the Indonesian government, which Freeport has warned could force it to slash production and its local workforce.

A strike at the country's biggest copper smelter, which is Freeport's sole domestic buyer of copper concentrate, has added to pressure on the partnership.

"There is no doubt that Grasberg is a world-class resource. But the key question, especially in the light of what happened three weeks ago, is: is Grasberg a world-class business for us?" Rio CEO Jean-Sebastian Jacques said, according to a transcript of an analyst briefing late on Wednesday.

"Everyone was taken by surprise," he said, referring to Indonesia's stoppage of copper exports from Grasberg on Jan. 12. Freeport CEO Richard Adkerson was "on his way back to Jakarta" for talks with the government, Jacques added.

Rio, which reported earnings on Wednesday, will decide in "coming weeks and months" whether to sell or walk away from its option to take an effective 40 percent stake in Grasberg in 2021, he said.

"If we want to have a meaningful offtake and stream beyond 2021, we would need to invest in a big way in the coming years," Jacques said.

"We're going to watch very carefully what's happening before we commit additional material money into this project."

A spokesman for Rio Tinto in Australia could not be reached for comment on Thursday.

POLITICS RULE

Under a joint venture deal it inked with Freeport in 1995, Rio gets a 40 per cent share of Grasberg's production above specific levels until 2021, then 40 per cent of all production after 2021.

Rio said last month it was expecting to benefit from a share of production in 2017, but the miner has not had any production from Grasberg since 2014, when its share was just 7,700 tonnes of copper. Freeport's share of copper production from the joint venture was nearly 300,000 tonnes that year. Freeport Indonesia spokesman Riza Pratama told reporters that amid the export stoppage, Grasberg's copper concentrate stockpile warehouse was now "almost full", indicating that a production cut would be imminent without a breakthrough.

He declined to comment on Freeport's partnership with Rio.

Analysts have noted that muddled policies are complicating matters for miners in Indonesia.

"What this signals is that politics rule in Indonesia. At the moment it is very difficult for any investor to navigate through the mining sector in Indonesia," Achmad Sukarsono, Asia political analyst at Eurasia Group, said.

However, he saw a resolution.

"I think it will end with an agreement. The ball is now in Freeport's court - to what extent they want to concede."

(Reporting by Fergus Jensen in Jakarta; Additional reporting by Nicole Mordant in Vancouver, Jim Regan in Sydney and Sonali Paul in Melbourne; Editing by Joseph Radford and Keith Weir)