Freeport-McMoRan’s 4Q15 Call: Indonesia Issue Remains Unanswered



Indonesia issue

Freeport-McMoRan (FCX) must sign an amended contract of works (or COW) with the Indonesian government. Freeport needs assurance from the government so it can proceed with the investment to convert the Grasberg mine into underground operations. However, according to Indonesian law, the contract cannot be extended before 2019, which is two years before the current contract expires.

One or the other issue seems to be hitting Freeport-McMoRan’s Indonesia operations, as you can see in the chart above. You can learn more about these issues in our article Key Issues facing Freeport-McMoRan’s Indonesia Operations. Newmont Mining’s (NEM) Indonesia operations were also impacted by the changes in the country’s mining laws.

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Smelter construction

In this recent setback, Freeport-McMoRan’s export permit in Indonesia was suspended, which the company acknowledged in its 4Q15 earnings call. Also, the Indonesia government wants Freeport to deposit $530 million into an escrow account for the construction of the smelter in the country.

In the 4Q15 earnings conference call, Freeport didn’t provide much information on how the talks are progressing with the Indonesian government. However, Freeport’s CEO, Richard Adkerson, stated that the company has “full confidence that the government will come up with a favorable decision and issue the export license to ensure the continuity of our mining operations.”

Stake sale?

According to Freeport-McMoRan’s agreement with Indonesia’s government, it needs to divest a 20.6% stake in the Indonesian operations to the government or its citizens. In its 4Q15 earnings conference call, Freeport-McMoRan noted it has submitted the valuation of the Indonesia operations to the government. The company has valued the Indonesia operations at ~$16 billion. That could be quite high, considering the recent slump in the commodity space.

The stake sale in its Indonesia operations could be an option that Freeport could consider to raise cash. There are several other alternatives that Freeport might look at to shore up its balance sheet in 2016. We’ll explore that in the coming parts of this series.

You can also consider the SPDR S&P Global Natural Resources ETF (GNR) to gain diversified exposure to international natural resources companies. Together, Rio Tinto (RIO) and BHP Billiton (BHP) form 6.1% of GNR’s portfolio.


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