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Freeport-McMoRan’s Q2 Call: Indonesia and Debt Reduction

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Jul. 28 2016, Updated 3:06 p.m. ET

Freeport’s 2Q16 earnings call

In the previous parts of this series, we looked at Freeport-McMoRan’s (FCX) 2Q16 financial results. Now, we’ll look at the key takeaways from the company’s 2Q16 earnings conference call.

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Contract extension

Freeport 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 can’t be extended before 2019, which is two years before the current contract expires. The Indonesia government also wants Freeport to construct a smelter in the country and divest an additional stake in the Indonesia operations to the government or its citizens.

Capital expenditure

Freeport and Rio Tinto (RIO)(TRQ), Freeport’s partner in the Grasberg mine, are spending ~$1 billion per year to convert the mine to underground operations. It’s only natural that a company would want to be certain about the future before investing large chunks of money.

Freeport listed August 2016 and January 2017 as two key trigger times to take any decision on cutting its investment at the site. Note that Freeport’s export permit, which has to be renewed every six months, expires next month. The permit needs to be extended for Freeport to export copper from the Grasberg mine.

January 2017 is a critical timeline for Freeport. Exporting unprocessed ores from Indonesia will be banned at that point. If the law doesn’t change, it could negatively impact Freeport’s Indonesian operations. Note that Newmont Mining (NEM) sold its Batu Hijau mine in Indonesia (EIDO). NEM’s Indonesia operations were also negatively impacted by the changes in the country’s mining laws.

In the next part of this series, we’ll see what Freeport-McMoRan’s management had to say about its debt reduction plan during its 2Q16 earnings call.

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