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Why Grasberg Issues Dominated Freeport’s 4Q16 Earnings Call

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Freeport’s 4Q16 earnings call

Freeport-McMoRan (FCX) owns the Grasberg copper and gold mine in Indonesia (EIDO). Rio Tinto (RIO) (TRQ) is Freeport’s partner in this mine. 

The issues facing the Grasberg mine dominated FCX’s management’s discussion and analysts’ questions during the company’s 4Q16 earnings call.

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Export permit expired

Earlier this year, Freeport’s Indonesia export permit expired. As a result, the company hasn’t been able to export copper concentrates (SCCO) since January 12, 2017. Now, the Indonesian government is revising its guidelines for the export of unprocessed ore.

The new guidelines would require Freeport to convert its contract of work (or COW) into a special operating license called an IUPK. Freeport would also need to construct a smelter in Indonesia within five years and divest 51% of its holdings to the Indonesian government or its citizens.

Several issues

There are several points of contention between Freeport and Indonesia over the new guidelines. Firstly, according to Freeport, it wants “an investment stability agreement providing the same rights and the same level of legal and fiscal certainty enumerated under its COW.”

Secondly, Freeport doesn’t seem keen to divest 51% of its stake in its Indonesian operations. There are issues over the valuation of these operations. Freeport has valued its Indonesian operations at ~$16 billion, but the Indonesian government has valued the Grasberg mine at only a fraction of what Freeport has proposed.

During the company’s 4Q16 earnings call, its CEO, Richard Adkerson, said, “An IPO [initial public offering] would be an attractive step in achieving a divestment plan because it results in a market-based valuation of the Business.”

For now, Freeport isn’t permitted to export concentrates from the Grasberg mine. We’ll get more updates on the company’s negotiations with the Indonesian government in the days to come.

Keep checking our Copper page for ongoing updates on this industry.

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