A litmus test for 2017
In this part of the series, we’ll see why a resolution of the Indonesian issues could be a litmus test for Freeport’s management.
Freeport-McMoRan and the Indonesian government have economic interests in keeping the Grasberg mine (RIO) (TRQ) running. While Grasberg is a key revenue and profitability driver for Freeport, Indonesia also derives economic benefits from the mine in terms of employment generation, royalties, and other taxes.
In 2014, Freeport had to increase royalty rates and agree to other concessions in order to get its export permit. The company might have to offer more concessions to the Indonesian government to get its contract extended. Freeport’s management might have a tough time getting the export permit without giving away too much in terms of concessions.
Freeport could also face labor negotiations in Indonesia in the coming months. The company has been facing recurring labor issues at the Grasberg mine for the last few months. As a result, its production profile has been negatively impacted.
Labor discussions could be another difficult issue for Freeport’s management in 2017. It’s worth noting that BHP Billiton (BHP), which owns the Escondida mine, is facing a labor strike.
To be fair, Freeport’s management did a decent job cutting the company’s debt levels last year. Now, with copper markets showing signs of improvement and Freeport’s balance sheet in a much better position, Freeport might want to look for an early resolution of issues plaguing its Indonesian operations.
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