Inside Freeport’s Indonesia Problem



Freeport’s 2017 guidance

Freeport-McMoRan (FCX) expects to ship 4.1 billion pounds of copper (GLNCY) (BHP), 2.2 million ounces of gold, and 92 million pounds of molybdenum in 2017. When running at the projected capacity, Freeport’s Indonesian operation was expected to contribute more than 32% to the company’s expected consolidated 2017 copper shipments.

Freeport had to reduce mining rates in its Indonesia operations as the Gresik smelter can process only about 40% of copper concentrates from Grasberg, assuming normal mining rates. However, as noted in Part 2, Freeport could now start mining at normal rates from its Grasberg mine. Below, we’ll discuss what would this mean for the company.

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Impact on unit costs

Freeport expects its unit cash costs after by-product credits to average $1.06 per pound in 2017. Its Indonesian operations are expected to be the key driver of the reduction in its 2017 unit cash costs. The company expects its unit cash costs after by-product credits to average -$0.03 per pound in its Indonesian operations (EIDO).

Since Freeport is expected to mine higher ore grades along with more gold from its Grasberg mine (RIO) this year, its after-by-product copper cash costs are expected to be negative in Indonesia. This would likely have a positive impact on Freeport’s 2017 earnings.

The dual impact of fewer shipments and higher unit cash costs could have magnified the negative impact from Indonesia standoff. The resumption of copper concentrate exports from Indonesia will likely be positive for Freeport’s 2017 earnings.

Now let’s discuss what the export ban means for Indonesia.


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