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Freeport-McMoRan’s 2017 Outlook: Grasberg Remains the Wild Card

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Freeport’s 2017 outlook

In the previous parts of this series, we’ve looked at Freeport-McMoRan’s (FCX) bearish and bullish drivers. In this article, we’ll look at Freeport’s 2017 outlook, keeping in mind both the bearish and bullish arguments. Let’s first look at copper markets.

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Copper markets

Though recent economic data raised concerns over Chinese copper demand, we should wait for some more data points—especially Chinese copper imports data. Also, a slight uptick in inventory shouldn’t be a big concern for investors. In our view, bears would have a tough task pushing copper below the psychologically crucial $5,500 per metric level mark. However, rising geopolitical tensions could lead to the next leg of copper’s downturn, given copper’s sensitivity to macro events.

Grasberg

Grasberg could be Freeport’s wild card in 2017. Freeport is currently negotiating its long-term contract with the Indonesian government after it was granted a short-term export permit. The key points of contention between Freeport and Indonesia basically involve Freeport’s post-2021 mining rights, construction of a smelter in Indonesia (EIDO), and divestment of an additional stake in Indonesia operations. Also, the Indonesian government could push for higher royalties in exchange for extending Freeport’s permit beyond 2021.

Freeport’s dilemma

As for Freeport, the company is caught in a dilemma over its investments at the Grasberg mine (RIO)(TRQ). The company can’t fully suspend its investments into converting the mine into underground operations. Richard Adkerson, Freeport’s CEO, said during the company’s 1Q17 call that “a highly skilled group of workers that are involved in this block-cave development. And if we demobilize that group, then we would be faced with a period of time to remobilize them and get them back to work.” He also added, that “to bring them back together would be a period of time measured in months rather than weeks.”

Continue reading to the next part of this series to see how analysts are rating Teck Resources (TECK) after its 1Q17 earnings miss.

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