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Why Markets Are Concerned about Freeport-McMoRan

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Updated

Freeport

As we noted previously, Freeport-McMoRan’s (FCX) 2017 price action has lagged other copper miners including Southern Copper (SCCO) and Glencore (GLNCY). The stock has also underperformed copper prices (RIO). In this part, we’ll see why Freeport stock has underperformed copper this year.

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Grasberg issues

Markets are apprehensive about the future of Freeport’s Indonesia operations (EIDO). We should remember that Freeport is exporting copper concentrate from Indonesia under a short-term export permit. The current six-month temporary export permit expires in October. Freeport’s management sounded optimistic about its talks with the Indonesian government during the 2Q17 earnings call. The company said that it expects to reach an agreement with the Indonesian government by October.

Is there a solution?

According to Reuters, Ignasius Jonan, Indonesia’s Minister for Energy and Mineral Resources, sees a “conclusion this month.” However, Jonan sounded firm on the proposed 51% divestment of Freeport’s Indonesia operations. He said, “Well if they don’t, they can go. We don’t negotiate that.”

While Freeport might agree to the additional divestment, the two sides would need to figure out the valuation. A market-based approach, like a listing on the Indonesia stock exchange, could be aggregable for Freeport. The divestiture could also help strengthen Freeport’s balance sheet. The company could utilize the cash to repay some of its debt or pursue growth.

Despite the concerns about Freeport’s Indonesia operations, markets seem to be pricing a lot of negatives. An amicable resolution to Freeport’s Indonesia issues could lead to the company being rated again by financial markets.

In the next part, we’ll see how analysts rate Southern Copper.

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