In the previous parts of this series, we looked at some of the macro developments that could impact Freeport-McMoRan (FCX) in October. In this article, we’ll look at some company-specific issues that could be Freeport’s key price drivers this month.
Freeport and Indonesia have been involved in long, and often bitter, discussions over the last few years. In August, Freeport announced a framework with the Indonesian government. Under the terms of the framework, Freeport would convert its existing CoW (contract of work) to a special license called IUPK. This license would provide Freeport operating rights through 2041. Plus, Freeport agreed to construct a smelter in Indonesia within five years. The company also agreed to divest a 51% stake to Indonesia interests. Notably, these were the two key demands from the Indonesian government (EIDO).
However, goodwill between Freeport and Indonesia hasn’t lasted long, it seems. According to Reuters, citing a letter written by Richard Adkerson, Freeport’s CEO, the two sides are still not on the same page when it comes to the divestment. In Freeport-McMoRan Investors: Hold the Celebration, we noted that the framework announced by Freeport lacks crucial details—including divestment pricing and new fiscal terms.
Freeport’s temporary export license allows it to export copper concentrates from Indonesia, and it’s also expiring this month. Notably, earlier this year, Freeport wasn’t able to export copper concentrates from Indonesia for more than three months after its export license expired.
While the export ban was a drag on Freeport’s earnings, it helped buoy copper prices (RIO)(GLNCY). The Grasberg mine is the world’s second-largest copper mine, as you can see in the graph above. Supply disruptions at Grasberg and BHP Billiton’s (BHP) Escondida negatively impacted copper supply in 1Q17 and lifted copper prices.
However, according to Reuters, citing Indonesian mining officials, Freeport would be allowed “to export copper concentrate even if negotiations over the company’s permit to operate the giant Grasberg mine are not resolved this month.” Having said that, we feel it would be prudent to wait for an official announcement from Freeport.
You can also visit our Copper page for ongoing updates on this industry.