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Freeport’s Major Risks in the Short Term

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Major risks

In the previous part, we discussed how Freeport-McMoran’s (FCX) balance sheet has improved since 2015. A strong balance sheet helped address one of key investors’ concerns regarding Freeport’s higher leverage ratio. Having said that, there are a few other risks that Freeport faces in the short term.

Resolving Indonesia’s issues

In the next few months, markets will closely follow Freeport’s discussions with the Indonesia government (EIDO). Freeport is discussing the terms to extend its mining permit in Indonesia beyond 2021. The Grasberg mine, where Rio Tinto (RIO) (TRQ) is Freeport’s partner, is among the top copper mines globally (GLEN-L). The operations contribute significantly to Freeport’s earnings given its low-cost operations.

In August, Freeport announced a framework with Indonesia to resolve the issue. However, the framework was void of crucial details, especially regarding the valuation part. The ongoing impasse in Indonesia is the key risk for Freeport in the short term.

Copper prices

While there’s a broad consensus in the markets about copper’s positive long-term outlook, especially given the tight supply and expected uptick in demand, the sharp up move in the past year concerns some analysts. Among other factors, better-than-expected Chinese demand was a key driver of copper’s upwards price action. Some of the recent Chinese economic data, including fixed asset investment and industrial growth, were lower than expected.

In October, China’s copper imports had a steep fall compared to September. If China’s economic activity cools off more in the coming months, copper bulls might want to reconsider their bets. Any fall in copper prices could have a negative impact on copper miners’ earnings.

Visit Market Realist’s Copper page for ongoing updates on the industry.

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