Freeport-McMoRan (FCX) operates the Grasberg mine in Indonesia (EIDO) with Rio Tinto (RIO) (TRQ) as a minority partner. While the mine is a crown jewel in Freeport’s portfolio due to its vast size and attractive unit cash costs, its operations have been surrounded by uncertainties. Let’s discuss these uncertainties in perspective.
Freeport has been engaged in discussions with the Indonesian government to extend its mining permit beyond 2021. According to Reuters, “President Joko Widodo has instructed his administration to complete negotiations over the purchase of a majority stake in Freeport-McMoRan Inc’s local unit by the end of April.”
However, whether Freeport will have to divest its majority stake in the Grasberg operations or Rio Tinto will sell its entire stake is not clear. If Rio Tinto were to sell its entire stake, Freeport would have to divest only ~5% in Grasberg. Another uncertainty is over the valuation of the Grasberg operations. The Indonesian government and Freeport haven’t exactly been on the same page when it comes to valuing Grasberg operations.
Who would operate?
Thirdly, there is uncertainty over who would operate the Grasberg mine if Freeport divests its majority stake there. Freeport has indicated that would like to operate the mine after divestment.
Finally, there is still no formal agreement between Freeport and the Indonesian government on how production would be shared between the two parties in the immediate aftermath of Freeport’s stake sale. It’s worth noting that Freeport would mine a significant amount of gold (NEM) over the next few quarters from the Grasberg mine.
In the next and final article of this series, we’ll see how markets are valuing Freeport given its risk-return trade-off. Check out all the data we have added to our quote pages. Now you can get a valuation snapshot, earnings and revenue estimates, and historical data as well as dividend info. Take a look!