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Freeport-McMoRan: Analyzing the Grasberg Concerns

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May. 4 2018, Updated 10:15 a.m. ET

Grasberg concerns

Freeport-McMoRan (FCX) operates the Grasberg mine in Indonesia. The Grasberg mine is the world’s second-largest mine after BHP Billiton’s (BHP) Escondida mine. Rio Tinto (RIO) (TRQ) is Freeport’s partner at the Grasberg mine. Despite Freeport-McMoRan agreeing to two of the key demands made by the Indonesian government, its problems are far from over.

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New concerns

During the 1Q18 earnings call, Freeport-McMoRan pointed to Indonesia’s new environmental regulations, which have complicated the company’s struggle with the Indonesian government (EIDO). Upcoming presidential elections in Indonesia could complicate things even more for Freeport-McMoRan. While lower-than-expected earnings spooked investors after Freeport-McMoRan’s 1Q18 earnings call, the Indonesian issues were the real trigger for the massive sell-off. Are the Indonesian issues being overblown by the markets?

Key operations

The Grasberg mine accounted for 32% of Freeport-McMoRan’s 1Q18 copper shipments. The operations have a disproportionate share in Freeport-McMoRan’s consolidated profitability. The company expects the Grasberg mine’s unit cash costs after by-product credit to average -$0.55 per pound in 2018. The company’s unit cash costs after by-product credit are expected to average $1.71 per pound in North America and $1.64 per pound in South America.

While the Grasberg mine’s 2018 unit cash costs could be a deviation due to higher gold production, the mine’s long-term economics also look attractive. Freeport-McMoRan expects Grasberg’s unit cash costs after by-product credit to be ~$0.50 per pound in 2022—eye-popping cost dynamics for any copper miner.

Freeport-McMoRan is spending a significant amount of money every year to develop Grasberg’s underground operations. For quite some time, Freeport-McMoRan’s future in Indonesia has been hanging in limbo. While the Grasberg issues are a risk for Freeport-McMoRan investors, markets seemed to have discounted some of the fears in the recent sell-off.

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