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Freeport-McMoRan and Indonesia: The Tussle Gets Muddier

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May. 15 2018, Updated 5:00 p.m. ET

Indonesia

Freeport-McMoRan (FCX) operates the giant Grasberg mine in Indonesia (EIDO). Rio Tinto (RIO) is Freeport’s partner at the mine. Notably, Grasberg is the second largest copper mine globally after BHP Billiton (BHP) owned Escondida.

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Strategic asset

Grasberg is a key strategic asset for Freeport given its vast copper reserves. The mine’s low-cost operations make it even more attractive for the company. Freeport expects the Grasberg mine’s unit cash costs after by-product credit to average -$0.55 per pound this year. To put this in perspective, 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 mine’s unit cash costs could be an aberration this year due to higher gold production, its long-term cost dynamics also look attractive. Freeport 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.

Having said that, while the mine is a key part of Freeport’s asset portfolio, the company has been involved in a tussle with the Indonesian government. Despite agreeing to two of the key demands made by the Indonesian government, Freeport’s problems are far from over in the country.

New regulations

During the 1Q18 earnings call, Freeport pointed to Indonesia’s new environmental regulations, that according to the company, would make it impossible to operate the mine. Now, according to Reuters, citing a decree from Indonesia’s ministry of energy and mineral resources, the country plans to penalize companies not making adequate progress building a smelter in Indonesia.

The new regulations muddy the ongoing tussle between Freeport and Indonesia. Given the various possibilities for Freeport’s Indonesia operations, it is complicated to value the stock.

In the next article, we’ll see how analysts rate Southern Copper (SCCO) after its 1Q18 earnings release.

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