Grasberg Mine: Freeport-McMoRan’s Outlook Is Murky



Grasberg uncertainty

Freeport-McMoRan (FCX) is negotiating its long-term mining rights in Indonesia (EIDO). Rio Tinto (RIO) (TRQ), Freeport’s junior partner at the Grasberg mine in Indonesia, is discussing a separate stake sale with the Indonesian government.

Rio Tinto exiting the Grasberg mine should reduce Freeport-McMoRan’s divestment obligation. Ideally, the exit should have removed a key bone of contention between Freeport-McMoRan and the Indonesian government—the valuation of Freeport-McMoRan’s stake in the Grasberg mine. However, the Indonesian government came up with new environmental norms that Freeport-McMoRan contends would cause the Grasberg operations to not be viable.

Key operations

The Grasberg mine accounted for 32% of Freeport-McMoRan’s first-quarter copper shipments. The operations have a disproportionate share in Freeport-McMoRan’s consolidated profitability. Freeport-McMoRan expects the Grasberg mine’s unit cash costs after by-product credit to average -$0.55 per pound this year. In comparison, Freeport-McMoRan’s unit cash costs after by-product credit are expected to average $1.64 per pound in South America and $1.71 per pound in North America. The Grasberg mine’s long-term cost dynamics also look attractive.

However, Freeport-McMoRan doesn’t know how the situation will unfold in Indonesia. The upcoming presidential elections in Indonesia could complicate things even more. With little under a year left before the general elections, the government might not want to be seen as going soft on a big multinational giant.

The prospects of a global trade war and concerns about Indonesian operations could dent Freeport-McMoRan’s short-term outlook. However, watch out for labor negotiations at BHP Billiton’s (BHP) Escondida mine. A labor issue at the mine could change the copper market’s dynamics and push copper higher.

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