Freeport-McMoRan (NYSE: FCX) better start evaluating its options in Indonesia with an eye toward following industry peer Newmont Mining (NYSE: NEM) out of the country. Indonesia's new resources minister issued a warning to the miner that it better not start making demands on getting assurances its contract of work will be extended at its massive Grasberg copper and gold mine, because Jakarta was "evaluating everything."
It was just that sort of maneuvering by Indonesia that ultimately led Newmont to decide it was better off selling its lucrative project at Batu Hijau than having it appropriated by a government that continuously changed the rules mid-game.
Two years ago, the Indonesian government got resource nationalism, an affliction that hit numerous countries around the globe, particularly after the commodities boom sent metal and mineral prices soaring. Rio Tinto struggled to get its Oyu Tolgoi project in Mongolia going after the government wanted a larger stake in the endeavor. Barrick Gold has been forced to shelve its Pascua-Lama gold mine in Chile after battling with the government for years, and Kinross Gold abandoned its Fruta del Norte gold mine in Ecuador after the government wanted to confiscate 70% of its profits.
Indonesia implemented a ban on exporting unprocessed ore in a bid to boost domestic smelting operations, but the country didn't have the capacity to handle the output of the miners. Moreover, it was a ban that shouldn't have applied to either Freeport or Newmont since they had contracts that prohibited changes being made prior to their expiration in 2020. Jakarta, however, ignored that provision and shut the miners' operations down several times for noncompliance.
After much wrangling, both companies were allowed to start up again, but Newmont apparently felt the time was right to get out of Indonesia and recently announced the sale of Batu Hijau for the below market price of $1.3 billion. Freeport-McMoRan may want to start making similar contingency plans.
By law, it's not permitted to begin negotiations with Jakarta on an extension until 2019 but last year had actually received assurances it would be granted an extension. Until, that is, it was revealed Jakarta's president and vice president had extorted guarantees from Freeport to sell them a 20% stake in the venture, and the whole thing was negated by an ethics investigation.
Now, the country's resources head was quoted by Reuters as saying, "Freeport shouldn't push us. We are a sovereign state and we know what we are doing."
Due to all the disruptions, Freeport's output from Grasberg fell last year, and the company cut its guidance for copper production in 2016 to 1.3 billion pounds from 1.4 billion. It also dropped its estimate of gold production by 8% to 1.8 million ounces.
As with Newmont Mining, it's beginning to look like there are few good alternatives for Freeport-McMoRan to remain in Indonesia.
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Rich Duprey has no position in any stocks mentioned.
Source: Freeport-McMoRan Is in Trouble in Indonesia
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