Freeport, Indonesia work out Grasberg deal

By Frik Els / January 31, 2017 / www.mining.com / Article Link

Shares in Freeport McMoRan Inc (NYSE:FCX), the world's largest listed copper miner, gained on Tuesday after reports that the US company's Indonesia operations will be temporarily exempt from new mining rules introduced by the Asian nation.

Freeport shares jumped as much as 2.4% in early trade in New York, bringing gains so far in 2017 to nearly 25%. The pundits favourite regularly makes the most active list on the NYSE and the Phoenix-based miner is worth $23.7 billion on the NYSE and boasts a 258% increase in market value over the past year on an improving copper price.

Freeport has not been able to ship copper concentrate from its Grasberg mine in Indonesia's remote Papua province due to a ban on concentrate exports that kicked in on January 12 as part of Indonesia's comprehensive change to mining regulations and ownership rules.

Reuters quotes coal and minerals director general Bambang Gatot as saying "while their special mining license is not definitive, we cannot apply (these rules) fully," when asked about the requirements of Freeport's special mining license. Yesterday Indonesia indicated it may issue a temporary export permit within days and valid for up to six months to the company's local unit.

Freeport's Grasberg mining complex is responsible for more than a quarter of the Phoenix, Arizona-based company's total output and before the current troubles were set contribute an even greater proportion in 2017 as copper grades improve and gold production is boosted.

Other changes in Indonesia's new regulations include the requirement for all foreign investors to sell their interests down to 49% over a 10 year schedule

On Friday, ratings agency Moody's which has a positive credit rating outlook on Freeport said recent developments are credit negative for the company, but thanks to Freeport's cost reduction and asset sales undertaken last year, the company should be able to weather the latest storm surrounding the iconic mine:

Freeport must convert its so-called Contract of Work (COW) to a new IUPK (special operating license). Conversion to an IUPK would allow for the export of copper concentrate for 5 years through January 2022. FCX's current COW expires in 2021 and as per description of the contract terms contains 2 ten year extension rights subject to government approval not being unreasonably withheld or delayed.

Although FCX has advised the Indonesian Government that it is willing to convert to an IUPK, the company seeks an investment stability agreement that would afford rights and protections similar to what is in the existing COW. From the date of the new regulations FCX (and other similar copper producers in the country), has not exported copper concentrate from PT Freeport Indonesia (PT-FI).

Other changes in Indonesia's new regulations include the requirement for all foreign investors to sell their interests down to 49% over a 10 year schedule. Freeport and Indonesia have been locked in discussion over additional stake sales for year, but the two parties have made little progress on valuation of the giant mine which has been mined since the early 1970s.

Moody's warned that Freeport is "not in the same position to absorb lost revenues on no exports over the same time frame it could accommodate when the ore export bans came into effect in 2014 (FCXdid not export concentrate January 2014 through July 2014)":

Nonetheless, the North and South American mining operations are stronger contributors than in the past with the expansion at Cerro Verde also contributing to its improved cost position. We estimate that without production from Indonesia, FCX's debt/EBITDA would be 5x (using $2.25/lb copper sensitivity), a level that is acceptable.[...]Further, the current liquidity position, including cash of $4.2 billion at December 31, 2016 comfortably covers the $1.2 billion in 2017 debt maturities.

For each month of delay in obtaining approval to export, the Indonesian subsidiary's share of production is projected to be reduced by approximately 70m pounds of copper and 100,000 ounces of gold

Grasberg boasts some of the world's largest copper and gold reserves value at over $200 billion at today's prices and Freeport said it may have to suspend planned spending of around $1 billion per year through 2021 to transition the mine to underground operations unless exports can resume.

Freeport said consolidated sales volumes from Indonesia mining operations assuming normal operations, including the resumption of concentrate exports in February 2017 and the renewal of its smelters export license are expected to total 1.3 billion pounds of copper and 2.2 million ounces of gold for the year 2017.

But for each month of delay in obtaining approval to export, the Indonesian subsidiary's share of production is projected to be reduced by approximately 70 million pounds of copper and 100,000 ounces of gold according to Freeport.

Freeport's overall consolidated sales for 2017 are expected to be around 4.1 billion pounds of copper, 2.2 million ounces of gold and 92 million pounds of molybdenum, including 1.0 billion pounds of copper, 460,000 ounces of gold and 23 million pounds of molybdenum for first-quarter 2017.

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