Here Are the Winners of Indonesia's Ore Ban

The export ban is not as bad as you might think.

Jan 13, 2014 at 4:22PM

Many analysts really didn't think Indonesia would go through with its export ban of unprocessed ore, but with only a few 11th-hour changes made, yesterday marked the sealing off of one of the most important markets for industrial metal minerals. Yet it's in those changes we can still find a few winners investors will want to take note of.


Grasberg mine, Indonesia. Source: Freeport-McMoRan Copper & Gold.

As I pointed out last month, the Indonesian bid to boost domestic resource processing would have serious repercussions on the country's economy, which, according to the World Bank, relies on minerals for about 5% of its exports, or some $10.4 billion worth in 2012. Goldman Sachs says Indonesia accounts for 3% of the world's copper supply, as much as 20% of its nickel, and around 10% of bauxite used to produce aluminum -- and it's the world's largest exporter of nickel ore, thermal coal, and refined tin.

Yet despite the ban being first proposed in 2009, there's still insufficient infrastructure in place to comply with the law, meaning certain mining operations will simply cease to operate. The Indonesian Chamber of Commerce warns that as many as 800,000 jobs are threatened by the export ban and more than 100 mining companies have been forced to reduce or shut down operations.

Copper miner Freeport-McMoRan (NYSE:FCX) expects to have two smelters built in-country, but they won't go online until 2015, while Newmont Mining's (NYSE:NEM) Batu Hijau copper mine only processes about 20% or so of its copper concentrate at Indonesia's only copper smelter, PT Smelting in East Java.

Batu Hijau Mining Epc

Batu Hijau mine, Indonesia. Source: Fluor.

The two of them account for 97% of Indonesia's copper exports, and they were able to gain a reprieve from the new rules as an exemption was adopted that will allow exports of copper, iron ore, lead, and zinc concentrates to continue until 2017. While they ought to have their processing facilities working by then, bauxite, nickel, tin, gold, and silver won no such relief.

Still, Vale (NYSE: VALE) says it doesn't anticipate the rules impacting it negatively at all. As the world's second-largest nickel producer, it operates a smelter in Soroako and plans to increase capacity already under way, so it should profit if nickel prices blow up.

Metal prices, though, shouldn't be affected right away because of alternative sources for supply and inventories that have been built up in anticipation of the ban becoming reality. Bauxite, for example, is largely bound for China, and exports to the country jumped 80% in 2013, while alumina was up some 20% from the prior year. With the ability to source bauxite from Australia, prices shouldn't move all that much. Similarly, China began sourcing tin from Myanmar this year, and London Metal Exchange warehouses saw tin stockpiles increase ten-fold, while the steel-making ingredient nickel pig iron has about a six-month supply. Still, nickel miners like Alumina (NASDAQOTH:AWCMY) are seeing their shares trade higher on global bourses. 

So, where miners like Freeport could be hurt by the ban on unrefined gold exports because 90% of its reserves are in Indonesia, the precious metal only accounts for around 10% of annual sales, meaning the impact will be minimal. As we've seen, the pass given to Newmont Mining and the infrastructure Vale has in place will allow them to come out of this relatively unscathed as well. On the other hand, state-owned tin producer PT Timah, which is the largest in the country, will like bear the brunt of the action.

Although there is the potential for disruption, the long-telegraphed decision allowed markets to prepare for the inevitable, while certain producers finagled an end-run around the law. Look for them to come out on top of this government-created shortage.

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Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Companhia Vale Ads, Fluor, and Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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