The Market Is Overreacting to the Export Ban on This Copper Miner

Freeport-McMoRan and Newmont Mining make great long-term investments based on weakness in the stocks caused by overblown fears of export duty taxes in Indonesia.

Jan 28, 2014 at 11:54AM

Last week, the Indonesian Ministry of Finance announced a punitive tax on the export of ore concentrate mined within its country. Considering Freeport-McMoRan (NYSE:FCX) operates a massive mining facility in the country that produces substantial copper and gold ore, the impact is very concerning to the bottom line for shareholders. The decree also impacts mining operations of Newmont Mining (NYSE:NEM) so Freeport-McMoRan will have some extra help in lobbying for a reprisal of the proposed new law.

For numerous reasons highlighted in the recent earnings conference call, investors shouldn't be so quick to dump the stock. Jefferies recently named Freeport-McMoRan a top franchise pick, and this the type of scenario where investors can pick up long-term winners at bargain prices.

Already 40% compliant
The purpose of the new law is to require more valued added work be completed in Indonesia, instead of shipping the work to other parts of Asia. In the case of Freeport-McMoRan, it already processes 40% of the copper concentrates at a Mitsubishi joint venture smelter in the country. The ruling would only impact up to 60% of the copper produced in Indonesia.

The joint venture smelter built back in the 1990s only costs $750 million to build and would cost up to three times the amount at this time. Not to mention, the fees received for processing the copper ore haven't changed much over the years. This unattractive cost-benefit ratio provides Freeport-McMoRan with some leverage in negotiating with the government.

Focused on mining in the Americas
While the Grasberg mine is one of the largest in the world, Freeport-McMoRan produces more copper in both North America and South America than it does in Indonesia. In fact, the 2013 sales in North America equaled 1,422 million pounds and South America sold 1,325 million pounds. Combined, the two regions produced triple the copper mined in Indonesia at 888 million pounds.

The biggest wildcard is that Indonesia is the only major source of gold production, having produced 1.1 million ounces in 2013. Of more concern is the 1.6 million ounces expected for production in 2014.

The Tenke mine in Africa provides another source of copper that helps reduce any impact from Indonesia. In addition, Freeport-McMoRan has three brownfield projects outside of Indonesia that should add roughly 1 billion pounds per annum in increased production by 2016.

Newmont Mining is less affected with roughly 7% of the company's revenue coming from the Batu Hijau mine in Indonesia. The company doesn't plan to export copper concentrate until later this quarter after having already completed the a scheduled shipment in early January.

History with government
Before investors get too scared by the new decree that would add a 25% export tax in 2014 that expands to 60% in 2016, one needs to remember that Freeport-McMoRan has a long history of working with the government in that country. Similar to the U.S., members of parliament and high-ranking government officials can make statements in order to win political favor. These officials may have no intention in following through with the suggested punitive tax.

Freeport-McMoRan already has a working contract that specifically stipulates no export tax. With the company estimating that it already pays over $1 billion annually in the various taxes including a 30% income tax, it appears unlikely that the government would continue to push a tax that would shut down operations at the massive Grasberg mine.

Since operations at the Batu Hijau mine began in 2000, Newmont estimates it has spent more than $3 billion in taxes and royalties.

Bottom line
Improving copper demand in the U.S. combined with a recovering Europe could provide a strong backdrop for copper demand, especially if the Chinese economy holds on to current demand. The large drop in shares of Freeport-McMoRan appears irrational considering the likelihood that a reasonable compromise will be reached in Indonesia. The lack of available smelter capacity in the country makes it impossible to meet the government targets or continue production at the proposed export duty. Both parties have every reason to reach a compromise that limits the impact to Freeport-McMoRan and Newmont Mining.

Put your money where the growth is
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.


Mark Holder and Stone Fox Capital clients own shares in Freeport-McMoRan Copper & Gold. The Motley Fool owns shares of 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers