Freeport-McMoRan Copper & Gold Inc: Wrapping up the Indonesia Issue

The recent weakness in Freeport-McMoRan is a great investment opportunity considering the company's global diversification and the reduced risk of any long-term impact in Indonesia.

Mar 10, 2014 at 9:14AM

By all accounts, it appears that Freeport-McMoRan Copper & Gold (NYSE:FCX) is wrapping up any lingering issues with the Indonesian government. The stock fell more than $7 back in January on a decree by the government to impose a heavy export duty on unprocessed materials, including copper and gold.

Freeport-McMoRan is a leading copper producer with global operations, though the largest mine is located in the Grasberg mining complex in Indonesia. Similar to Newmont Mining (NYSE:NEM), the stock was affected by the government decree, though expectations were for a peaceful resolution. The stock remains down nearly $5, providing an opportunity for long-term investors willing to accept some of the global risk but also the rewards of a diversified portfolio of commodities.

Indonesian government
As a refresher, the Indonesian government had originally implemented an export ban on unprocessed materials from 2017. Both Freeport-McMoRan and Newmont utilize smelters to process some of the mined copper and gold, previously leaving partial questions regarding the future of those unprocessed materials.

The government made the shocking move to place progressive export taxes on any unprocessed materials due to a perceived lack of progress toward the original target. The tax starts at 25% and eventually reaches 60% by year-end 2016. The previous export ban of concentrates kicks in during 2017.

Considering neither Freeport-McMoRan nor Newmont view the current export tax as legitimate, both companies curtailed production in the country. In light of the impact to government taxes and employees of the miner, it isn't a surprise to see that Freeport-McMoRan is working toward either building a smelter with a partner or utilizing some proposed new smelters. In response, the government has suggested the removal of the tax is pending. Either way, it is another sign of how investors should not overreact to any political moves in one particular region.

Global diversification
The political moves in Indonesia highlight how attractive Freeport-McMoRan shares are over most global miners. The company has operations spanning North America, South America, Indonesia, and Africa. While a few of the locations, including the recent issues in Indonesia, could present future political risk, the company has diversification between copper, gold, and hydrocarbons to weather most storms.

Not only does the company obtain 20% of revenue from oil and natural gas, but also current copper production is spread out; more tons are mined in North America and South America at several mines that outproduce the massive Indonesian mine. Even better, the company has several projects to increase production in these locations that have more stable political systems.

Likewise, Newmont obtains more than 70% of revenue from stable locations, including the United States, Australia, and New Zealand. Having a substantial amount of assets within secure countries allows for investors to easily accept the risk from unstable countries such as Indonesia, where it only obtains 7% of revenue.

The other leading public copper miner, Southern Copper (NYSE:SCCO), relies almost entirely on mines in Mexico. Even worse, the company is majority owned by Grupo Mexico, enlarging the potential political risk from a country that isn't always stable.

Bottom line
The recent news coming out of Indonesia again suggests that the management team at Freeport-McMoRan has successfully navigated another political issue. While always a threat to investors, Freeport-McMoRan's and even Newmont's global diversification provide more safety than the average global mining company.

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Mark Holder has no position in any stocks mentioned. 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.

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