Indonesian Tax Issue Still Weighs on Freeport-McMoRan

It's been already almost four months since Freeport-McMoRan (NYSE: FCX  ) stopped exporting copper concentrate from Indonesia due to a restrictive 25% export tax. This issue has hurt the company's first quarter results, which were negatively affected by lower sales from the country. Freeport-McMoRan's first quarter copper sales were 9% below last year's first quarter. The company was optimistic during the recent earnings call and said that it would be able to resume exports from Indonesia as soon as in May. However, there are still several obstacles to deal with.

Export ban pressures sales
Freeport-McMoRan stated that if exports didn't restart in May, sales would drop by 50 million pounds of copper and 80,000 ounces of gold. The impact on the company's total gold production will be bigger than on the company's total copper production given the big share of Indonesian gold in Freeport's gold production profile.

Newmont Mining (NYSE: NEM  ) also suffered from the export tax in the first quarter. As a result, Newmont's copper all-in sustaining costs were 9% higher over the prior year's quarter. The company also stated that it was halfway through obtaining the export permit and that it expected to receive it over the coming weeks.

However, the issue is somewhat less important for Newmont Mining than for Freeport-McMoRan. Freeport-McMoRan remains primarily a copper producer despite the purchase of oil assets in 2013, and Indonesian assets play a key role in its portfolio.

Presidential elections add to uncertainty
Freeport-McMoRan is unlikely to make significant investments in its Indonesian assets until the company reaches some agreement with the government. Yet, the company will soon have to transition its Grasberg mine to underground operations, which need significant capital investment. Freeport-McMoRan's investment decisions also affect Rio Tinto (NYSE: RIO  ) , which owns a 40% share of the Grasberg mine production above specific levels until 2021.

Indonesia has a presidential election in early July, and this could be another hurdle. The government officials are surely more focused on the coming elections rather than on the copper concentrate tax issue. In addition, there's always risk that if a new government is elected, it could enforce new rules and set to zero the results of negotiations with the previous government.

Whoever is elected, one can be sure that the government will insist on previous plans to force foreign companies to build smelters in the country. Freeport-McMoRan estimates the cost of building a smelter at $2 billion-$2.5 billion. Just like Newmont Mining, the company will probably search for a partner in this endeavor. Freeport seeks financial incentives to build a smelter, because it thinks that the economics of building a new smelter in Indonesia are unattractive. The smelter issue is another obstacle to Freeport's plan of reducing its debt to $12 billion from the current $19.8 billion.

Bottom line
Even if Freeport-McMoRan restarts copper concentrate exports from Indonesia in May, this story is far from over. The company will have to find a way of building a smelter, which is economically dubious. The presidential elections that will take place in July add to uncertainty. All in all, the news from Indonesia will continue to move Freeport-McMoRan's shares in the coming months.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2935486, ~/Articles/ArticleHandler.aspx, 10/25/2014 2:21:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement