Freeport-McMoRan Copper & Gold: 2 Reasons Not to Fret Over Indonesia

With news breaking that the CEO of Freeport-McMoRan Copper & Gold (NYSE: FCX  ) is heading to Indonesia next week to discuss the ongoing tax issue, investors have a couple of reasons not to fret over the outcome. The issue is entering the sixth month of dispute and has forced the company to cut production in the country by 60%. Even Newmont Mining (NYSE: NEM  ) is reaching a copper stockpile capacity that would force it to cut production as well.

According to Reuters, the country claims that the escalating tax on miners has led to plans for 66 smelter projects to improve the economy and help the country move up the value chain versus only exporting minerals. It's possible the meetings could involve finalization of the talks between Freeport-McMoRan and Newmont with Indonesia's state-owned PT Aneka Tambang to build a $2.2 billion copper smelter; this could lead to a quick removal of the export ban and punitive tax. If not, investors don't need to fret over the lingering issue.

Copper inventories plunging
Possibly the best way to understand the situation faced by Newmont Mining and Freeport-McMoRan is to consider that the copper market isn't fungible. Any cutbacks in supply from one country or mine don't lead to increases in production at other mines, at least in the short term.

While a lot of debate exists regarding the copper inventories on the Shanghai Exchange and in China in general, the London Metal Exchange (LME) warehouse stock levels are at multi-year lows. The latest report shows only 163,500 tons after peaking at close to 700,000 tons back in 2013.

Source: Kitco

Its difficult to place the plunging inventories squarely on the back of the reduced exports from the mines in Indonesia, but for every day this tax issue goes on there is another 2,000 tons held from export to the world markets. Freeport-McMoRan estimates that its withheld production is roughly 50,000 tons per month. Newmont continues to mine copper, but it is stockpiling nearly half the production. The Indonesian government estimates that 2014 production will hit 850,000 tons, or roughly half of the target.

Copper price remains stable
Ultimately, price is what matters to the bottom line equation for these companies. Both Freeport-McMoRan and Newmont Mining are hampered by reduced sales out of Indonesia, but higher prices for the red commodity improve the value of sales from other mines. It also improves the value of the copper still in the ground.

At the start of the year, copper plunged to lows below $3/lb that hadn't been seen since 2010. Fears existed that weakening economic data in China would send the commodity even lower, but the plunge in inventories helped stabilize the price. With the current price per pound around $3.15, the increased price hasn't fundamentally bounced a lot but the stabilization is encouraging for forward estimates.

 

Source: Kitco

Bottom line
While it's highly possible that CEO Richard Atkinson going to Indonesia next week is an attempt to finally resolve the impasse in the copper export issue, investors don't need to fret over a positive outcome next week. Lower copper inventories and higher prices will continue to help the larger production areas outside of Indonesia. The long-term value of Freeport-McMoRan isn't affected by short-term disputes such as this one.

If anything, the dispute has helped prevent a potential oversupply of copper and turn it into a shortage scenario. For those looking for a copper company without the risk of further issues in Indonesia, Southern Copper (NYSE: SCCO  ) is a pure-play producer in Latin America. The company has its own risks related to mine concentrations in Mexico, but it does have growing production outside of Indonesia.

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