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This Battle Is Extremely Important for Freeport-McMoRan Inc. and Newmont Mining Corp.

Five months passed since Indonesia imposed a controversial tax on copper concentrate exports, which forced Freeport-McMoRan (NYSE: FCX  ) and Newmont Mining (NYSE: NEM  ) to halt their exports. Clearly, both Freeport-McMoRan and Newmont Mining cannot pay a 25% export tax, as it makes exports uneconomical. Since then, there were a few signs that the Indonesian government was going to relax its hard stance and negotiate a reasonable deal. However, nothing has changed.

Newmont Mining stops production of copper concentrate
Back at the beginning of May, Newmont Mining warned that it was going to stop production of copper concentrate in June, as its Batu Hijau copper concentrate storage facilities were going to reach capacity in late May. There was no progress in negotiations in May, and Newmont Mining has announced that its concentrate storage facilities at Batu Hijau are full on June 3.

Newmont Mining anticipated that the ministerial meeting in the first week of June would clarify how to obtain export permits. However, Newmont Mining's hopes did not come true. On June 5, the company announced force majeure due to ongoing export restrictions. Force majeure means that Newmont Mining is unable to deliver previously contracted production because of challenges beyond the company's control. In addition, Newmont Mining decided to place 3,200 employees on leave with reduced pay.

Second quarter results will be hurt
As the good part of the second quarter is behind us, it is clear that Freeport-McMoRan's and Newmont Mining's copper sales will decrease as a result of continuing export ban. Copper prices are not cooperative too, putting pressure on miners like Teck Resources (NYSE: TCK  ) as well. Teck Resources got 30% of last year's revenues from copper. However, met coal is a bigger source of headache for Teck Resources, as the raw material continues to be under tremendous pressure.

While copper prices are higher than they were in the middle of March, they are still significantly lower than at the start of the year. With the absence of blockbuster economic news from China, copper prices clearly lack further upside catalysts. While Freeport-McMoRan enjoys stable oil prices, which benefit its oil assets acquired last year, Newmont Mining's bottom line is hurt by depressed gold prices.

The fact that gold prices continued lower after pausing near the $1,300 level is not a good sign for the company's future profits. Newmont Mining projects all-in sustaining costs of $1,075-$1,175 per ounce of gold in 2014, and the high end of this range is in a dangerous proximity to current gold prices.

Bottom line
The proclaimed reason for the draconian Indonesian copper concentrate tax was to force producers to build smelters in the country. Five months have passed, and the government has not achieves any progress on this matter. It is clear that Freeport-McMoRan and Newmont Mining are not going to contribute cash deposits for smelter building guarantees until the export problem is resolved.

Newmont Mining's halt of copper concentrate production must speed up negotiations. The prospect of a significant number of people sitting at home at reduced pay is not great before presidential elections that will take place in July. However, the fact that Newmont Mining has declared force majeure means that the company expects no fast solution to the export issue. Thus, the dramatic and lengthy battle over copper concentrate exports continues. 

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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8/28/2015 4:00 PM
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