Don't Expect Freeport-McMoRan to Follow Newmont's Lead in Indonesia

A freeze on copper output by one doesn't mean a similar halt by the other.

Jun 11, 2014 at 2:48PM

Batu

Newmont Mining's Batu Hijau, Indonesia. Source: Wikimedia Commons.

Indonesia has proved to be an immovable force over its export ban on unprocessed ore that was imposed in January, forcing Newmont Mining (NYSE:NEM) to halt further copper output from its Batu Hijau mine and declaring force majeure on copper sales from Indonesia, meaning it can miss deliveries because of circumstances beyond its control.

While that wasn't an unexpected development, as the miner's been rumbling it was quickly approaching full capacity at its copper concentrate barn in Indonesia, it doesn't necessarily suggest copper and gold miner Freeport-McMoRan (NYSE:FCX) will soon follow suit. Freeport is more heavily invested in Indonesia than is Newmont, so it has found it expedient to temper its response to the government's export ban, and as negotiations by both miners continue, it may not be able to take such a hardline position.

Following the ban going into effect on January 1, where Freeport cut its copper out at the massive Grasberg mine to about half its previous levels, Newmont increased its production from Batu Hijau and has now built up its storehouse of reserves -- and it may feel it can wait out the presidential elections next month.

Newmont and Freeport are responsible for 97% of the country's copper production, with Batu Hijau planning to produce 95,000 to 110,000 tonnes of copper this year, and Grasberg having a 500,000 tonne target of copper production. Indonesia is the world's 11th largest copper producer, according to the World Bank, and its economy relies on its mineral for about 5% of its exports.

Indonesia, however, represents just a small portion of Newmont's annual sales -- only 6% of the total in 2013. For Freeport-McMoRan, Indonesia represented a much larger percentage, almost 20%, and it relies upon the country for much of its annual production, with it accounting for 21% of its copper output and 91% of its gold production.

Screen Shot

Source: Newmont Mining 10-K filing.

Screen Shot

Source: Freeport-McMoRan 10-K filing.

As a result, it's easier for Newmont to take a more hardline stance than Freeport was able to do.

Indonesia prohibited the export of ores mined in the country in an effort to promote domestic industries, particularly local smelters. But because the country lacks the infrastructure necessary to do the processing, and building new smelters not only takes years but would be uneconomical regardless, the miners are in an untenable position.

Having received prior written agreements with the government over their production, called contracts of work, that gave them the right to export ore -- and that had been signed off by both the Indonesian parliament and its president -- they signed other long-term contracts with foreign smelters for their ore. The government is now trying to go back and rewrite the rules in the middle of the game. 

No doubt there's a bit of gamesmanship going on. As part of its declaration, Newmont also said that approximately 80% of the 4,000 workers at Batu Hijau were placed on leave at reduced pay starting on June 6, leaving only enough staff to keep the mine in care and maintenance mode.

It remains to be seen whose strategy pays off best in the end. Freeport-McMoRan is said to be close to an agreement with the government wherein it will pay a "significantly reduced" export tax and could begin full production again as early as this month. While Newmont Mining seems to be taking a more principled stand against the government's capricious change midstream, with a relatively minor amount of revenue at risk, it's able to make a higher-stakes gamble than its rival.

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Rich Duprey 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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