Why Newmont Mining Is Taking a Harder Stance Than Freeport-McMoRan

Freeport-McMoRan has much more to lose in Indonesia than Newmont Mining.

Jun 18, 2014 at 10:03AM

Both Freeport-McMoRan (NYSE:FCX) and Newmont Mining (NYSE:NEM) face the problem of exporting copper concentrate from Indonesia after the country imposed a controversial 25% tax on exports back in January. While the problem is the same, the companies' approaches to a solution differ dramatically. Newmont Mining has chosen the hard approach by suspending copper concentrate production at Batu Hijau and declaring force majeure. Freeport-McMoRan, on the other hand, has been very gentle in rhetoric about the crisis and stated multiple times that it hopes the solution will be found soon. Why do the tactics of the two companies differ that much?

There's more risk for Freeport-McMoRan than for Newmont Mining
According to the latest Freeport-McMoRan annual report, Indonesia holds 27% of the company's proven and probable copper reserves. What's more, 95% of Freeport-McMoRan's gold reserves and 37% of the company's silver reserves are there as well. The company predicts that Indonesia will account for 20% of its total EBITDA this year. Freeport-McMoRan's key asset in the country is the huge Grasberg mine. Rio Tinto (NYSE:RIO) holds interest in the mine as well.

Obviously, Indonesian assets are extremely valuable for Freeport-McMoRan. For Newmont Mining, the country is less important. Newmont Mining gets the majority of its revenue from Australia and the U.S.  Indonesia's share of Newmont's revenue mix declined from 15% in 2011 to just 6% in 2013. That's why Newmont Mining could afford a harder approach in the Indonesian crisis – the company has less to lose than Freeport-McMoRan.

Freeport-McMoRan has big plans for Grasberg mine
After 2016, Freeport-McMoRan will transition the mine to underground operations. This transition will require additional investment. Prior to this transition, Freeport-McMoRan expects to grow copper sales from 4.3 billion pounds in 2014 to as much as 5.7 billion pounds in 2016. Rio Tinto is also interested in the solution to this problem, as the company has rights for 40% of total production from the mine starting after 2021. With all that in mind, Freeport-McMoRan is trying to be delicate and does not make rough moves like Newmont Mining. The undertaking of big projects needs good relations with local authorities.

The stance that Indonesian government has taken has not been very constructive, however. The country wants to force miners to build smelters within Indonesia, but as yet it does not provide positive incentives to do that. The copper concentrate export tax, together with proposed submissions of cash deposits for the smelters, does not paint a good picture for investment in the country.

Interestingly, Newmont Mining's move clearly benefits Freeport-McMoRan. With the help of Newmont Mining, Freeport-McMoRan could see whether the government can be pushed to find an amicable solution through the use of rougher methods. How rough are Newmont Mining's methods? The company placed 3,200 workers on leave with reduced pay on June 6. That's a good number of people to be reckoned with, keeping in mind that Indonesian presidential elections will take place in July.

Bottom line
Newmont Mining's decision to suspend copper production in Indonesia is likely to put pressure on government officials to reach an acceptable solution as soon as possible. Until then, it's clear that both Freeport-McMoRan's and Newmont Mining's full-year sales targets are in question. Most likely, both companies will issue revised estimates when they report their second quarter earnings.

Vladimir Zernov 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers