Newmont Mining's Harsh Decision Benefits Freeport-McMoRan

Newmont Mining (NYSE: NEM  ) has just added more drama to the Indonesian copper concentrate export story. The company filed for international arbitration against the Indonesian government regarding export restrictions that the government imposed back in January. This move is bad for Newmont Mining's relations with the country, but it could benefit Freeport-McMoRan Copper and Gold (NYSE: FCX  ) , which is even more interested in resuming exports from Indonesia because of the importance of the Grasberg deposit for the company.

A quick recap on previous parts of the story
To those who have missed the beginning of the story, Indonesia imposed a 25% tax on copper concentrate exports at the beginning of the year, seeking to motivate Newmont Mining and Freeport-McMoRan to build copper smelters within the country. The tax was going to rise to 60% in 2016 and turn into a complete ban in 2017. Things did not go according to plan right from the start, and the parties started lengthy discussions on how to resolve the export issue.

Newmont Mining was playing hard, and warned the government that it would ramp down production at the Batu Hijau copper and gold mine in June as copper concentrate storage facilities were going to reach their full capacity. This did not help to speed up discussions, and Newmont Mining suspended operations at Batu Hijau on June 5, putting 3,200 employees on leave at reduced pay. As it turned out, this didn't help either, so the company decided to go to court.

Newmont Mining could have made a false start
There is one important thing to consider regarding the whole Indonesian story. The country will have presidential elections on July 9. What's more, the current president isn't taking part in the election because he has already served for two terms. This fact only multiplies uncertainty regarding the country's future policy toward mining.

In such conditions, Indonesian officials will likely wait to see who the next president is. Unlike Newmont Mining, Freeport-McMoRan stated that it continued talks with the government and had no plan to seek international arbitration in the near term.

Newmont Mining negotiating skills are under question. The company's unsuccessful merger attempt with Barrick Gold (NYSE: ABX  ) in April resulted in a brief press release war, where Newmont and Barrick accused each other of merger failure. Newmont's Conga project in Peru has been stalled since 2011 because of the opposition from locals. Meanwhile, Barrick Gold seems to have move forward with its stalled Pascua-Lama project, as it reached an initial agreement with local communities over the future of the mine.

What is the likely scenario?
Newmont Mining's move puts pressure on the Indonesian government to resolve the export issue. However, the move backfires at the company itself. Meanwhile, Freeport-McMoRan must be gaining ground because of its dovish stance while receiving the benefits of Newmont's hard position.

Finally, the parties must come to an agreement. Freeport-McMoRan and Newmont Mining produce almost all copper in the country. However, the talks will likely last a little longer as the government waits for a new leader. Ironically, the export ban has a positive side for Freeport-McMoRan. The situation has affected copper prices, which recently rose to 4-month highs.

Bottom line
Taking into account that the matter would have been resolved eventually because of the importance of the industry for Indonesia, Newmont Mining made a precipitate move. Freeport-McMoRan is playing a smart game, and will likely reach an agreement with Indonesian officials.

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  • Report this Comment On July 02, 2014, at 1:45 PM, ROCKJCP wrote:

    Totally concur. FCX has a long relationship with the government /people of Indonesia and wants to maintin that on a positive level.

  • Report this Comment On July 04, 2014, at 7:31 PM, alphabeta wrote:

    With respect to the author, more research might deliver a different view on FCX Indonesian position.

    The problem now is that FCX has paid the government bond, but Indo refuses to allow them to commence work (must get approval from the investments ministry or some such). Indo is also refusing to ratify the current tenure beyond 2021. After 2021 the law states that FCX must give the Indos 51% of the entire project at sunk cost less depreciation. No reward for risk there.

    Can anyone build and get positive NPV on a $2B copper smelter in 7 year, then give 51% away?

    To maintain production, FCX must invest 16B in underground development over the next 5 years. again, FCX must divest 51% to a government body at cost less depreciation. the government has not yet set the pricing formula.

    Being nice to the government doesn't guarantee FCX will get what they want.

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