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Freeport-McMoRan Outsmarts Newmont Mining

Finally, the Indonesian copper-concentrate export story seems to be close to the end for one of its participants. Freeport-McMoRan Copper & Gold (NYSE: FCX  ) has agreed on a memorandum of understanding (MoU) with the Indonesian government, which is a signal that the company will be able to resume exports soon.

Meanwhile, Newmont Mining (NYSE: NEM  ) , which filed for international arbitrage to resolve the issue with the Indonesian government, found itself in a difficult situation. I've previously written that Newmont Mining's decision was precipitated and benefited Freeport-McMoRan while worsening Newmont Mining's position in the country. As these predictions turned into reality, it's time to look ahead at what could happen in the coming months.

Newmont Mining could be forced to negotiate
Now, Newmont Mining finds itself in an uncomfortable situation. The company applied for international arbitrage, meaning that it was unable to resolve the issue through negotiations. Meanwhile, Freeport-McMoRan achieved a breakthrough in talks that lasted for half the year. This fact hints that successful negotiations were possible for Newmont Mining, too.

It will be interesting to hear Newmont Mining explaining its Indonesian position when the company holds its second-quarter earnings call on July 30. Until then, the company could be forced to return to the negotiation table. The pressure is likely to come from two sides. Both the Indonesian government and Newmont's shareholders are interested in the fastest resumption of copper-concentrate exports.

Newmont Mining has already put itself in a difficult position, but it can undo some damage if it reacts fast and returns to talks with the Indonesian government. If the company is stubborn and decides to proceed with international arbitrage, it will seriously worsen its already shaken position in the country.

The story is not over yet for Freeport-McMoRan
While Freeport-McMoRan made a serious step forward, the saga is not over yet. First, parties agreed on the MoU but did not sign it. Freeport-McMoRan indicated that the MoU had no time frame for resumption of copper exports. Still, Rio Tinto (NYSE: RIO  ) , which has a share of production from Freeport's Grasberg mine, must be happy with recent developments. Currently, Rio Tinto has a 40% share of production above specific levels until 2021. However, Rio Tinto's share rises to 40% of all production after 2021, so Freeport's long-term relations with the Indonesian government are extremely important for Rio Tinto.

The MoU has yet to be finalized, but the Indonesian industry minister indicated that it could be finalized within two weeks. Government officials said that Freeport-McMoRan will have to pay a smelter construction bond of $115 million. After this, new export regulations will be imposed. The copper sales royalty will rise to 4%, and the gold sales royalty will rise to 3.75% -- both up from the previous 1% royalty. In addition, Freeport-McMoRan has agreed to divest 30% of its Indonesian unit.

Surely, new rules are worse than rules that existed before the new export tax was imposed, but this was inevitable. However, Grasberg is the largest gold mine and the third largest copper mine in the world, so the access to it is valuable. That's why the progress in negotiations spurred shares of Freeport-McMoRan, extending the momentum they gained in the last few weeks.

Bottom line
Freeport-McMoRan achieved progress in negotiations with the Indonesian government, and that's positive for the company. It's still too early to be overly optimistic, and we have to wait for a signed contract to judge the real impact of new rules on Freeport-McMoRan. In turn, Newmont Mining has hurried with filing for international arbitrage and could have to reassess its stance.

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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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9/2/2015 2:59 PM
FCX $9.75 Down -0.02 -0.24%
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