Freeport-McMoRan Understands Better Than Newmont Mining How the Game Is Played

Source: Wikimedia Commons

Freeport-McMoRan (NYSE: FCX  ) is proving once again the truth behind the old adage you can attract more flies with honey than with vinegar. By acting sweetly with Indonesia's government the copper and gold miner has reached a memorandum of understanding to resolve its export tax dispute and is on its way toward being able to ship ore again from its Grasberg mine. 

Rival miner Newmont Mining (NYSE: NEM  ) , on the other hand, chose to use vinegar, and is facing an escalating war of words with the government where it's been given an ultimatum to drop its international arbitration case or face a withering attack that the government assures "will certainly harm Newmont."

Both companies have been harmed by Indonesia's decision to change the rules of the game mid-play and require them to pay usurious export taxes on exported unprocessed ore even though long-standing contracts they have with the government exempt them from such fees. Together, they are responsible for 97% of the country's copper production, and both halted copper concentrate exports in January when the government introduced the tax. Freeport and Newmont both object to being subject to the tax, but they've taken divergent paths in trying to rectify the situation.

Freeport has been more accommodating of the government while Newmont has been more principled in rejecting the imposition. When it halted output from its Batu Hijau mine it also declared force majeure on copper sales from the country, meaning it could miss deliveries because of circumstances beyond its control. Last week it filed a case with international arbitrators to resolve the case and Jakarta apparently objects to its dirty laundry being aired in public, which is why it's responded with threats of what can only be termed extortion. "Drop your case, or else!"

That "or else" could be significant. Freeport, for example, has been seeking assurances from the government that it will get its contract for its huge Grasberg mine renewed after 2021. The government has said it's got a few years to go before it can renegotiate that contract, but with the framework for the new memorandum of understanding that's been agreed to in principle (it hasn't been signed yet), it's apparent the contract that will be offered will be somewhat different than what it currently has in place.

The whole situation developed because Indonesia ostensibly wants to developing its country's processing facilities, desiring miners to use in-country smelters before exporting production. The problem is there's not enough infrastructure available, and though some miners like Vale (NYSE: VALE  ) contend they don't have a problem with the restrictions because they already process its nickel ore at a smelter it operates in Soroako, it's not economical to build processing facilities for all metals mined. For instance it's estimated it would cost approximately $1.5 billion to build a 1 million tonne per year alumina refinery but would necessitate the ore fetch well over $400 per tonne to justify its cost. Alumina, though, goes for just $307 per tonne today.

Still there are reasons why the two miners have likely chosen different courses of action. Freeport relies upon Indonesia for almost one-fifth of its annual production while the country represents only 6% for Newmont. In short, the latter can afford to take a more principled stance against the government's capricious policies than can its rival. 

Source: Newmont Mining !0-K filing

Source: Freeport-McMoRan 10-K filing

Even so, Newmont can't afford to completely lose its rights to Batu Hijau, which seems to be the veiled threat behind the government's words. And if it at least heeds the entreaty to drop its arbitration case and head back to the negotiation table it may yet come away with half a loaf rather than none at all. It may feel personally satisfying to remain steadfast in opposition to arbitrary and unfair rulings, but we're dealing with government so don't expect the Marquess of Queensberry rules to apply.

Certainly unleveling the playing field is unfair, but cutting your nose off to spite your face only invites shareholder lawsuits that management didn't take proper precautionary measures to protect the fiduciary interests of investors. Freeport-McMoRan has shown that going along to get along can sometimes taste sweeter than facing the sour outcome of pursuing a take-no-prisoners policy.

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