Shares of copper and gold miner Freeport-McMoRan Inc (FCX 0.44%) fell around 5% in September. The slump was driven in part by weak copper and gold prices, but it's worth noting that competitor Southern Copper was only down about half as much.
In fact, Freeport's decline might even seem a little surprising in light of the company's August 29 announcement that it had made important progress in its dispute with the Indonesian government over the Grasberg mine. To sum that problem up quickly, Indonesia wants to benefit more from that giant mine than it is today, and is looking to change Grasberg's ownership structure. The late-August understanding was a key step toward a resolution, which is good news.
Grasberg holds virtually all of Freeport's gold reserves and about 30% of its copper reserves. It's an important asset for the company. In fact, Freeport has major plans to expand its mining efforts there, including shifting from open-pit mining to underground mining. Underground mines are much more expensive to build and operate than open-pit mines. Clearly, Freeport believes there's a lot of value yet to be found in the Grasberg mine.
The dispute with Indonesia, however, has stopped the miner from investing too much in Grasberg because of the uncertainty of the investment. And while there's likely to be some resolution to this problem in time, the late-August agreement was simply a broad framework of a deal. The fine details have yet to be hammered out. So it was an important step, but not the final solution. That's the key fact to keep in mind.
Indeed, it increasingly looks like Freeport and Indonesia remain at odds on some notable issues. That includes how the miner will give up its ownership stake, the timeline for divestment, and the valuation of the mine. These are major points of contention and can have a material impact on how much value Freeport gets out of its Grasberg investment.
Freeport's stock has been driven more by news over the past few years than by fundamentals. That's included working back from a poorly executed investment in the oil sector and, now, the escalating issues at Grasberg. Commodity prices will, indeed, have an impact on how investors perceive Freeport-McMoRan, but right now the dispute with Indonesia over Grasberg is likely to play a bigger role in the stock's price moves. Don't expect that to change anytime soon, since it looks like there's still a lot more negotiating to do.