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Freeport-McMoRan's Indonesian Problems Are Not Over Yet

By Vladimir Zernov – Mar 30, 2014 at 10:07AM

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The situation with copper concentrate exports from Indonesia remains unclear despite favorable comments by Indonesian officials.

Problems with Indonesian copper concentrate exports have weighed on the shares of Freeport-McMoRan (FCX 1.86%) since the beginning of this year. The government has imposed a tax on copper concentrate exports, which started from 25% in 2014 and turned into a complete ban in 2017. As a result, the company stopped exporting copper concentrate and entered lengthy negotiations with government officials. Finally, there is some positive news for Freeport-McMoRan.

A government official has recently stated that the company has received export certification in Indonesia. However, the company still needs to get a recommendation letter from the mining ministry of the country to resume exports. Are Freeport-McMoRan's Indonesian problems over?

The problem of the tax is not solved
It's too early to state that Freeport-McMoRan has a green light in exporting copper concentrate from the country. The government officials did not give any clue about whether they will further negotiate the size of the tax. However, it is likely that Indonesia will probably ease the tax for those firms that will build smelters in the country, which is the main goal of the imposed tax.

Newmont Mining (NEM 0.47%), which also produces copper in the country, is waiting for a solution to this problem. Newmont Mining stated that it was still shipping concentrate to the only country's smelter in Gresik. However, the facility in Gresik can't process all the copper concentrate that is produced by Freeport-McMoRan and Newmont Mining, so these companies have to export the remaining production.

Although copper production doesn't have a big share in Newmont's revenue mix, it is still important for the financial performance of the company. The company's copper production was stable last year, but now this year's production numbers are under question. The export ban will surely impact Newmont's first quarter results, but the key thing to consider is whether the company will be able to meet its 110,000-125,000 ton production target at the end of the year. If the export problem is not resolved quickly, Newmont's cash flows will suffer, hurting the valuation of the company.

The renewal of exports may put pressure on copper prices
Ironically, copper price might decline if Freeport-McMoRan and Newmont Mining resume their copper concentrate exports. Copper prices have already come under pressure after a series of disappointing statistics from China, which sent prices below $3 per pound. Other copper producers like Teck Resources (TECK 1.29%), which got 30% of its revenue from copper in 2013, are also affected by this drop. Teck Resources' cash flows are also pressured by the drop in met coal prices, as met coal brought almost 50% of the company's gross profit last year. As Teck Resources is squeezed from both sides, its shares are down almost 20% year to date.

It's not clear whether the output from Freeport-McMoRan and Newmont can significantly affect copper prices once their exports are resumed. However, given the fact that the market looks soft following a series of poor Chinese statistics, additional production could weigh on copper prices.

Bottom line
The Indonesian story is not over for both Freeport-McMoRan and Newmont Mining. Building smelters in the country will require additional capital spending. This complicates the Freeport-McMoRan's plan to reduce its debt from the current $20.4 billion. The situation with the export tax is still unclear. If the tax is not reduced, the companies are unlikely to resume exports, which will lead to further rounds of negotiations.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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.

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