Light at the End of the Tunnel for Freeport-McMoRan and Newmont Mining

Freeport-McMoRan and Newmont Mining are close to winning the battle over controversial Indonesian copper concentrate export taxes.

Vladimir Zernov
Vladimir Zernov
Apr 14, 2014 at 2:18PM
Energy, Materials, and Utilities

It's already been more than three months since Freeport-McMoRan (NYSE:FCX) and Newmont Mining (NYSE:NEM) halted their copper concentrate exports due to new heavy taxes imposed by the Indonesian government. Both companies started long negotiations with government officials to lower the tax burden. At first, the government was reluctant to give up its positions. However, as the halt in copper concentrate exports hurts Indonesia as well as Freeport-McMoRan and Newmont Mining, it looks like the government is ready to lower the tax.

Freeport-McMoRan and Newmont Mining close to winning the battle
Reuters recently reported that the Indonesian mining ministry has recommended lowering the export tax to no more than 10% for Freeport-McMoRan and Newmont Mining, down from the heavy 25% imposed back in January. However, the companies are not eager to pay more than 5%.

In my view, Freeport-McMoRan and Newmont Mining could try to gain more ground, as they've already committed to paying a 5% deposit for building a new smelter in the country. Building a new smelter in Indonesia, which has only one smelter in Gresik, was the main proclaimed target of the tax. The smelter demands significant capital investments, so a higher tax rate will discourage both Freeport-McMoRan and Newmont Mining from committing to a large project.

First quarter results will be affected
Both Freeport-McMoRan's and Newmont Mining's first quarter results will look bleaker than previously expected due to the halt in copper concentrate exports. Lower copper prices will also add to pressure on Freeport-McMoRan's results. Worrying data from China kept copper prices closer to $3 per pound for the most part of March and the beginning of April.

Although Freeport-McMoRan diversified into oil and gas last year, its oil and gas revenues accounted for only 21% of total revenues in the fourth quarter. This means that the company continues to be heavily dependent on its mining revenues. In fact, the drop in copper prices is a bigger factor than the halt of copper concentrate exports for Freeport-McMoRan.

To a lesser extent, low copper prices affect another major copper producer, Rio Tinto (NYSE:RIO). In turn, Rio Tinto, which got 11% of total revenues from its copper unit last year, is heavily exposed to the softness in iron ore prices.

The situation with copper concentrate exports will significantly impact Newmont Mining's copper unit's results, as copper from Indonesia accounted for 58% of company's total copper production in the fourth quarter. Still, gold prices are more important for Newmont, as it is primarily a gold miner. The company expects that its all-in sustaining costs will be $1,075-$1,175 per ounce of gold in 2014, higher than costs of its major peers Barrick and Goldcorp. The relative weakness in expected costs performance weighs on Newmont Mining's shares, although they are up 6% this year.

Bottom line
Freeport-McMoRan and Newmont Mining are close to winning the battle over taxes. The fact that the Indonesian government shows readiness to lower the tax means that it feels the pain from missing copper concentrate exports profits. In such conditions, Freeport-McMoRan and Newmont Mining have good cards on hand to negotiate a better deal.