At last, Freeport-McMoRan Copper & Gold managed to get a deal to export copper concentrate from Indonesia. The export issue, which reduced Freeport-McMoRan's copper sales by 150 million pounds and gold sales by 240,000 ounces in the second quarter, weighed on the company's results.
One might have anticipated that Freeport-McMoRan's shares would rally on the day Indonesia offered mining companies a lowered export tax. However, this was not the case, and the reason for this was the terms of the offered deal.
Freeport-McMoRan made major concessions
In a new revision, the concentrate export tax was cut to less than 10% from 25% originally announced back in January. However, this is not the only burden that Freeport-McMoRan will have to carry. According to the Memorandum of Understanding between Freeport-McMoRan and the Indonesian government, the company will also have to pay a 4% royalty on copper sales and a 3.75% royalty on gold sales. Current royalties are 3.5% for copper and just 1% for gold, so the royalty on gold has increased significantly.
What's more, Freeport-McMoRan will provide a $115 million assurance bond for the development of a new smelter in Indonesia. Building smelters within the country has been the proclaimed target of Indonesian taxes. However, there is reasonable suspicion that the Indonesian government wanted more money, and the smelter issue was a convenient excuse to bargain better terms. The indirect evidence for this theory is that Freeport-McMoRan will have to pay increased royalties and an export tax despite providing the assurance bond for building a smelter.
One way or another, Indonesia has been very straightforward with its smelter building demands, so Freeport-McMoRan will have to build one if it wants to do business in the country. Importantly, $115 million is a small sum of money compared to the cost of building a smelter. Thus, Freeport-McMoRan has some negotiating power. The company stated that building a smelter in Indonesia was uneconomic, so it counted on positive incentives from the Indonesian government. One such incentive could be a prolongation of Freeport-McMoRan's contract of work, which ends in 2021.
Here's another thing to consider. Currently, the Indonesian government owns a 9.36% stake in Grasberg. According to preliminary agreements, Freeport-McMoRan will start a divestment process that will increase the Indonesian ownership interest to 30%. It's too early to say what this process will bring to Freeport-McMoRan in terms of money, but the rising government share is rarely a good sign.
Will Newmont Mining be able to negotiate?
Perhaps Freeport-McMoRan did not get the best possible terms from the Indonesian government. However, Newmont Mining's position is much worse. The company clearly angered Indonesian officials when it chose the path of international arbitrage instead of negotiations. Now, Newmont Mining will have a hard time deciding how to continue its battle.
The latest months have been haphazard for Newmont Mining, including a failed merger with Barrick Gold and a quarrel with the Indonesian government. The merger talks with Barrick Gold could restart, as the gold giant ousted its CEO whose proclaimed strategy was to make Barrick a lean company. Restarting negotiations with the Indonesian government could be a harder thing to do. Currently, the scenario when the Indonesian government meets with Newmont Mining in the court looks very plausible.
Investors would have been happy if Freeport-McMoRan managed to negotiate better terms, but at least the company will continue its work in the country. The future is less clear for Newmont Mining, which will possibly have to pay for choosing the aggressive approach.