Indonesia–and its desire to make more off of its natural resources–has been a thorn in the side of both Freeport-McMoRan Copper & Gold (FCX) and Newmont Mining (NEM) this year. That could be changing.
Reuters Reuters reports that Indonesia reached a deal with Freeport-McMoRan Copper & Gold to resume copper shipments. The deal would require Freeport to build a smelter in exchange for losing an export tax.
Citigroup’s Brian Yu and Daniel Knauff explain the significance:
Freeport previously estimated the cost of constructing a smelter and slime processing facility at $2.0 – $2.5 bln. Since mid-January [Freeport-McMoRan Copper & Gold] has been operating Grasberg at ~50% of normal milling rates, reducing production by 40 mln lbs Cu and 80k ozs Au per month. In the interim, they continue to process ~40% of concentrates or 205kt per year of copper domestically at PT Smelting in Gresik…
The ability to resume exports, even at the cost of a new smelter, should be a marginal positive for [Freeport-McMoRan Copper & Gold] shares since Grasberg is key to the company's deleveraging plans. However, we will need details behind the smelter financing and any potential impact to the mining plan to properly assess the impact to our model.
Still, Yu and Knauff aren’t feeling much love for Freeport-McMoRan. They maintained their sell rating due to an expected fall in copper prices.
When reports first surfaced yesterday that a deal was close, Cowen’s Anthony Rizzuto and team noted that “other mining companies taking similar actions to [Freeport-McMoRan] are also expected to be granted a reprieve from the export tax.” That could be the reason shares of Newmont have been rallying today. JPMorgan, for one, had previously noted that that a Newmont Mining rally would depend on an Indonesia resolution.
Investors appear to be betting that one is at hand. Shares of Newmont Mining have gained 4.5% to $23.98 at 2:43 p.m. today, while Freeport-McMoRan Copper & Gold is up 1% at $32.73.
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