Indonesia’s Importance to Freeport
This tax wouldn’t bode well for Freeport, 90% owner of the Grasberg mine, one of the largest copper and gold mines in the world. Despite having diversified operations in North America, South America and Africa, the Grasberg mine remains a key asset for Freeport. At the end of December 2011, the mine had about 32 billion pounds of recoverable copper reserves and roughly 32 million ounces of recoverable gold reserves. The mine, however, has experienced severe political strife in recent times including the Indonesian government’s decision to limit stakes and now this regulation.
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We estimate that Freeport’s copper sales from its Indonesian mines will increase from 1.24 billion pounds in 2012 to 1.3 billion pounds by the end of our forecast period. The company exports much of the produced copper to China, the world’s largest copper consumer. We will likely have to revise our estimates should these regulations impact its operations at Grasberg.
Additionally, an increase in taxes would eat into the company’s cash flows, which could have a material impact on its valuation. We estimate that nearly 20% of Freeport’s value comes from its Indonesian copper mines.
Perhaps more importantly, this brings up the possibility that other governments could be prompted to take similar steps, which would have a significant impact on the industry as a whole. Such risks help to explain why many mining stocks haven’t realized the same returns as their underlying commodities of late.
- Indonesia Ban on Unprocessed-Metal Exports Effective May 6, Reuters, May 03 [↩]
- Govt to Impose 20% Tax Rate on Exempted Miners, The Jakarta Globe, May 04 [↩]