Freeport McMoran’s Force Majeure At Grasberg Mine Raises Supply Concerns

Freeport McMoRan Copper (NYSE:FCX) has invoked the force majeure clause for shipments from its Grasberg mine in Indonesia where operations have been shut down pending government investigation into the tunnel collapse that occurred last month. Force majeure is a clause in agreements with customers that allows commodity suppliers to express inability to meet obligations due to circumstances beyond their control. It allows them to avoid paying penalties for delays or cancellations. ^[1]

The invocation of force majeure is causing copper futures prices to rise as the supply-demand situation is now expected to be tight in 2013, as opposed to a clear supply surplus expected earlier.

The Grasberg mine is Freeport’s key copper mine. Poor ore grades for more than a year have dented the company’s results, but it was expected that towards the end of 2013 ore grade quality would improve to previous levels.

See our full analysis for Freeport McMoran here

Importance Of The Grasberg Mine

On a standalone basis, the Grasberg mine is Freeport’s biggest in terms of copper production quantity. While in the last two years, the production has declined almost by half from its peak levels, it remains the company’s biggest copper producing mine. In 2012, Grasberg produced 695 million pounds of copper, earning $2.5 billion in revenues and $850 million in gross profits. Total sales revenues from copper in 2012 stood at nearly $13 billion. ^[2]

The company intends to turn Grasberg into the world’s biggest underground mining complex after 2016 when its open pit operations are due to end. Open-pit mining currently accounts for two-thirds of production. Open pit mining at Grasberg contributes around 140,000 metric tons of copper ore per day while underground operations produce 80,000 metric tons.

Before the accident, Freeport Indonesia’s sales volumes were expected to touch 1.1 billion pounds of copper and 1.25 million ounces of gold in 2013, an increase of 54% and 31%, respectively over 2012 figures.

The Accident

On May 14, a tunnel collapse at the Grasberg mine resulted in the death of 28 workers who were trapped beneath, prompting the suspension of mining activity. Operations at the mine were suspended the next day and an independent investigation was ordered. While operations resumed after two weeks on May 28, a second accident after just two days resulted in the death of another worker, prompting the government to issue a shutdown order, barring maintenance activities. Now operations will resume only after the probe is complete.

Impact Of Shutdown

Freeport has said that the suspension of mining activity at Grasberg has so far impacted some 36,000 tonnes of copper output, which amounts to 7% of 500,000 tonnes of copper sales the company had expected from Grasberg in 2013. The output of gold has also been curbed by about 80,000 ounces, which amounts to 6% of 1.25 million ounces expected for the year. Each day that the mine remains shut, Freeport loses about 3 million pounds of copper (1,361 tonnes) and 3,000 ounces of gold in production. This amounts to nearly 3% of average daily global copper output this year. ^[3]

While an initial estimate suggested that the probe will take two months to complete, no official time-frame has been provided. An extended suspension at Grasberg could help keep copper supplies tight this year despite the addition of new supplies from Rio’s Oyu Tolgoi mine in Mongolia. This is evident from rising copper futures prices this week. ^[4]

The accidents could also have an impact on contract renegotiations between the Indonesian government and Freeport, which is trying to obtain an extension to mining permit beyond 2021.

We have a Trefis price estimate for Freeport McMoran Copper of $42.

Understand how a company’s products impact its stock price at Trefis

1. UPDATE 3-Freeport declares copper force majeure at Indonesia mine, Reuters [↩]
2. Freeport McMoran 2012 10-K, SEC [↩]
3. Indonesia Completes Probe Into Freeport Grasberg Tunnel Accident, Bloomberg Businessweek [↩]
4. Copper soars after Freeport McMoRan declares force majeure on Grasberg mine, Mining.com [↩]