Freeport Resumes Open-Pit Copper Production At Grasberg Mine In Indonesia

Freeport McMoRan Copper (NYSE:FCX) was informed by the Indonesian government over the weekend that it could resume production at the Grasberg mine in Indonesia. Accordingly, the company has resumed production and is ramping up output gradually. It is to be noted that only open-pit mining has resumed, underground mining operations remain closed. There is no information on when and under what conditions these will resume. ^[1]

The Grasberg mine was shut down following a major tunnel collapse accident on May 14, in which 28 workers lost their lives. While production had initially resumed two weeks later, another accident after a couple of days resulted in mining being suspended again on government orders. All mining activities were to be put on hold till the time investigations into the accident could be completed. Freeport even invoked the force majeure clause, 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.

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. At the moment, it is not clear whether the company still thinks it can achieve its targets.

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.

In the last production impact update provided by Freeport about 10 days back, it had said that the suspension of mining activity at Grasberg had impacted some 36,000 tonnes of copper output. This amounted to 7% of 500,000 tonnes of copper sales the company had expected from Grasberg in 2013. The output of gold had also been curbed by about 80,000 ounces, which amounted to 6% of 1.25 million ounces expected for the year. Each day that the mine remained shut, Freeport lost 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. Additional days of production shutdown since then would have added to the losses, though the final numbers have not been given out yet.  ((Indonesia Completes Probe Into Freeport Grasberg Tunnel Accident, Bloomberg Businessweek))

Where The Situation Stands Right Now

Freeport has resumed only its open-pit operations, which account for two-thirds of production. Previously, the workers’ union had demanded that operations be resumed only after all probes were completed. The union wanted to evaluate the final investigation report and verify that Freeport had implemented all recommendations. But now, the union is encouraging workers to get back to work and many have already done so. However, the company spokesperson was not able to provide details on how much production capacity was being operated right now and the status of shipments. We would have to wait for further updates to know if the force majeure is going to be lifted anytime soon. In absence of such information, it is difficult to assess the overall impact on the copper surplus situation for the year.

Even though production may have resumed, we think that the impact on Freeport would go beyond just lost production in the last six weeks. The company was in pay negotiations with workers when the accident occurred and these had been put on hold. With the negotiations resuming now, we expect the company to be in a relatively weaker bargaining position. Workers are sure to demand significant hikes, citing exposure to dangerous working conditions. Negotiations were already being expected to be acrimonious owing to the downturn in the natural resources sector at the moment, which would have increased Freeport’s reluctance to grant significant pay hikes. It doesn’t help that ties between the company and workers have been strained in the last couple of years after the latter went on a three-month strike in late 2011 over pay hikes.

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.

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1. Freeport-McMoRan Copper & Gold Inc. : Freeport Indonesia ramping up output at world’s No.2 copper mine, 4-traders.com [↩]
2. Freeport McMoran 2012 10-K, SEC [↩]