Freeport McMoRan Copper (NYSE:FCX) can breath a sigh of relief. The much feared export ban on ores in Indonesia will not affect the company’s copper business after all. Though the ban has come into effect, a last-minute rule has allowed Freeport and Newmont Mining to export copper till 2017 since they have processing facilities under construction which are expected to come online around this time. 
The metals primarily affected by the ban would be bauxite, nickel, gold and silver. Freeport does produce gold and the majority of its production takes place in Indonesia but gold sales account for a relatively minor component of its overall revenues.
We have a Trefis price estimate for Freeport McMoran Copper of $29 which represents a 17% downside to the current market price.
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What Is The Export Ban All About?
A mining law enacted in 2009 prohibited export of unprocessed minerals from Indonesia after January 12, 2014. The purpose was to increase the value of commodity exports and encourage development of the local processing industry. On the designated date, this ban came into effect but the government used its discretionary powers to provide selective relaxation for some minerals and metals. The copper content in the ore exported has to be greater than 15%. Both Freeport and Newmont export copper concentrates with a higher percentage of the metal than the designated minimum and account for nearly 97% of Indonesia’s total copper exports. 
The problem mining companies like Freeport faced with the original ban is that there is a shortage of smelters in Indonesia even if they were ready to process all of their ore before exporting it. In addition, Freeport said that it ships its minerals under long-term contracts to international smelters and wishes to honor these contracts. It said that it entered into these contracts in the first place because its initial agreement with the Indonesian government allowed it to export concentrates without placing any restrictions. However, Freeport already processes about 40% of its ore mined in Indonesia at a smelter in East Java which is the only copper smelter in the country. While it has plans to get the rest of its copper ore processed in two upcoming local facilities, construction will be complete only around 2017. ((Indonesia trying to skirt its own ban on mineral exports, Reuters))
Newmont Mining, another major copper producer, currently smelts less than a quarter of its ore in Indonesia it produces at the Batu Hijau mine.
Why Leniency Was Shown Towards Copper
Currently, Indonesia is struggling to cut a large current account deficit. As a result of the high deficit, confidence in its currency is being undermined which has been Asia’s weakest performing this year after falling around 20% relative to the U.S. dollar. Any cut in exports will results in bigger deficits and a further weakening of the currency. A weak currency makes imports costlier which in turn fuels inflation and angers the population. So far, the authorities have been deliberately slowing growth in an attempt to cut imports and the current account deficit but a reduction in exports may cause the deficit to widen to unmanageable proportions.
The exports of nickel and bauxite in 2012 amounted to a total of $2 billion which is relatively small so the Indonesian government has more room for acting tough there as compared to in the case of copper. 
What If The Government Hadn’t Granted Relief For Copper
If the ban had been enforced in its original form, Freeport would have faced a loss in revenue of around $5 billion next year. This amounts to 65% of its total revenue in Indonesia. Right now, it processes about 40% of its output at a smelter in Java while the rest is exported. Therefore, the company’s output at the Grasberg mine would have fallen by 60% after the ban, with the production of copper reducing by 900 million pounds. It would also have had to layoff half of its 15,000 employees in Indonesia, which may have caused worker unrest and pose further problems for the government in an election year. Financially, the country would have lost $1.6 billion in taxes, royalties and dividends, which translates to a reduction of 0.6% in its GDP growth rate. ((Freeport warns of output cuts, layoffs from Indonesia export ban, Reuters))
Freeport does stand to lose gold exports worth 1.7 million ounces due to the ban but gold sales account for less than 10% of its overall revenues. 
As of now, Freeport says that it has not received formal government approval to resume export of copper concentrates. The company had voluntarily halted shipments after December 15 in the absence of clarity on rules. The government hasn’t come out with written guidelines about the ban either. The energy ministry is expected to come out with more specific information later. Notes:
- Indonesia slaps ban on mineral exports, Financial Times [↩]
- Here Are the Winners of Indonesia’s Ore Ban, Daily Finance [↩]
- Indonesia bans mineral ore exports, but may allow Freeport shipments, Reuters [↩]
- Freeport McMoran 2012 10-K, SEC [↩]
- Freeport Indonesia says yet to receive govt export approval, Reuters [↩]