Last week, Freeport McMoran (NYSE:FCX) lowered its first quarter gold and copper sales volume outlook following labor-related disruptions in a mine in Indonesia. Although work has resumed since March 12, the company expects that full production won’t be reached until the second quarter. Freeport’s stock has slumped about 13% in the past two weeks following a host of issues, including significant labor disruptions and the Indonesian government’s decision to limit foreign miners’ stakes in mines. Freeport is a global miner with mines in the U.S., South America, Indonesia and Africa and has a product portfolio spanning basic metals like copper, gold and molybdenum. It competes with other mining companies like Vale (NYSE:VALE), Newmont Mining (NYSE:NEM) and Barrick Gold (NYSE:ABX).
Our current price estimate for Freeport McMoran stands at $45, implying a premium of about 15% to the current market price. We may have to revise our forecasts once the company assesses the impact on its full-year operations.
- Freeport-McMoRan’s Q4 2016 Earnings Review: Improved Commodity Pricing Environment Boosts Results Amid Regulatory Uncertainty In Indonesia
- Freeport-McMoRan’s Q4 2016 Earnings Preview: Improved Commodity Prices And Production Levels To Boost Earnings
- Why Has Freeport Halted Copper Exports From Indonesia?
- Why Copper Prices Are Likely To Sustain Recent Gains This Year
- The Year 2016 In Review: Successful Debt Reduction Efforts And An Improvement In Commodity Prices Boost Freeport’s Prospects
- Improved Outlook For Copper And Oil Prices Prompts A Revision In Our Price Estimate For Freeport-McMoRan To $15
No medicine for Indonesia Syndrome?
Freeport’s operations in Indonesia have been heavily disrupted since October 2011. First, the company faced a three month labor strike as workers were demanding better wages and bonuses. As a result, Freeport reported a 13% and 26% year-on-year decline in copper and gold volumes in its full year 2011 results. ((FCX Reports Fourth-Quarter and Year Ended December 31, 2011 Results, FCX News Releases, Jan 19 2012)) Then in February, fighting among disgruntled workers caused a two week suspension after which the company had to reduce its Q1 gold sales volume estimates by 30%, to 300,000 ounces from 425,000.
The company’s estimate for copper sales volumes was reduced by 10% to 795 million pounds. We are maintaining our current estimates for the full year, as the company has yet to assess the potential impact on full-year operations. Freeport expects to ramp up production to full capacity in Q2, which could allow it to make up for lost volumes. 
According to Trefis estimates, copper mines in Indonesia currently contribute about 20% of our price estimate. Further, gold constitutes about 18% of the company’s value, and Indonesia contributed almost 85% of total gold revenues in 2011. If Freeport continues to face similar troubles in Indonesia, it could have a significant impact on our price estimates.
The company has also been facing the risk of losing control of its Grasberg mine in Indonesia following the Indonesian government’s announcement that it will limit foreign miners’ stakes in Indonesian mines in the future. We discussed the issue in our recent article, Political Risks Weigh on Freeport, Vale & Other Mining Stocks.Notes: