Indonesia Export Bans Could Hurt Freeport

by Trefis Team
Freeport-McMoRan Inc.
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The Indonesian government’s sudden ban on the export of 14 unprocessed raw minerals, effective May 6, could potentially have a significant impact on the valuation of miners with Indonesian operations. The new rules, which mainly ban the export of copper, iron ore, gold, nickel and bauxite, could hurt Freeport McMoran (NYSE:FCX) and Newmont Mining (NYSE:NEM) even though they are currently exempt from the ban, [1] as it has also been reported that an additional tax of 20% will be imposed on these exempted miners. [2]
While Freeport believes that its current contract will insulate it from this new tax, the ramifications remain unclear at this point. Below we take a look at how Freeport could be impacted by this new tax.
Our current price estimate for Freeport is $45, which is about 30% above the current market price. We may have to revise our shipments and tax rates once more clarity comes on this matter.

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.

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.

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Exempted miners will be imposed an additional tax of 20% on these mineral’s shipments.
  1. Indonesia Ban on Unprocessed-Metal Exports Effective May 6, Reuters, May 03 []
  2. Govt to Impose 20% Tax Rate on Exempted Miners, The Jakarta Globe, May 04 []
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