Why Has Freeport Halted Copper Exports From Indonesia?

Freeport-McMoRan Inc.’s Indonesian operations have been beset by uncertainty caused by regulatory changes affecting the mining sector over the past few years. Freeport’s embattled Indonesian operations face more uncertainty as the company has been forced to halt the exports of copper concentrate from Indonesia in order to comply with more regulatory changes to Indonesia’s mining regime. ^[1] Freeport’s Indonesian copper and gold mining operations accounted for close to 20% of the company’s overall revenue in the first nine months of 2016. ^[2] The following graph illustrates the scale of the company’s Indonesian copper shipments, which are affected by the regulatory uncertainty in Indonesia.

Indonesia: Recent Regulatory Changes

Indonesia implemented changes to regulations governing its mining industry in 2014 which were aimed at increasing domestic mineral processing capacity. The country initially completely banned unprocessed mineral exports but subsequently allowed the exports of certain unprocessed mineral exports such as copper concentrates for a limited period of time. Under the changed rules, mining companies such as Freeport were subject to higher export taxes and were also to make investments for the development of smelting capacity within the country. ^[3] While negotiating with the Indonesian government over the regulatory changes in 2014, Freeport was forced to stop its mineral exports for nearly seven months, which adversely impacted sales from the company’s Indonesian operations that year. ^[4]

The latest changes require the company to switch from its existing long-term investment agreement or contract of work (COW) with the Indonesian government to a special mining license in order to resume mineral exports from Indonesia. ^[5] In addition, the new rules will also include stipulations for foreign companies to gradually divest a portion of their local operations, consistent with the Indonesian government’s policy. ^[5] Freeport’s original COW was valid till 2021, with options for two ten year extensions post expiry, subject to government approval. ^[6] The company is currently engaged in talks with the Indonesian government and is looking at various aspects of the new regulations before taking steps to ensure the resumption of its exports from Indonesia. ^[1]

Newmont Mining sold off its Indonesian mining assets last year, electing to exit a geography characterized by significant regulatory risk. ^[7] While Freeport is not considering a sale of its Indonesian operations, a swift resolution of the uncertainty created by the latest regulatory changes and the resumption of normal operations in Indonesia would certainly benefit the company going forward.

Have more questions about Freeport-McMoRan? See the links below.

• What Is Freeport-McMoRan’s Fundamental Value Based On 2015 Results?
• What Is Freeport-McMoRan’s Revenue And EBITDA Breakdown?
• How Has Freeport-McMoRan’s Revenue Composition Changed Over The Last 5 Years?
• By What Percentage Did Freeport-McMoRan’s Revenue & EBITDA Decline Over The Last 5 Years?
• By What Percentage Can Freeport-McMoRan’s Revenue & EBITDA Change Over The Next 3 Years?
• How Will Freeport-McMoRan’s Revenue Composition Change by 2020?
• Why Have Copper Prices Declined Over The Past Year?
• Why Is China Important For The Global Copper Industry ?

Notes:

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Notes:

1. Freeport says new Indonesia mining rules have ‘many impacts,’ Reuters [↩] [↩]
2. Freeport-McMoRan’s Q3 2016 10-Q, SEC [↩]
3. Freeport-McMoRan Announces Resumption of Exports from Indonesian Subsidiary, Freeport-McMoRan Press Release [↩]
4. FCX Announces Resumption Of Exports From Indonesian Subsidiary, Freeport-McMoRan News Release [↩]
5. Indonesia Commodity Export Rethink Rattles Metals, Miners, Bloomberg [↩] [↩]
6. Freeport-McMoRan’s 2015 10-K, SEC [↩]
7. Newmont Mining to Sell Indonesian Mine for $1.3 Billion, Wall Street Journal [↩]