Ongoing Uncertainty In Indonesia Weighs On Freeport’s Operations

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Freeport-McMoRan’s ongoing standoff with the Indonesian government has adversely impacted its operations in Indonesia, with first quarter shipments expected to be lower than originally expected. Freeport reduced production levels by 60% in Indonesia towards the end of last month, as the company has been unable to export copper concentrate from the country since January, in the wake of changes to Indonesia’s mining regime. [1] As a result of the inadequate availability of smelting capacity in Indonesia, the suspension of exports has forced the company to lower its production rates. Per the company’s estimates, the suspension of exports could lower its first quarter copper and gold shipments from Indonesia by 17% and 59%, respectively. [1]

The regulatory changes introduced in January require Freeport 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. [1] Freeport is contesting the government’s position, insisting that the terms of its COW should exempt it from the requirement to switch to a new framework governing its operations. Though the company is currently engaged in negotiations with the Indonesian government, there does not seem to be an end in sight to the uncertainty at the moment.

As a result, we have revised down our estimates for Freeport’s Indonesian copper shipments and its gold shipments, which are primarily sourced from Indonesia. We have lowered our 2017 shipment estimates for both of these by around 10% from the company’s original guidance. Our current forecasts factor in Freeport making up a part of the shortfall in shipments following the resumption of exports over the course of the year.

These changes to our forecasts have translated into our new $13 price estimate for Freeport-McMoRan. If the suspension of exports persists over the coming months, it would necessitate a further reduction to our estimates. A swift resolution of the ongoing uncertainty in Indonesia is certainly in the company’s best interests.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Freeport-McMoRan
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Notes:

  1. Freeport-McMoRan Updates Status Of PT Freeport Indonesia Operations, Freeport-McMoRan News Release [] [] []