Why We’ve Raised Our Price Estimate For Freeport-McMoRan to $17

The recent framework of agreement of Freeport-McMoRan (NYSE:FCX) with the Indonesian government has reduced a significant degree of uncertainty lingering on Freeport’s outlook with respect to its copper shipments, which has led us to revise our price estimate for Freeport to $17.

Changes to Indonesia’s mining regime in January 2017 had led to a suspension of Freeport’s export of copper concentrate from the country. Additionally, the regulatory changes introduced by the Indonesian government required 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 has been contesting the government’s position since then and has insisted that the terms of its COW should exempt it from the requirement to switch to a new framework governing its operations. As a result of these revolving uncertainties, Freeport’s copper shipments from Indonesia are expected to fall by 4% in 2017.

However, as per our initial forecast, we had expected Freeport’s Indonesia division to suffer from a great magnitude of uncertainty in 2019. This was due to the pending decision regarding the extension of Freeport’s Indonesian mining rights beyond 2021 which was to be determined in 2019. ^[2] Consequently, we had expected Freeport to see a decline in its copper shipments from Indonesia by approximately 25% in 2019.

In contrary to our earlier estimates, the prevalent final framework of agreement between Freeport and the Indonesian government would provide Freeport with long-term operating rights in Indonesia through 2041 ((Freeport-McMoRan Announces Framework For Agreement With Indonesian Government Regarding Long-Term Operating Rights For PT Freeport Indonesia, Freeport-McMoRan News Release)) and hence would cease the initial uncertainty we had anticipated for the company in 2019. We now expect stable growth of Freeport’s Indonesian shipments in 2019.

Apart from the brighter shipment outlook, an enhanced pricing position for copper due to its favorable demand condition has resulted in the revision for our pricing outlook for Freeport’s copper division in 2017 and 2018.

The new agreement would also result in Freeport divesting its ownership in Grasberg to increase the stake of the Indonesian government to 51%. The impact of this divestment on Freeport could be estimated post the final terms of  divestment have been arrived at. The agreement regarding the divestment process of Grasberg is anticipated to take ground by Q1 2018. ((Indonesia, Freeport Near New Deal for Giant Copper Mine, Bloomberg)) However, a further delay would continue to disrupt the shipment volume for Freeport in 2018. We look forward as these developments take shape.

1. Freeport-McMoRan Updates Status Of PT Freeport Indonesia Operations, Freeport-McMoRan News Release [↩]
2. More Grasberg uncertainty for Freeport, Mining.com [↩]