What Factors Have Led To Freeport’s Recent Stock Slump?

Freeport-McMoRan (NYSE: FCX) shares have tumbled since the release of its first-quarter results in the month of April. The company’s share price has negatively been impacted due to a  greater degree of uncertainty arising in its Indonesian operations. Unfavorable project development status coupled with new environmental regulatory developments in the South East Asian nation has increased the risk associated with Freeport’s operations in the country and hence, reduced investor confidence on the company’s future performance. Consequently, Freeport’s stock price has declined by almost 11% since its first-quarter earnings release.

Freeport and the Indonesian government had jointly arrived at their final framework of agreement with respect to the divestment of the company’s stake of its Grasberg mines in the second half of 2017. However, despite the agreed terms, both parties have failed to arrive at an appropriate divestment value for the sale of Freeport’s stake. Freeport, last year, had reiterated on having a definitive agreement with the Indonesian government by H1 2018, however, no such progress has been achieved as of yet. In fact, Freeport’s operations in Indonesia have become increasingly riskier due to the latest inimical developments in the region.

Firstly, Freeport’s development activity at its Deep Mill Level Zone (MLZ) underground mine has been negatively impacted by seismic activity in the region which has led the company to lower both its short-term and long-term copper and gold sales guidance and hence painted a negative picture for the company’s future performance.

Secondly, the Indonesian government has imposed new environmental standards in the region which has challenged Freeport’s 20-year-old operating system and has been indicated as impossible to adhere to by Freeport’s management. The company has been given a six-month transitional period for the establishment of the new decree and hence this poses a significant threat with respect to the company’s future operation in the region.

Given that Grasberg accounted for around 26% of Freeport’s copper output and almost 99% of its gold output in 2017, these unfavorable developments have increased concerns regarding the company’s long-term operation. Especially so because Freeport has initiated the development of the final phase of the Grasberg open pit mine which is expected to result in an increased annual capital spending of an average of $0.8 billion per year ($0.7 billion per year net to PT-FI) over the next five years. Given the prevalent uncertain situation, the company’s management indicated on cutting its Capex spending on the project until a definitive agreement with the Indonesian government is arrived at. However, despite this fact, the looming uncertainty will continue to have a negative impact on the company’s stock price.

Thus, on the basis of these unfavorable occurrences, our 2018 expected fair price for the company has been revised downwards as illustrated in our interactive dashboard. Although the company has stated that the new environmental decrees are more political than technical, investors have remained cautious with respect to their holdings of the company’s stock. In case you do not agree with our estimates, you can make changes to our assumptions to arrive at your own fair price estimate for the company.

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