Freeport-McMoRan Could Lose Over $3 Billion In Revenues Due To Grasberg Transition

by Trefis Team
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Freeport-McMoRan Inc.
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The ongoing 2-year transition at the Grasberg mine in Indonesia, under which the mine is being converted from open pit to an underground mine, is set to deprive Freeport-McMoRan (NYSE: FCX) from taking advantage of positive trends in global gold and copper prices. At this stage, it would be interesting to know the potential revenue that FCX could lose out on, owing to this mine transition.

You can view the Trefis interactive dashboard – Impact of Grasberg Transition On Freeport-McMoRan’s Revenues – and alter the assumptions to arrive at your own estimates for the company’s financial metrics. In addition, here is more Materials data.

Almost 50% Loss of Revenue At Grasberg

  • Revenue from Indonesian operations has increased consistently from $3.6 billion in 2016 to $5.9 billion in 2018, contributing about 32% of FCX’s revenues in 2018.
  • Due to the ongoing transition, the mine is expected to contribute a very low output of copper and gold.
  • Trefis expects FCX’s Indonesian operations’ revenue base to shrink by a net of $2.9 billion by the end of 2020, on the back of lower copper and gold sales.

a] 37% Decline In Indonesian Copper Revenue

  • Though copper revenues have increased from 2016 to 2018 on the back of higher production and elevated global copper price levels, we expect FCX to see a net decline of about $1.12 billion in its copper revenue from Grasberg till 2020.
  • The ongoing transition of the Grasberg mine in Indonesia, which is the second largest copper mine in the world, is driving a sharp drop in the production of copper.
  • With US-China trade talks progressing and a possible truce in sight, prices increased since the beginning of 2019. However, re-escalation of tensions with the imposition of additional tariffs has led to drop in global copper prices post April 2019. Copper price outlook still remains positive due to strong end market demand, especially from electric vehicle manufacturers.
  • Thus, despite an uptick in prices, a significant drop in shipments is expected to lead to a sharp drop in copper revenue from Indonesia over the next 2 years.

b] >60% Decline in Indonesian Gold Revenue

  • Similar to copper, gold revenue also saw an increasing trend due to increased production volume and higher global gold prices.
  • However, gold revenue is expected to witness a sharp drop of close to $1.8 billion over the next 2 years.
  • Since Grasberg is the world’s largest gold mine and contributes almost all of FCX’s gold production (with some gold being contributed as a by-product from the American mines), the current transition at Grasberg would lead to negligible gold output for the company.
  • With increased retail and institutional investment in gold since December 2018, in the face of rising global economic uncertainty, gold prices have been on an upswing since the beginning of 2019.
  • With rising investment in the yellow metal by major central banks, gold price realization is expected to remain elevated.
  • However, FCX is expected to miss out on this opportunity, as a significant drop in production is likely to more than offset any improvement in price realization, thus leading to very low segment revenue over 2019 and 2020.

Conclusion: Projected Decline Of 17% In Total Revenues

  • For the full year, we expect Freeport-McMoRan’s revenues to decrease by over 21% to $14.7 billion in 2019 from $18.6 billion in 2018, followed by a slight recovery to $15.5 billion in 2020.
  • This amounts to a net loss of $3 billion (17%) in FCX’s total revenue base, primarily due to a sharp decline in revenue from its Indonesian operations, partially offset by higher molybdenum revenue, with an increase in molybdenum prices due to a revival in the demand for the product from China, along with higher sales from American mines.

 

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