Political Risks Weigh on Freeport, Vale & Other Mining Stocks

by Trefis Team
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Global miners have recently witnessed growing political risks that have left investors cautious. Mining stocks like Freeport McMoRan Copper & Gold Inc. (NYSE:FCX) and Newmont Mining Corporation (NYSE:NEM) have taken a dip following the Indonesian government’s decision to restrict foreign investment in natural resource-rich country. In January, China barred Vale’s (NYSE:VALE) vessels from docking at its port to protect the domestic shipping industry and curb imports of iron ore. On a similar note, a joint venture between Barrick Gold (NYSE:ABX) and Antofagasta was refused a mining license in Pakistan last year. These precedents exacerbate the uncertainties for miners and investors while discouraging investment in the industry. This is a big reason that mining stocks have not replicated the returns generated by their underlying commodities.

See Our Full Analysis for Freeport | Vale | Newmont Mining | Barrick Gold

Freeport vulnerable to Indonesia risk, Newmont less affected

Last week, the Indonesian government announced an amendment in its regulations which would require foreign companies to gradually decrease their stakes in mines and increase domestic ownership to at least 51% by the 10th year of production. The country justified its stand by saying that domestic firms should reap more benefits from the nation’s huge mineral wealth. [1]

This surely doesn’t bode well for Freeport, which owns the world’s largest gold mine (and second largest copper mine), Grasberg in Indonesia. Freeport has faced a host of issues at the mine, including significant labor disruptions and now this regulation. The company is saying that the government will honor its existing contract, which should protect its interests. However, should the government decide to attempt to renegotiate that contract it could have a substantial impact on Freeport’s future earnings.

Looking at Freeport’s financials, it is evident that the company is much more dependent on its Indonesian mining operations than other geographies. As shown in the chart above, nearly 20% of Freeport’s value comes from its Indonesian copper mines, according to Trefis estimates. That figure doesn’t include the gold from its Indonesian mines; in 2011, Indonesia contributed almost 85% of Freeport’s total gold revenues. [2]


Conversely, the impact of the new regulation on Newmont will likely be minimal as its existing contract covers similar clauses. Further, the company is relatively less dependent on its Indonesian operations.

Vale runs into Chinese wall

In January, the Chinese government banned Vale’s giant “Valemax” ships from docking at its ports, in what could be another political risk looming over the industry as a whole. Vale’s fleet of 400,000 deadweight ton Valemax ships, each costing about $110 million, were constructed in an effort to reduce its shipping costs and compete with better-positioned Australian companies Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP). However, China slapped a 350,000 deadweight ton limit on vessels docking at its ports to protect its shipping industry and reduce its dependence on imported iron ore. This was partially in response to a complaint from the China Shipowners Association, which claimed that Vale’s massive ships would drive freight rates down throughout the industry. As a result, Vale has had to send its giant vessels to costlier trans-shipment hubs in the Philippines and Malaysia and then transfer it to smaller vessels.

Vale is trying to negotiate with the Chinese government to lift the ban. The company is also talking to the governments in Japan and South Korea to allow access to their ports for Valemax vessels. Otherwise, the company may have to wait until 2014, when it completes the construction of a distribution center in Malaysia with a capacity of 30 million tons per annum. [3]

Barrick Gold hits roadblock in Pakistan

Tethyan Copper Company (TCC), a joint venture between Barrick Gold and Chile’s Antofagasta, also ran into a political roadblock in Pakistan last year, and is currently struggling to save its $220 million investment. The company spent five years exploring deposits in the Baluchistan state of Pakistan and was planning to invest a total of $3.3 billion before the government surprised it by refusing to grant a mining license. The licenses were then granted to inexperienced Pakistani and Chinese companies. The matter is currently pending with the Supreme Court of Pakistan. [4]

How do miners hedge against these risks?

All of these events help to explain why these mining stocks haven’t realized the same returns as many of the underlying commodities. If other governments are prompted to take similar steps, it could have a significant impact on the industry as a whole. Absent an industry-wide regulatory overhaul we believe that the more geographically diversified miners will be best positioned going forward.

Understand how a company’s products impact its stock price at Trefis

Indonesia changes rules on foreign mine owners

  1. Indonesia changes rules on foreign mine owners, Reuters, Mar 7 2012 []
  2. FCX Reports Fourth-Quarter and Year Ended December 31, 2011 Results, FCX News Releases, Jan 19 2012 []
  3. Vale moves to spot ore pricing; sees ship solution, Reuters, Feb 16 2012 []
  4. Fool’s Gold? Pakistan mine rift exposes investor risk, Reuters, Feb 17 2012 []
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