| Key Updates on Freeport-McMoRan’s Indonesia Operations | |
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A Closer Look at Freeport-McMoRan’s 3Q15 Earnings (Continued from Prior Part) Indonesia operations
Freeport-McMoRan (FCX) owns the Grasberg mine in Indonesia (EIDO). Rio Tinto (RIO) is Freeport-McMoRan’s partner in this mine. Mining operations in Indonesia have been in the news for the last couple of years. In 2014, Indonesia banned exports of unprocessed base metals (DBB). This negatively affected companies with copper mining assets in Indonesia, including Freeport-McMoRan and Newmont Mining (NEM).
The graph above shows the unit cash costs after by-product credits for Freeport-McMoRan’s different operations. The Grasberg mine is a key asset for Freeport-McMoRan, as we can see from looking at the mine’s low-cost operations. In its 3Q15 earnings conference call, Freeport-McMoRan provided updates on its Indonesian operations. Let’s discuss them in detail.
Underground operations
- Freeport-McMoRan has to sign an amended contract of work (or CoW) with the Government of Indonesia. The current CoW allows Freeport-McMoRan mining access only until 2021.
- According to Freeport-McMoRan, it has received a letter of assurance from the Indonesian Government regarding the company’s ability to extend its operations beyond 2021.
- The Grasberg mine will need to be converted into underground operations in the next couple of years. According to Freeport-McMoRan, the capital expenditure needed to convert Grasberg into an underground mine will be around $15 billion.
- According to Freeport-McMoRan’s CEO, Richard Adkerson, the company would have to spend “$800 million a year for the next several years, including power and processing facilities,” in its Indonesian operations.
Higher royalties?
- Last year, Freeport-McMoRan had to increase royalty rates to 3.8% for gold and 4% for copper. Earlier, the royalty rate was 1% for gold and 3.8% for copper.
- There have been concerns that Freeport-McMoRan might have to offer higher royalties to the Indonesian government. However, Richard Adkerson tried to allay these fears. He said, “Like we see here in the United States with this presidential campaign, there’ll be a lot of comments politically coming out of Indonesia.”
In the next part of this series, we share a valuation analysis for Freeport-McMoRan.
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Vale Inco is a nickel and copper producing company based in Brazil. Vale Inco produces nickel, copper, gold, palladium and platinum in Canada, and holds various exploration projects in Australia, in Brazil, in Canada, in Indonesia, in New Caledonia, in Peru and in Turkey. Its main assets in production are MCCREEDY WEST MINE and VICTORIA - INCO in Canada and its main exploration properties are EAGLE CREEK, MEL PROJECT, B20, SHEBANDOWAN - BAND-ORE and GARSON MINE in Canada and GOONGARRIE SOUTH - GOONGARRIE, HIGHWAY - GOONGARRIE, SCOTIA - GOONGARRIE, BIG FOUR HERON - GOONGARRIE, GOONGARRIE HILL - GOONGARRIE, TOBY PROPERTY and BORDER DOWNS in Australia. |