Report: Freeport can ride out Grasberg storm

Shares in Freeport McMoRan Inc (NYSE:FCX), the world's largest listed copper miner, was hammered down on Wednesday after the US company announced fourth quarter earnings below expectations and warned about problems at its operations in Indonesia.

But the stock soon rallied and on Friday, Freeport was trading up 3.7% in New York, bringing gains so far in 2017 to more than 24%. The pundits favourite regularly makes the most active list on the NYSE and the Phoenix-based miner is worth $23.6 billion on the NYSE boasts a 255% increase in market value over the past year.

In a statement accompanying the financial results Freeport said it had not received approval to ship copper concentrate from its Grasberg mine as of Wednesday and in the absence of a permit, production at the mine Indonesia's Papua province would drop to roughly 40% of capacity.

A ban on concentrate exports from Indonesia kicked in on January 12 as part of the South East Asian nation's comprehensive change to mining regulations and ownership rules. Freeport's Grasberg mining complex in the remote Papua region of Indonesia is responsible for more than a quarter of its total output and before the current troubles were set contribute an even greater proportion in 2017 as copper grades improve and gold production is boosted.

The North and South American mining operations are stronger contributors than in the past with the expansion at Cerro Verde also contributing to its improved cost position

On Friday, ratings agency Moody's which has a positive credit rating outlook on Freeport said recent developments are credit negative for the company, but thanks to Freeport's cost reduction and asset sales undertaken last year, the company should be able to weather the latest storm surrounding the iconic mine:

Freeport must convert its so-called Contract of Work (COW) to a new IUPK (special operating license). Conversion to an IUPK would allow for the export of copper concentrate for 5 years through January 2022. FCX's current COW expires in 2021 and as per description of the contract terms contains 2 ten year extension rights subject to government approval not being unreasonably withheld or delayed.

Although FCX has advised the Indonesian Government that it is willing to convert to an IUPK, the company seeks an investment stability agreement that would afford rights and protections similar to what is in the existing COW. From the date of the new regulations FCX (and other similar copper producers in the country), has not exported copper concentrate from PT Freeport Indonesia (PT-FI).

Other changes in Indonesia's new regulations include the requirement for all foreign investors to sell their interests down to 49% over a 10 year schedule. Freeport and Indonesia have been locked in discussion over additional stake sales for year, but the two parties have made little progress on valuation of the giant mine which has been mined since the early 1970s.

Moody's warned that Freeport is "not in the same position to absorb lost revenues on no exports over the same time frame it could accommodate when the ore export bans came into effect in 2014 (FCX
did not export concentrate January 2014 through July 2014)":

Nonetheless, the North and South American mining operations are stronger contributors than in the past with the expansion at Cerro Verde also contributing to its improved cost position. We estimate that without production from Indonesia, FCX's debt/EBITDA would be 5x (using $2.25/lb copper sensitivity), a level that is acceptable.
[…]
Further, the current liquidity position, including cash of $4.2 billion at December 31, 2016 comfortably covers the $1.2 billion in 2017 debt maturities.

For each month of delay in obtaining approval to export, the Indonesian subsidiary's share of production is projected to be reduced by approximately 70m pounds of copper and 100,000 ounces of gold

Grasberg boasts some of the world's largest copper and gold reserves value at over $200 billion at today's prices and Freeport said it may have to suspend planned spending of around $1 billion per year through 2021 to transition the mine to underground operations unless exports can resume.

Freeport said consolidated sales volumes from Indonesia mining operations assuming normal operations, including the resumption of concentrate exports in February 2017 and the renewal of its smelters export license are expected to total 1.3 billion pounds of copper and 2.2 million ounces of gold for the year 2017.

But for each month of delay in obtaining approval to export, the Indonesian subsidiary's share of production is projected to be reduced by approximately 70 million pounds of copper and 100,000 ounces of gold according to Freeport.

On Wednesday, Freeport posted revenue of $4.4 billion for the fourth quarter and net income of $292m compared to a loss of $4.2bn in the same quarter 2015 due to writedowns on its oil and gas businesses. Annual revenues came in at $14.8 billion and losses for the year amounted to just over $4 billion, or $3.16 per share.

Freeport said sales totalled 1.2 billion pounds of copper, 405,000 ounces of gold and 22 million pounds of molybdenum for Q4 2016 and 4.65 billion pounds of copper, 1.1 million ounces of gold and 74 million pounds of molybdenum for the year 2016.

Consolidated sales for the year 2017 are expected to be around 4.1 billion pounds of copper, 2.2 million ounces of gold and 92 million pounds of molybdenum, including 1.0 billion pounds of copper, 460,000 ounces of gold and 23 million pounds of molybdenum for first-quarter 2017.