An Investor’s Guide to Freeport-McMoRan’s 2016 Outlook
(Continued from Prior Part)
Freeport-McMoRan’s Indonesia operation
As discussed previously, Freeport-McMoRan (FCX) needs to sign an amended contract of works (or COW) with the Indonesian government. Freeport needs assurance from the government so that it can go ahead with the investment to convert the Grasberg mine into underground operations.
However, according to Indonesian law, the contract cannot be extended before 2019, which is two years before the current contract expires.
Capital expenditure
According to Freeport-McMoRan, the capital expenditure needed to convert Grasberg into an underground mine would be ~$15 billion. From Freeport’s perspective, it’s crucial to extend the contract at the earliest opportunity so that it can proceed with the investment with a sense of security and stability. However, we’ve seen differing statements from Freeport and the Indonesian government.
Last year, Freeport said that it has received a letter of assurance from the Indonesian government regarding the company’s ability to extend its operations beyond 2021. However, the Indonesian government has denied that it has given any assurance to extend the contract beyond 2021.
Negotiations
Freeport has retained the services of its outgoing chairman, James Moffett, to provide advisory services in relation to the company’s ongoing negotiations with the Indonesian government. Freeport needs the contract extension more than the Indonesian government does, which could mean that Freeport might have to offer more concessions to the Indonesian government to get the contract extended.
Resolving the issues in Indonesia (EIDO) would be a key priority for Freeport in 2016. Another issue that Freeport needs to address is regarding its energy assets. We’ll discuss this in more detail in the next part of this series.
Investors looking to diversify the risk of investing in a single security can also consider the SPDR S&P Global Natural Resources ETF (GNR). Together, BHP Billiton (BHP) and Rio Tinto (RIO) form 6.3% of GNR’s portfolio. Overall, GNR’s holdings comprise almost a quarter of its investments in metal companies.
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