Why Freeport-McMoRan Inc (FCX) Stock Is Much Uglier Without Indonesia

Advertisement

How does the old saying go? Don’t put all your eggs in one basket? It’s advice that Freeport-McMoRan Inc (NYSE:FCX) shareholders were likely wishing the company had heeded for itself.

Why Freeport-McMoRan Inc (FCX) Stock Is Much Uglier Without Indonesia

Although the mining and drilling outfit [though it’s getting out of the oil business] didn’t limit itself to just one property to develop, in retrospect most owners of FCX stock just learned the hard way not to lean too heavily on just one asset.

Specifically, a mine where someone outside the company has room and reason to pull the rug out from underneath the company’s plans. Freeport McMoRan will survive, and FCX will recover; time heals all wounds. It’s going to take some time to fully recover though.

FCX: No Deal

The legal wrangling between Indonesian regulators and Freeport McMoRan has been underway for months.

In short, the country wants to raise its tax and royalty revenue on the country’s copper exports — new costs, by the way — which hits Freeport right in the breadbasket. See, the company owns rights to the Grasberg copper mine in Papua, which just so happens to be the second-biggest copper mine in the world, and it was going to make the company boatload of money for year to come.

The bickering hadn’t taken too much of a toll on FCX stock, with most investors presuming the two parties would come to some sort of an accord. Plus, with copper prices up 30% over the last twelve months, it was in both parties’ best interests to work it out. More copper output means more jobs for Indonesians, and more profits for Freeport McMoRan.

Now, neither side wants to budge.

And it does matter. Along with the news of the impasse, the company reported it’s planning a 60% reduction in the mine’s output. That translates into a company-wide copper production cut of about 17%, and a whopping 59% dip in gold sales.

If it’s a slow-motion game of chicken, FCX seems to be losing it.

Deutsche Bank Takes Aim at Freeport McMoRan

It took little time for Deutsche Bank’s analysts to respond to the news, downgrading FCX stock from a “Hold” to a “Sell,” and simultaneously lowering the firm’s price target from $14.00 to $12.50.

Analyst Chris Terry explained:

“Following news that Freeport has failed to reach an agreement to export copper concentrate from Indonesia, we now assume 1) Grasberg operates on scaled-back mode, only supplying the local Gresik smelter for the remainder of 2017 and 2) underground development and ramp-up (production and capex both pushed-out) are delayed a further 18 months. We now value PT-FI’s share of Grasberg at $11.7bn ($8.3/sh), down from $12.9bn ($9.1/sh). Grasberg is a high quality, long life, low cost asset, but ownership and operating risks continue to increase.”

The concern is merited. The company itself said that for each month Indonesia and it can’t come to an agreement, it loses out on production of 70 million pounds of copper and 70,000 ounces of gold.

The company doesn’t have such wiggle room.

Although Freeport swung back to a profit a couple of quarters ago, margins remain woefully thin; last quarter’s net profit was less than 7% of sales. A whopping $18.2 billion in debt is proving to be a drag as well.

Bottom Line for FCX Stock

Whether Indonesia’s new royalty and tax policies are a means of capitalizing on fortuitous copper prices or just one big unfortunate coincidence isn’t clear; it may be a combination of both. Whatever the case, Freeport McMoRan is on the defensive here, and isn’t well armed to fight.

In simplest terms, the nation’s government has nothing to lose. If FCX throws in the towel, a different player willing to play by the new rules will step up to the plate and pay what regulators are asking … which includes selling more of its copper concentrates to Indonesian buyers.

Either way, this ends ugly for the company.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/freeport-mcmoran-inc-fcx-stock-uglier-without-indonesia/.

©2024 InvestorPlace Media, LLC