Why Grasberg Mine Could Be Freeport’s Wild Card this Year
Understanding the Strategic Importance of Freeport’s Asset Sales
Grasberg mine
A stake sale in Indonesia was one of the ways through which Freeport-McMoRan (FCX) intended to raise cash. According to Freeport-McMoRan’s agreement with Indonesia’s government, over time, it needs to divest a 20.6% stake in the Indonesia operations to the government or its citizens.
In its 4Q15 earnings conference call, Freeport-McMoRan noted it has submitted the valuation of the Indonesian (EIDO) operations to the government. The company valued the Indonesia operations at ~$17 billion. Freeport’s Indonesia operations, where Rio Tinto (RIO) (TRQ) is its partner, is one of the most sought-after assets in Freeport’s portfolio.
Valuation differences
However, recent industry reports suggest that the Indonesian government is valuing the Freeport’s Indonesia operations at only a fraction of what Freeport proposed. While Freeport had proposed a valuation of $1.7 billion for ~10.6% stake in the Indonesia operations, the Indonesian government is valuing it at only $630 million.
According to Freeport, it wants the asset to be valued at fair market value, but the Indonesian government is valuing the asset on replacement cost. According to Freeport, it’s in talks with the government to settle these issues amicably. However, the company said it could look at international arbitration over this issue, as it has no obligation to divest the stake in Indonesia.
Wild card
Indonesia operations are a wild card for Freeport. If the company manages to get an IPO of its Indonesia operations at valuation levels near what its management guided in the 4Q15 earnings call, it could go a long way in restoring investor confidence. Higher valuation for the Indonesia operations would not only help it raise more cash but also support Freeport’s valuation multiples.
But then, valuation is not the only issue facing Freeport’s Indonesia operations. You can read about the other issues in Key Issues facing Freeport-McMoRan’s Indonesia Operations.
In the next part of this series, we’ll see if selling copper assets is the correct strategy for Freeport.
You can also consider the Materials Select Sector SPDR ETF (XLB) to get a diversified exposure to the materials sector. Together, Freeport and Newmont Mining (NEM) form ~6.4% of XLB’s portfolio.
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