Freeport-McMoRan, Inc. (NYSE: FCX) has done a great job turning itself around. But just as it was starting to gain traction in its efforts to recover from an (in hindsight) ill-advised oil investment, troubles popped up at one of its most important mine investments: the Grasberg Mine in Indonesia. Legal wrangling with the country's government has cast a cloud over the company's future. But it should, hopefully, start to clear over the next year. Here's what you need to know.
Credit where credit is due
The first thing to make clear is that Freeport's management has been executing well. Previous company leaders made a debt-fueled investment in the oil and gas industry that didn't work out. That left the miner with two notable problems: Some $20 billion in long-term debt and an oil business that was a drag on performance.
Image source: Getty Images
When new management came in it quickly went to work to right the ship. The oil business is now effectively gone, and long-term debt has fallen from around $20 billion following the 2013 acquisition to $11.1 billion at the end of the first quarter of 2018. As a sign of just how much progress has been made, the company reinstated its dividend in the first quarter. It was eliminated in late 2015, partly because of the debt overhang left from the ill-fated oil merger.
Unfortunately, the Indonesian government has decided that it wants to benefit more from Freeport's Grasberg mine. That issue jumped into the headlines in early 2017, and has been a dark cloud on the horizon for more than a year at this point.
Calling it an important asset is an understatement
The first thing to understand is that Grasberg is a key mine for Freeport. In the first quarter the mine accounted for roughly a third of the company's copper sales volume, and basically provided every ounce of gold Freeport sold. Note, too, that this is one of the lowest cost operations in Freeport's portfolio, with operating costs 18.5% below the company's average -- and when you take into consideration by-product credits, the mine's costs were actually negative. So what happens at Grasberg is vitally important to the future of Freeport-McMoRan.
A quick idea of just how important Grasberg is to Freeport. Image source: Freeport-McMoRan, Inc.
In fact, the copper and gold miner would like to invest in the giant, low-cost mine. It has a five year, $4 billion expansion project on the drawing board just waiting to be put into action. But until there is a clearer picture of the future at Grasberg, those plans are largely on hold.
Effectively, Indonesia wants to have a controlling stake in the mine. That will require Freeport to materially reduce its ownership and, perhaps, material control at this key asset. The two sides came to a broad agreement in late 2017 that would leave Indonesia with a 51% stake. However, the finer details have been harder to agree on.
The two sides are hoping to have a final resolution by the middle of 2018. A mutually beneficial agreement would obviously be good for everyone, but governments and companies often have different views of the world. For example, Indonesia's Ministry of Environment and Forestry imposed new environmental standards in April of 2018 that are complicating the larger mine discussion. The stock sold off sharply, partly because of this revelation. This is a big, difficult, and still very uncertain issue facing Freeport and its investors.
A clearer picture
With any luck Freeport will have a solution to its Grasberg problem by the middle of 2018, the agreed upon target. The timing, however, is still unclear, and the mid-year date could slip. The actual impact of that solution, meanwhile, will be far more clear as the two sides work to implement the agreement. Assuming the mid-2018 date holds (or is at least close to the right time frame), this will all unfold over the next year, and at that point investors will have a much better idea of what Freeport's future will look like. In fact, until there's a resolution, most investors are better off watching from the sidelines here. The unfortunate fact is that, despite the current goal, the two sides could still be discussing this issue in a year's time...
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