Update February 22,2017. With the world’s largest copper mine at Escondida in Chile out on strike, the fight between Freeport McMoRan Copper and Gold (FCX) and Indonesia is a big, big deal. Copper has already climbed above $6,000 a metric ton and the metal is likely to head higher the longer the conflict drags on. On Monday, February 20, copper for March delivery climbed 1.6% to $6,066 a metric ton. On Tuesday, February 21, copper retreated 0.36%.
The root cause is a demand by the Indonesian government that Freeport follow newly written rules at the company’s huge Grasberg mine. Grassberg, located in Indonesia’s Papua province, is the largest gold mine and the third largest copper mine in the world. In 2016 Grasberg produced more than 500,000 metric tons of copper and over 1 million ounces of gold.
The rules would require Freeport to sell 51% of Grasberg to local owners and prohibits the export of copper ore or copper concentrate from Grasberg unless the company agrees to work under a new permit that would require local refining and would probably raise royalties. Freeport McMoRan is insisting on continuing under the current contract, which dates back decades. Freeport, unlike most other miners in Indonesia, has been successful in the past in holding out against government demands for new permits.
Freeport obviously intends to play hardball. The company has said it will suspend investment in Papua, reduce its workforce, and cut production by approximately 60%. That would devastate the local economy and cut royalty payments to the Indonesian government.
The government has, so far, shown no interest in backing down.
The two sides have 120 days to reach agreement and then Freeport can initiate arbitration proceedings.
Shares of Freeport McMoRan fell 5.23% on Tuesday, February 21, to $14.13. The stock is a member of my long-term 50 Stocks portfolio. Shares are down 7.13% for 2017 through the close on February 21, but up 95.2% over the last 12 months. Freeport McMoRan is up 50.25% since I added it to my 50 Stocks portfolio on December 30, 2008.
