As per a draft regulation awaiting signature by Indonesia's President, Freeport-McMoRan Inc (NYSE:FCX) may be able to export unprocessed copper concentrates from Grasberg after the Jan 12th export ban kicks in. However, Freeport will first have to agree to change its existing Contract of Work to an IUPK license. Management has said that any new agreement must provide the same legal and fiscal certainties as provided in the COW. Jefferies expects a resolution, but there are still hurdles.
As per Indonesia's 2009 Mining Law, there was to be a ban on exports of unprocessed ores and concentrates from the country starting in January 2014. While the ban on exports of unprocessed ores (nickel, bauxite) happened at that time, Indonesia provided a three year extension to producers of metals in concentrate to give them time to build domestic smelters. The export ban for those miners, including Freeport, was deferred to 12 January 2017. Freeport's smelter is not yet complete, and construction has been on hold due to uncertainty regarding mining rights beyond 2021. The export ban for unprocessed concentrates from Grasberg is therefore scheduled to begin on Jan 12th. If this ban happens, >500ktpa of copper production from Grasberg would be at risk, based on 2017 production plans. This equates to more than 2% of global copper supply.
Freeport has been unwilling to give up the fiscal and legal rights that it has under its COW, which has been in place since 1991. Any disputes regarding the terms of the COW are subject to international arbitration. This important arbitration provision for Freeport may not be included in an IUPK. In addition, IUPKs must prioritize national interest whereas Freeport 's COW gives it the right to export at its own discretion. IUPKs may also allow the public to sue companies that violate existing environmental laws. Freeport may not agree to change from a COW to an IUPK due to these issues. One possible solution is a license along with a stability agreement, as Freeport has in other regions.
Grasberg is Freeport's most important asset. This is the world's lowest cost and second largest copper mine. If Freeport and Indonesia come to an agreement regarding long-term mining rights, both parties should benefit. Freeport will invest in a domestic smelter, develop the large block cave mine at Grasberg (total cost of $1bn per year from 2016-20) and sell a 20.64% stake in PT-FI to a state enterprise or list the stake on the Indonesian Exchange. Higher sales volumes from Grasberg - including the sale of unprocessed concentrates for export before the smelter is complete - will lead to higher taxes and royalties for Indonesia, and Freeport's continued investment in the district would be good for employment and good for the economy of Papua in general. Because of these factors, Jefferies expect an agreement to ultimately be reached, although there is risk of delays. If there is no agreement, this would be a supply shock to the copper market, and the copper price would likely go much higher as a result. All things considered, Jefferies would buy FCX shares now as an agreement would be a clear positive for the company. Even if there is a delay and exports are halted for a short period of time, the increase in the copper price would partially offset the negative impact of lower volumes for Freeport.