Freeport: “Significantly Lower” Copper Production from Grasberg

Base Metals Investing

Freeport-McMoRan says it expects much lower copper production from its Indonesian operations as the Grasberg mine transitions from open pit to underground.

The Grasberg mine in Indonesia may be enjoying its last year as the world’s second-largest copper mine, with majority owner Freeport-McMoRan (NYSE:FCX) saying production will be “significantly lower” over the next two years as it transitions to underground mining.

In its quarterly report, released last month, guidance shows that copper production could fall as much as 300,000 tonnes in 2019, which would drop the huge project well off its spot near the top of the biggest producers list. The mine produced 478,000 tonnes of the red metal in 2017.

According to the report, the company, which is mining the last of the open pit now, believes that the first ore from underground activities will be produced “in the first half of 2019.”

“Lower copper and gold production from Indonesia mining is expected during the transition period in 2019 and 2020,” it says. The full ramp up of underground activities is expected to be complete by 2021. 

There’s been plenty going on behind the scenes for the American company, which has been grappling with a changing rule structure required by Jakarta. The country now has laws requiring extractive resources be majority Indonesia owned.

Richard Adkerson, president and CEO of Freeport, has been talking up the company’s progress with the government though, which has so far progressed to Freeport’s joint venture partner Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO) committing to bowing out of the operation.

“We achieved important progress during the quarter to reach a new long-term partnership structure with the Indonesian government, and we remain focused on completing negotiation and documentation of definitive agreements to restore long-term stability for [Grasberg],” he said at the end of July.

Under a heads of agreement signed last month, the three partners — Freeport, Rio and Jakarta — are working towards a 51-49 percent ownership structure in Jakarta’s favor, with Freeport holding the remainder and acting as operator.

To get there, Rio will sell its share for US$3.5 billion, and Freeport will relinquish part of its share to bring Jakarta’s ownership to 51 percent.

Talks are ongoing, and both Freeport and Rio have stressed that the heads of agreement is non-binding, and the complexities in negotiations ahead could prevent the deal from closing at it currently stands.

Adkerson also touched on the copper price, which many have noted is headed down.

“Despite the recent decline in copper prices associated with the uncertain impact on the global economy of recent international trade actions, we remain positive on the outlook for copper prices given limitations on supply and the important role of copper in the global economy,” he said.

“To date, we have not experienced a decline in demand for our products, but will be prepared to adjust our plans if necessary to respond to market conditions.”

There’s little chance of a decline in demand, according to analysts, who have so far noted that new copper projects are few and far between for the near term.

David Lilley, managing director of Drakewood Capital Management, said that “the problems facing copper supply are meaningful, widespread and generally underestimated … It seems like wherever you look there are challenges be they political, labor unrest, under-investment, ore-grade depletion or some combination of them all.”

Speaking to the Investing News Network last month, Thomson Reuters GFMS base metals analyst Karen Norton said that while the pipeline of new projects has been sparse, growth between 2020 and 2022 will improve — just in time for Freeport and Grasberg if all goes well.

“Our 10-year supply view indicates that there will be a period of slow supply growth between 2020 and 2022, but, even discounting low- and medium-probability projects, momentum (bearing in mind the economic cycle) is expected to pick up again with a return to long-term, or close to long-term, average growth rates in the ensuing years,” she said.

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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.

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