Freeport-McMoran Inc (FCX) Grasberg Not a Done Deal; Berenberg Suggest Risks Remain

In Any Agreement Between Freeport and Indonesian Government, FCX Stands to Lose


Despite having reached “an understanding on a framework” with the Indonesian government on Tuesday, Freeport-McMoRan Inc (NYSE:FCX) shareholders were clearly apprehensive sending the stock 4% southward yesterday. The new framework contains three essential sections that deal with the length of the mining license, time frame for constructing a smelter, and the level of PT-FI divestment. However, there are a number of issues of contention, including operation evaluation. The government put its evaluation on operations at a fraction of the $16.2 billion that Freeport had proposed.

Analyst Fawzi Hanano of Berenberg highlights that this is “not yet a done deal,” noting that three main sticking points (namely: evaluation, operating control, and payment) could impede any finalized agreement. “While it is encouraging to see that progress is being made to reach a long-term agreement on Freeport’s operating presence in Indonesia, it is clear that this is not a done deal and that risks remain. An agreement will still require board approval and we believe would need to include definitive terms concerning valuation and form of payment, as well as the period during which Freeport may retain operating control of PT-FI; the absence of this could be a deal-breaker for Freeport,” opines the analyst.

Underscoring that management has already caved on its prior demand of not ceding a controlling interest to an Indonesian party, the government is additionally standing ground on other major requirements relating to divestment levels and the smelter. Moreover, in any finalized agreement, PT-FI would be obliged to sell a controlling share, while only maintaining control of operations. In the wake of statements by Ignasius Jonan, the energy and mineral resources minister of Indonesia, Hanano sees indications “that Indonesia will probably want to take operating control away from Freeport at some point before the expiry of PT-FI’s mining licence in 2041.”

In the end, Hanano emphasizes that in his view, “the Indonesian government will be the net winner in any agreement and that the market continues to underestimate the actual impact on Freeport.”

As such the analyst maintains a Sell rating on FCX stock with a $10.40 price target representing a 28% drop below current trading levels. (To watch Hanano’s track record, click here)

TipRanks analytics exhibit FCX as a Hold. Out of 7 analysts polled by TipRanks in the last 3 months, 2 are bullish, 4 are sidelined, while 1 is bullish on Freeport stock. With an upside potential of 6%, the stock’s consensus target price stands at $15.49.

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