Photographer: Dadang Tri/Bloomberg

Freeport Hopes for 2017 Deal From ‘Complex’ Indonesian Talks

Updated on
  • CEO Adkerson says gap has narrowed on valuation of Grasberg
  • Rio Tinto will also be obligated to divest, Adkerson says

Freeport-McMoRan Inc. signaled it’s made progress with Indonesia on how to value its flagship Grasberg mine, but warned that the final stages of divestment negotiations are complex.

“We are working with the government to have a complete resolution of those issues, and the current goal that we’re both working on is by the end of the year,” Chief Executive Officer Richard Adkerson said from Jakarta during a two-hour long earnings call that was, once again, dominated by questions about Indonesia. “It would be a comprehensive and final agreement.”

Questions about Grasberg have preoccupied analysts and investors all year. In August, the Phoenix-based miner said it had agreed to a framework under which it would divest a majority stake in PT Freeport Indonesia -- of which Freeport currently owns 91 percent -- to local interests. However, the deal was contingent upon an agreement on value and talks stumbled, leading to a letter last month from Freeport rejecting some of Indonesia’s proposals.

On Wednesday, Adkerson said the two sides are closer on valuation than media reports have suggested. Earlier this month, Energy and Mineral Resources Minister Ignasius Jonan said PT-FI should be valued at about $8 billion. While Freeport insists valuation should be based on a public share offering, Adkerson said under the government’s current logic it should be looking at enterprise value -- equity plus debt -- rather than just equity value. That would result in a number closer to $13 billion for PT-FI, Adkerson said.

Adkerson refused to say if Freeport’s own $16 billion valuation for PT-FI, made during the company’s fourth-quarter 2015 earnings call, still stands, noting there have been positives and negatives for the value since then. However, using $16 billion would imply the gap between the two sides is roughly $1.25 billion, based on Freeport divesting 41.64 percent of PT-FI to bring local interests up to 51 percent.

Freeport shares fell 3.5 percent in New York after initially gaining as much as 2.3 percent following the open. Among the highlights, adjusted profit of 34 cents a share topped the 31-cent average of 20 analysts’ estimates compiled by Bloomberg. The company had trailed expectations in the previous five quarters. Revenue also came in ahead of estimates while net income was higher than the third quarter of 2016.

The company stuck to its full-year guidance, forecasting consolidated copper sales of 3.7 billion pounds of copper and 1.6 million ounces of gold.

“I think the initial excitement about the beat wore off because, at the end of the day, nothing has really changed from the full-year perspective,” Lucas Pipes, an analyst with FBR Capital Markets & Co., said following the call.

Sentiment also was hurt by confirmation from Adkerson that Freeport’s share of Grasberg may drop to just over 29 percent once joint venture partner Rio Tinto Group gets a 40 percent output share in the mine around 2022, Jeremy Sussman, an analyst at Clarksons Platou Securities Inc., said by email.

Once that stake kicks in, PT-FI will only control 60 percent of Grasberg’s production, meaning Freeport’s post-divested stake in the asset would drop to 29.4 percent.

Adkerson stressed that Freeport’s divestment will likely take place in stages between now and 2022 and the company will continue to generate significant cash from Grasberg in the meantime. However, he also said the issues currently being discussed by the two sides are “complex,” which also weighed on sentiment, Sussman said.

Teguh Pamudji, secretary-general at Indonesia’s Energy and Mineral Resources Ministry, couldn’t immediately comment when contacted on his mobile phone on Thursday.

With the Grasberg talks a drag on the stock through much of the year, Freeport trades at about 10 times estimated earnings, down from a high of 15 earlier in the year, according to data compiled by Bloomberg. In comparison, the S&P/ASX 300 Metals & Mining Index fetches about 15 times projected profit, little changed from earlier in the year.

Copper futures averaged $2.91 a pound in the third quarter in New York, 34 percent more than a year earlier.

Freeport has committed to building a smelter in Indonesia once a long-term agreement is reached. The total cost would be $2.5 billion to $3 billion funded by PT-FI, equity partners and debt, Adkerson said. He noted that Freeport is already in talks with the buyer of Batu Hijau about a possible joint venture stake. He also noted that PT-FI would be responsible for 60 percent of the costs, meaning Freeport’s outlay could be as little as 29.4 percent post divestment.

Rio Tinto has the right to approve any contract changes negotiated by Freeport. The company faces a similar divestiture obligation for its 40 percent stake, Adkerson said. “The Indonesians will also be looking at Rio Tinto’s interest and expecting a divestment.”

Grasberg is the world’s second-largest copper mine and accounted for 18 percent of the company’s revenue last year and most of its gold production. Freeport also has core assets in Peru, Chile and the U.S. In 2015, at the depth of the commodities downturn, it was forced to offload assets to reduce its debt that stood at more than $20 billion.

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