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TheStreet Open House

What's Next for Freeport-McMoRan After Reprieve in Indonesia

NEW YORK (TheStreet) -- Mining company Freeport-McMoRan Copper & Gold (FCX) announced last week that it will resume exporting gold and copper from Indonesia in August after the government lifted a ban that had been in place since January.

Under an agreement with the government, Freeport will develop a smelter and increase royalties payments on copper and gold to Indonesia in exchange for a reduction in export duties on copper. The government had imposed a ban in exports to develop its own mining industry.

Shares of Freeport-McMoRan closed Wednesday at $37.88, down 3 cents. The stock is roughly flat year to date, compared with a 6.6% rise for the Standard & Poor's 500 Index.

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With the lifting of the export ban in Indonesia, Freeport will ramp up its copper sales in the coming quarters. Based on this deal, Freeport projects to reach over 1,065 million pounds of copper sold in the third quarter, almost 10% higher than the amount sold in the second quarter. 

Still, Freeport has already reduced its estimates of copper sales for this year by 200 million pounds to 4.1 billion pounds.

In Indonesia, Freeport still faces uncertainty with its operations in Grasberg, which is the world's largest gold mine and third largest copper mine. Still uncertain is what will happen after Freeport's license in Grasberg expires in 2021 as well as the level of royalties and taxes Freeport will have to pay to the Indonesian government for its mining in Grasberg.

Meanwhile, in the second quarter, Freeport's cash cost per pound of copper, which measures the direct cost of production and excludes depreciation and amortization, rose by 11% from the first quarter, mainly because of an increase in costs in its sites in Indonesia, South America and Africa. If production costs keep picking up, this trend could further depress Freeport's profit margin.

In other words, even with the lifting of the ban in Indonesia, a lot remains uncertain for Freeport and its shareholders.

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At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates FREEPORT-MCMORAN INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate FREEPORT-MCMORAN INC (FCX) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, reasonable valuation levels and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and generally higher debt management risk."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 3.0%. Since the same quarter one year prior, revenues rose by 28.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Compared to its closing price of one year ago, FCX's share price has jumped by 29.95%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • 43.73% is the gross profit margin for FREEPORT-MCMORAN INC which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 8.72% trails the industry average.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Metals & Mining industry and the overall market, FREEPORT-MCMORAN INC's return on equity has significantly outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • FREEPORT-MCMORAN INC's earnings per share declined by 6.1% in the most recent quarter compared to the same quarter a year ago. Earnings per share have declined over the last two years. We anticipate that this should continue in the coming year. During the past fiscal year, FREEPORT-MCMORAN INC reported lower earnings of $2.64 versus $3.18 in the prior year. For the next year, the market is expecting a contraction of 4.5% in earnings ($2.52 versus $2.64).

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