Freeport Reports Progress on Indonesia Talks, but Issues Linger

By Amrith Ramkumar

Mining giant Freeport-McMoRan Inc. said negotiations with the Indonesian government over control of the giant Grasberg copper and gold mine are progressing, but the parties have pushed their target date for a deal to midyear.

Freeport said in August that it would give up its majority stake in one of the world's largest copper mines, dropping to 49% from roughly 90%, as Indonesia seeks a greater share of the wealth from the country's vast mineral resources.

A sale of the mine stake would give Freeport cash and reduce risk in a mine it doesn't directly operate, analysts say.

The two sides have yet to come to an agreement over the valuation of that stake. The Phoenix-based company previously said it wanted to reach a deal by the end of 2017. That timetable is delayed because Indonesia is continuing to evaluate the benefits of potentially acquiring global mining giant Rio Tinto's stake in the mine.

Rio Tinto has a 40% interest in the mine's production under a roughly 20-year-old joint-venture agreement, and Indonesian officials said last month that the country plans to buy Rio's interest. A possible agreement there could limit Freeport's sale to a roughly 9% stake and make negotiations much easier, according to analysts.

"It appears to be the desire of the parties to do that, so I would characterize it as a most likely outcome," Freeport Chief Executive Richard Adkerson said on a Thursday earnings call with investors and analysts. "We've made a lot of progress."

Still, he acknowledged that there are differing views among the government's advisers and the government itself, and details need to be ironed out.

"I've spent as much time in Jakarta as I have in Phoenix," he added.

Freeport is now anticipating a midyear target date for an agreement, though the timetable could hinge on Indonesia and Rio Tinto reaching a deal. Complicating the picture for investors if a deal is delayed further is uncertainty over the effects of a smelter that Freeport has agreed to build by 2022 and the company's work on developing what had been a largely open-air mine underground.

Mr. Adkerson said Freeport's current standing under the agreement with Rio Tinto would be preserved if Rio Tinto and Indonesia reach a deal, and he has said Freeport wants operational control of the mine, which some analysts estimate accounts for about one-third of the firm's market value.

"It is pretty clear that they've made significant progress. That's the good news," said Christopher LaFemina, an analyst at Jefferies. But "they are not yet at the finish line. It's still a very complex situation."

Mr. LaFemina has a buy rating on the stock, which has rallied more than 60% to $19.55 since the start of July, and raised his price target to $26 following the firm's update.

For the fourth quarter, Freeport reported a 15% rise in revenue, boosted by a roughly 20% rally in copper prices since the start of July that has the industrial metal near four-year highs. Profits also came in ahead of Wall Street estimates. Shares edged higher Thursday, swinging as metals prices reacted to the dollar's moves. They are still well below highs hit during previous commodity rallies in 2008 and 2011.

Favorable demand from China and the possibility of supply disruptions around the world have supported copper recently, though some investors are worried a China slowdown could weigh on prices.

Freeport said it is optimistic about the long-term outlook for copper, discussing progress on long-term projects and the possibility of reinstating its dividend to shareholders as its balance sheet strengthens.

"It's a testament to Freeport's improved standing," said Lucas Pipes, an analyst at B. Riley who has a hold rating on the stock and an $18 price target. Still, regarding Indonesia, "the devil sits in the details.... I think six months could pass quickly," he said.

--Allison Prang contributed to this article.

Write to Amrith Ramkumar at [email protected]