Update Freeport McMoRan Copper & Gold (FCX)

03/09/2012 5:55 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Freeport McMoRan Copper & Gold (FCX) has been a laggard in the rally of the last few days. Oh, the stock was up yesterday, March 8—1.3% at the close—but that trails the performance of mining stocks such as Goldcorp (GG), up 1.7%, and BHP Billiton (BHP), up 1.5%. Today the shares finished off 1.8%.

That because Freeport McMoRan and every other mining company that operates in Indonesia has a country-specific problem today. A new government regulation announced bars foreign companies from owning more than 49% of some mines.

Limiting ownership to 49% would be a big blow to companies such as Freeport and Newmont Mining (NEM), which climbed just 0.4% today.

But the decree leaves open the question of exactly which mines it would apply to—making it hard to judge the impact on specific companies.

Right now I don’t see a reason to sell Freeport McMoRan out of my Jubak’s Picks portfolio http://jubakpicks.com/ but I think the situation merits watching.

The regulations say that foreign holders of mining licenses will have to begin divesting a part of their ownership to Indonesian holders beginning five years after production starts. By year 10, at least 51% would have to be held by Indonesia companies. (An earlier regulation had set the maximum foreign ownership at 80%)

But neither Newmont Mining nor Freeport McMoRan, which runs the world’s second largest copper mine at Grasberg, operate under mining licenses. For example, Freeport McMoRan operates Grasberg under contracts that don’t convert into mining licenses until 2021.

In Freeport McMoRan’s case the danger to company earnings isn’t divestiture but government efforts to renegotiate the company’s contracts to include higher royalty payments. Such renegotiation seems to be part of life in the copper mining industry these days as governments try to recoup a greater part of the rising price of copper. And for mining companies, higher royalty payments can be passed along to customers as long as global copper supply remains in deficit to global demand.

In the long run the new regulations will discourage some new companies from investing in Indonesia’s mining industry—and that will probably work to the benefit of existing operators since it will reduce the amount of new supply coming to market over the next decade.

But that’s a very long-term view. Right now, investors are just paying attention to the short-term uncertainty.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Freeport McMoRan Copper & Gold and Goldcorp as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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