The world’s largest publicly traded copper miner Freeport-Mcmoran Inc (NYSE: FCX) reported a swing to profit in the fiscal 2017 second-quarter. That took the share price to $15.71 in August. However, the stock has lost about $2 so far to close at $14.18 yesterday. The principal reason behind the decline is the new mining rules of Indonesia that threatened to put an end to the copper concentrate exports of the company.
However, after years of negotiation, the company has reached a deal with the government of Indonesia. Freeport-McMoran has to give up its majority stake in the company, according to the signed agreement. However, as discussed below, the company would still benefit from the strong long-term demand outlook for copper. Thus, we expect a bullish reversal in the stock price in the week ahead.
The Phoenix, Arizona-based Freeport-McMoran recorded Q2 2017 revenues of $3.711 billion, compared with $3.334 billion in the corresponding period of fiscal 2016.
The owner of Grasberg mine reported a net income of $268 million, or $0.18 per share, in 2Q17. This compares with a net loss of $479 million, or $0.38 per share, in 2Q16. Excluding charges, the non-GAAP earnings were $241 million, or $0.17 per share, compared with a non-GAAP net loss of $27 million, or $0.02 per share, in the same period last year.
Freeport’s existing 30-year contract is due to expire in 2021. Thus, negotiations took place on an urgent basis. Notably, the company has been in negotiations with the Indonesian government since 2009. During the talks, the Indonesian government demanded Freeport to accept the new regulations or face a ban on the export of copper concentrate.
According to the new regulations, Freeport had to surrender its arbitration rights, and pay royalties and taxes according to the new structures. More importantly, Freeport should divest 51% of its stake in its Indonesian subsidiary. The miner has already sold a 9.36% stake to the Indonesian government. So, in order to continue mining in Indonesia, Freeport should divest another 41.64%.
Considering the robust outlook for copper, Freeport, agreed to divest a 51% stake in its Indonesian subsidiary PT Freeport Indonesia (PT-FI). Nearly 25% of Freeport’s copper production is from the Grasberg mine.
The Indonesian government followed suit and allowed Freeport to continue the mining operations. Furthermore, Freeport is now allowed to apply for a 10-year extension, beyond 2021, to its Grasberg mine license. The Indonesian Energy and Mineral Resources Minister Ignasius Jonan stated that Freeport can apply for a second extension to the license before 2031. The miner plans to build a second smelter in Indonesia. Freeport stated that it would invest between $17 billion and $20 billion in Grasberg through 2031.
Following the divestment, Freeport would still retain control over operations and administration. Thus, fundamentally, the stock is expected to gain in the short-term.
The stock of Freeport-McMoran has begun an uptrend, after testing the support at 13.85. Furthermore, the bullishness is confirmed by the crossover of the stochastic oscillator above the reading of 20. Thus, we can expect the stock to reach or even break above the next resistance level of 15.20.
An investment in a call option would allow us to gain from the current uptrend. We will invest only if our binary broker offers a contract valid for a week. Additionally, the stock should be trading near $14 on the NYSE.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
