Copper and gold may no longer be the stable stock choices they once were, as it seems industry giant Freeport-McMoRan (FCX) is set to experience another back-breaking change.
Last month, reports came that the Indonesian government is planning to impose a 25% export tax on minerals. This is the government's failsafe plan to prevent a boom in production by the mining companies. The measure has been taken to prevent companies from exploiting their mines, in advance of a law that would require them to upgrade ores come 2014. Should the law be implemented, a quarter of the proceeds of the exploration will automatically go into the treasury of the Indonesian government.
However, in a bid to sound optimistic and confident, Freeport-McMoRan, through its spokesman Ramdani Sirait, has recently said that it is sure that the Indonesian government will not go back on past agreements and that the 25% tax will not be implemented. It's been a question for some time what the Indonesian government would do.
It may be worthwhile to remind you that Freeport-McMoRan currently operates the largest gold reserve in the world in Grasberg, which is located in Papua, Indonesia, and it is the largest taxpayer to the Indonesian government. Paying a 25% export tax will definitely bring profits down drastically, and you can be sure that the price of the stock will fall, too, in response.
Well, the foreign government has spoken. Just recently the Indonesian government announced the imposition of a 20% export tax on ores as well as on fourteen other metals. The only way out for miners is to submit plans on how they plan to build smelters to process the ores, otherwise they will be banned from exports.
Newmont Mining (NEM) is also affected by this latest development because it has mines in Indonesia. This latest development will surely bring Newmont on par with Freeport-McMoRan, as both stand to lose up to 20% of profits to the Indonesian government. However, Newmont has also responded, much in the same way as Freeport-McMoRan responded last week, by saying that it will not be affected, because it has a long contract of works with the Indonesian government.
However, other competitors like Southern Copper (SCCO) may use the opportunity to snatch a bigger piece of the market share, because it does not have mines in Indonesia, but rather in Peru and Mexico. Thus, it is expected that Southern Copper will experience a period of more profitability in relation to Newmont or Freeport-McMoRan at least in the next quarter if not for a longer period.
However, Southern Copper is not without problems of its own. One such problems is that the management has failed to consider resistance to new mining plans into its operations and thus, production is suffering some hiccups. The worst part is that about 50% of its production assets are buried in this region and it is doubtful that the new plans will yield any result in the next two years. In addition, the social instability in the region will surely disturb production plans and Southern Copper will most likely be facing internal battles, rather than stealing market slices off Freeport-McMoRan.
In another development, Vale (VALE), which could have rode the waves of the problems being faced by its competitors, is also deep in a lawsuit with the Brazilian government. The highest court of the nation ruled in favor of the government yesterday, in a legal case involving four tax bills totaling about $15.3 billion. Vale however, has argued that the ruling is tantamount to double taxation, because it has paid taxes to foreign governments.
Interestingly, in the confident manner that seems to common to the mining companies in the news, Vales has said that it would file a motion to appeal the injunction. Whether or not the appeal will be scale through court still borders on uncertainty. Yet, the fact remains that Vale, as it stands, owes the Brazilian government $15.8 billion.
However, of all the mining companies in the news, it seems that all is going well with BHP Billiton (BHP). This is despite the fact that there was a strike by its contract workers on Wednesday over a dispute relating to bonuses. Interestingly, the unionized workers did not join in the strike action and were said to be going about their daily business.
However, the strike had been called off the next day, and according to Roberto Rojas who is the vice president of the Escondida's contract workers union, the roads to the mine that were previously blocked have been unblocked. More so, production has not been disrupted by the strike action and the BHP Billiton is expected to increased productions and rise in the next quarter.
Another point fact that will affect Freeport-McMoRan negatively is that it is again in the news for a settlement dispute. Freeport-McMoRan has been asked to pay $6.8 million as a settlement for federal and state natural resource damage claim in a case that is tied to the Morenci copper mine in Arizona. While paying $6.8 million in settlements will not have a catastrophic impact on the finances of Freeport McMoRan, the issues surrounding the case may not make it a good investment for now.
For one, the case, jointly filed by the United States and the State of Arizona against Freeport-McMoRan, alleged that it intentionally allowed the deposition of hazardous substances in the area. The allegations then went further to argue that the pollution had resulted in the destruction of terrestrial habitat, surface waters, migratory birds and wildlife and is still in the process of destroying more.
Without much ado, the mere fact that Freeport-McMoRan is paying a settlement fee is an indication that it was found guilty. Interestingly, Freeport-McMoRan would have to pay in more ways than a simple financial settlement. Conservationist will demand their pound of flesh and you can be sure that the negative publicity that the outcries will generate will be enough to keep investors away for some time.
This would be enough for any company to deal with, but Freeport-McMoRan may soon find its pockets tied, too, by the Indonesia government. The combination effect of these two causes may cause some sinking. Luckily for the company, many of its competitors are right alongside it. The question, then, is which will rebound first. That company may get the chance to take a nice chunk of the market share.