Freeport-McMoRan: Grasberg Violence Could Sink Stock

| About: Freeport-McMoRan Inc. (FCX)

Violence at the giant Grasberg copper and gold mine in Papua, New Guinea, could disrupt Freeport-McMoRan's operations there and send the mining giant's stock prices tumbling. The CEO and President of Freeport McMoRan (NYSE:FCX) made that admission at a conference in Miami on Tuesday.

Richard Akderson did not say how his company plans to deal with the violence, which is apparently caused by local rebels that want Papua to be independent from Indonesia. Nor did Adkerson did address rumors that the violence could be the work of elements of the Indonesian army, according to a Reuters article.

Statements in the Reuters report indicate that violence during a recent strike at Grasberg late last year was worse than has been previously reported. The article stated that a pipeline from the mine to a port was sabotaged and that there were violent clashes between police, rebels, and unidentified protesters. Adkerson did not mention an article that alleged that the leader of the union behind the strike may have connections to the Indonesian army.

It is clear that Adkerson and Freeport's management are worried about the situation at Grasberg. It is also clear that they are not saying what they are doing about it or if they have plans to deal with it. That could mean the situation at Grasberg could be worse than we have been led to believe.

If violence continues and it becomes impossible to operate Grasberg, Freeport's stock prices could go into a freefall. The mine is the company's biggest producer and asset; without it, Freeport will be forced to completely rewrite its' business plan and take major losses.

Freeport CEO Not Worried about new Indonesian Restrictions on Copper

One issue that Adkerson didn't seem very worried about was all the restrictions that the Indonesian government is apparently putting on its mining industry. Earlier this month, the government announced plans to restrict mineral imports to the 2009 or 2010 levels and slap a 20% tariff on exports of unprocessed metal orders.

This followed an earlier regulation that was passed in February that would require foreign mining companies to sell a majority of their Indonesian operations to local owners after ten years of operations that was passed in February. Among other things, that law would require that the miners' assets be auctioned off to Indonesian companies or government agencies if they did not comply.

I have to agree with Mr. Adkerson here - these moves look more like political grandstanding than serious regulations. The Indonesian government and its leaders are obviously not going to kill off their nation's most profitable industry. Nor are they likely to shut down the mines that provide much of their government revenue.

A more likely move is that some sort of face saving compromise that will protect the miners and keep them in business will be reached. It is highly likely that Mr. Adkerson has had some sort of private discussions with Indonesian officials, who have already told him that they are not serious about the restrictions. The restrictions come right at the time that Indonesia is negotiating new contracts with foreign mine operators, including Freeport, BHP Billiton (NYSE:BHP), and Vale (NYSE:VALE).

Adkerson seemed to confirm this speculation at the conference when he said he was confident that Freeport McMoRan can work out some sort of compromise to stay in business in Indonesia. He also said that his company is going ahead with plans to start underground mining at Grasberg in spite of violence, strikes, and a hostile political climate.

If Freeport can work out some sort of deal with the Indonesian government, its stock prices would probably go up. If new restrictions and attacks on miners keep coming out of Jakarta, (Indonesia's capitol), Freeport's stock will plummet. Of course, any deal to save Grasberg will be meaningless if rebels blow the mine up or burn it down. Any sort of major attack on Grasberg would be a serious blow to Freeport's stock values.

Adkerson Optimistic about Copper's Future

Adkerson's optimism extended to another issue that is clouding Freeport's future, the recent collapse of the Chinese demand for copper. Adkerson told those attending the conference that he expects Chinese copper consumption to jump later this year and restore the metal's price. Adkerson said his optimism was based on a report from the Brook Hunt analysis firm. This report stated that Chinese copper demand will increase to 16.4 million tons a year in 2025 from an expected demand of 9 million tons this year.

Despite the optimism, Adkerson admitted that his company will reduce capital expenditures in 2013 to $4.2 billion from $4.3 billion this year. He also said the increased copper demand justifies these expenditures.

Mr. Adkerson's optimism and commitment to expansion, at a time when media reports indicate that a major Chinese economic slowdown is beginning, will definitely hurt Freeport's stock. Like a number of other miners, the company seems committed to massive expansion at a time when demand is about to collapse. The market's reaction to Mr. Adkerson's presentation seemed to confirm this, - Reuters reported that Freeport's stock fell in value by 3.3% on Monday.

Billiton Slashes Expansion Plans

The attitude at one of Freeport's biggest competitors, BHP Billiton , was very different. Remarks that Billiton's Chairman Jacques Nasser made to reporters Wednesday seem to indicate that major cuts to his company's ambitious expansion plans are in the works.

When asked about an $80 billion growth strategy outlined by Billiton CEO Marius Kloppers in February, Nasser said no. Nasser did not say what Billiton expansion plans would be cut, but the Australian newspaper, the Herald Sun, speculated that cancelled projects could include the expansion of the massive Olympic Dam copper and uranium mine in Australia.

The reason Nasser gave for the change in strategy was clear - he told reporters that the environment had changed since Mr. Kloppers had announced the expansion agenda. Nasser did not clarify how the environment had changed. These reports could also indicate that Mr. Kloppers's job is also in peril. Billiton is already facing losses on natural gas investments that could be as high as $5 billion.

It is obvious that such a statement from a major mining industry executive is not good for mining stocks. Expect to see shares for miners fall and keep falling for the foreseeable future. These statements could give Billiton a slight boost because they show that its management is willing to realistically assess the situation and put the brakes on questionable expansion plans.

Rebels Could Threaten AngloGold Ashanti project in Congo

Freeport is not the only miner that has a major project threatened by violence. Reuters reported that AngloGold Ashanti (ANG) has admitted that one of its major projects, the Mongbwalu gold mine in the Democratic Republic of the Congo, could be threatened by former rebel fighters.

The problem is that the ex-rebels are digging for gold in the area where the company wants to build its mine. The rebels may not want to leave, and many of them are apparently armed and organized. Anglo has not said how it would deal with this problem, but there could be as many as 200,000 ex- rebels in the area, so it would presumably need an army to remove them. Another possibility would be to pay the rebels to leave.

This calls Mongbwalu's future into question and Anglo's expansion plans into question. Last week, it was one of the projects that the company's CEO Mark Cutifani mentioned when he outlined expansion plans. But Cutifani did not mention the potential conflict with rebels, and if. If violence breaks out at Mongbwalu, Anglo's stock will definitely take a major hit.

Gold Production Up in Tanzania

Gold production in the East African nation of Tanzania rose by 13%, or five tons, in the last year. Reuters reported that Tanzania's central bank stated that the country produced 40.4 tons of gold in the last fiscal year and 35.6 tons in the previous fiscal year.

That is definitely good news for the companies that have invested in Tanzania. Miners in Tanzania include Barrick Gold (NYSE:ABX), whose subsidiary, Barrick Gold Africa, will pay an extra 1% royalty this year, AngloGold Ashanti, and Resolute Mining (NYSE:RSG). The increases in Tanzanian production could boost the stock values of companies that invested there. That should definitely help AngloGold, which has seen a fall off in production at its South African mines because of labor and safety problems.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.