It isn't easy doing business in poor countries when the economy begins to deteriorate. While the S&P 500 and its tracking exchange traded fund, SPY, has rallied nearly 30% this year, and stocks such as Apple (AAPL) are up 30% this year, Chinese stocks, and companies heavily levered to China, have sold-off hard over the last year.
While leading industrial companies such as GE and Caterpillar (CAT) get significant revenue from the world's second-largest economy, few companies are more heavily levered to China than companies in the mining industry. Freeport-McMoRan (FCX), the world's largest publicly traded copper company.
China accounts for nearly 40% of copper demand worldwide, and weakness in the world's second largest economy has weighed heavily on Freeport-McMoRan's earnings recently.
Still, given the strong sell-off in the stock over the last year, and the company's strong balance sheet, it's interesting to look at the stock today.
I recently wrote in my article on Freeport-McMoRan's planned spin-off of the company's Indonesian operations that this company was likely looking to divest from its operations in this troubled nation primarily because management thought the company's labor problems at the world's largest copper mine, the Grasberg mine, were likely to continue. Freeport-McMoRan has consistently gotten nearly 30% of its production from this mine, the company's margins and grades of copper in Indonesia have been amongst the best in the industry for some time.
This is exactly why I think the recently disclosed terms the company's recent planned IPO, which would offer a 51% equity stake in the company's Indonesian operations to the Indonesian government, are so disturbing. To me, Freeport-McMoRan's labor problems and difficulties dealing with the Indonesian government are two sides of the same coin. Labor leaders in Indonesia are able to use political and military connections to force this company to make extreme concessions with few guarantees that future strikes and demands for additional wage increases and benefits won't continue.
Freeport-McMoRan's recent concessions the company made to end the strike at the Grasberg mine included paying three months' wages up front, agreeing to increase wages by 40% over the next two years, and offering additional education, living and retirement benefits. The company was unable to secure a long-term labor pact despite making these extremely generous concessions.
Freeport-McMoRan has continually dealt with a number of extreme requests from the Indonesian government in the last year, ranging from the possibility of politicians in this country imposing a 25% mineral export tax, to talk of a significant increase in existing taxes and royalties. The fact that many labor leaders who were able to secure these extreme concessions from Freeport-McMoRan have political and military connections is not surprising as well.
This is exactly why I question why Freeport-McMoRan would allow corrupt politicians to control its most important operations unless management thought its options were extremely limited. Freeport-McMoRan has consistently had to pay off military leaders, labor leaders, and politicians, to operate in Indonesia. If corrupt leaders in the Indonesian government take a majority position in the company's crucial Indonesian operations it is unclear how the government's position would effect the company's operations, compensation of employees and shareholders, and negotiations with labor groups.
To conclude, Indonesian leaders clearly know Freeport-McMoRan's largest and most important mines are in this corrupt country. With the Indonesian government able to leverage this company at any time with impunity, Indonesian leaders are likely to continue to exploit the company if management hands them a 51% interest in Freeport-McMoRan's Indonesian operations. While Freeport-MoRan is the world's lowest cost copper producer, the company would likely have limited control over costs and compensation moving forward if management is forced to surrender control of the company's most important operations.