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Freeport’s Deal to Resume Indonesian Exports: What Investors Can Learn

Last Friday, Freeport-McMoRan (NYSE:FCX) saw the light at the end of the tunnel for its Indonesian copper woes. Following a six-month export halt due to strict rules implemented in January, the company struck a deal with the Indonesian government to resume shipments of copper concentrate.

The agreement is big news for Freeport and the copper market, and there are several key takeaways for resource investors.

The deal

Reuters reported last Thursday that Indonesia had put out an offer to reduce taxes on concentrate exports in a bid to end a six-month halt of concentrate exports. In line with expectations, Freeport was the first to sign the deal, and with its export permit in place, the company plans to resume operations immediately.

In January, Indonesia set a new 25-percent tax on copper concentrate exports; the percentage was to rise to 60 by 2017 as part of a plan to ban concentrate exports that year and pressure miners to refine concentrate domestically. That tax has now been reduced to just 7.5 percent for Freeport, and will drop further as the company invests in a domestic smelter — the more Freeport spends, the more the tax will be reduced, hitting zero once Freeport invests 30 percent of the smelter cost.

The company will also pay higher royalties for its copper and gold , but Reuters states that Freeport’s deal with the Indonesian government has certainly paved the way for other miners to follow suit.

Freeport Indonesia CEO Rozik Soetjipto told Reuters, “[i]n terms of permitting, everything is OK. We still have to load the ship, and this may take a few days.” Freeport will export 756,000 tonnes of copper concentrate in the second half of 2014.

The company’s shares jumped 1.79 percent on the news on Friday.

The market

It is always wise for investors to keep an eye on what larger miners are up to in commodities spaces. In this case, the news that Freeport is now planning to export roughly three-quarters of a million tonnes of copper concentrate in the second half of 2014 is bound to have some effect on the red metal.

Copper prices have gained in recent weeks, but according to Reuters Africa, prices opened steady on Monday following news of Freeport’s deal with Indonesia.

Prior to Friday’s deal, a North America-based concentrate trader told the news outlet that a restart of exports from Indonesia wouldn’t cause a dramatic increase in global supply. However, he also stated that the news would renew fears of a surplus as “[a] lot of people expected the market to be over-supplied.”

Politics

Also important for investors to note is the fact that the resolution roughly correlates with elections in Indonesia this month. The Associated Press reported last Tuesday that Jakarta Governor Joko Widodo will replace the current president, Susilo Bambang Yudhoyono, in October.

In a Wall Street Journal article from June 5, Ignace Proot, an analyst with Sanford C. Bernstein & Co., notes how important it is for investors to keep track of political changes. 

Commenting on Newmont Mining’s (NYSE:NEM) decision to declare force majeure last month, the analyst stated that the company’s timing made sense as “[there would] be a new president in the fall” who might be more mining friendly.

Furthermore, the Indonesian export story represents the importance of paying attention to resource nationalism. The Journal stated on Friday that Freeport’s deal “represents a victory for Indonesia, which has tried to gain greater control of its vast natural resources and milk more in taxes and royalty payments from foreign miners and investors.” As Copper Investing News has previously explored, there are always multiple stakeholders involved, and it is important for investors to keep track of how government interests might affect mining projects.

Honey vs. vinegar

In terms of important factors to look for when investing in a company, management is always a key sticking point. Freeport-McMoRan and Newmont Mining have taken differing approaches to the Indonesian export ban, and their strategies are interesting for investors to note.

Writing for The Motley Fool earlier this month, Rich Duprey referenced the saying that one can “attract more flies with honey than with vinegar” to explain how Freeport and Newmont have approached the issue. While at that point Freeport had managed to reach a memorandum of understanding with the government, Newmont had filed an international arbitration case and was facing an “escalating war of words” with the government.
Duprey favors Freeport’s approach. However, he also said that “there are reasons why the two miners have likely chosen different courses of action.”A mere 6 percent of Newmont’s annual production comes from Indonesia, while Freeport depends on the island nation for 20 percent — a much more substantial consideration.

In any case, the Indonesian export ban story certainly illustrates the importance of gaining an understanding of multiple stakeholder interests when investing in the resource sector.

At close of day on Friday, Freeport’s stock was slightly up, having gained 1.23 percent to trade at $37.99.

By Teresa Matich+ - Exclusive to Copper Investing News

LME, Rusal spar at appeal hearing over warehouse reform

* Ruling could come as early as Wednesday after hearing ends
* Appeal hearing is over consultation, not warehouse reform
* Rusal says market conditions mean rules to have little impact

The London Metal Exchange (LME) and Russian aluminium giant Rusal (0486.HK) sparred in court on Tuesday as the LME sought to overturn a court ruling and allow it to implement tough warehousing rules to cut backlogs.

The dispute is over whether the LME, the world's oldest and biggest market for industrial metals, should have to launch a fresh consultation after a March court ruling labelled its original process as "unfair and unlawful".

The proposed warehouse rules - designed to speed up deliveries of metal from depots in the LME's global network - were not at issue in the original ruling.

"The LME makes great play of the fact that the judge did not hold that the proposal in itself was irrational," Rusal's legal team led by Monica Carss-Frisk said in written arguments on the first of two days of hearings before a panel of three Appeal Court judges.

"That is not, however, the test. The test is one of fairness."

Rusal argued that the original judge was right to say that the LME was unfair by excluding the option of capping warehouse rents in its consultation. Tuesday's arguments were heavy with legal precedents about the duties of public organisations.

The LME reforms, originally due to take force in April, aimed to make owners of warehouses deliver out at least as much metal as they take in.

Industrial buyers of aluminium, used in transport and to make beverage cans, have to wait up to two years to get delivery of metal from some LME warehouses and the new rules aimed to cut the queues down to a maximum of 50 days.

The exchange, owned by Hong Kong Exchanges and Clearing Ltd (0388.HK), told Tuesday's hearing that Rusal had not brought up the issue of rental caps at warehouses during the consultation process.

Michael Beloff, acting for the LME, said that the Russian company was using that issue to stop the reforms because it was worried that they would depress prices.

Benchmark aluminium prices CMAL3 on the LME have slid 30 percent since touching a peak in May 2011 due to overproduction and surpluses.

Rusal said in a separate briefing document that due to changes in the supply-demand balance, the LME's proposed changes would have scant impact on warehouse queues.

"Such market conditions demonstrate that the rule would have little or no impact at all, rendering the rule largely irrelevant and ineffective in the current circumstances," the Rusal document said.

Rusal says the aluminium market has moved into a substantial deficit due to cutbacks by producers after years of surpluses.

A ruling in the Appeal Court could come as early as the conclusion of the hearing on Wednesday, but the panel could also decide to reserve judgment to take time to consider the arguments, according to the court's website.

(Reuters)

Zinc, Lead buoyed as value hunters tune into global growth story

* Zinc correction looms; upside potential intact near term-Triland

* LME may quickly implement new warehousing rules, if appeal won-sources

* Coming Up: U.S. Consumer confidence for July at 1400 GMT

Zinc prices matched three-year highs hit the session before on Tuesday and lead inched to a new 17-month top as investors ploughed into metals that have lagged this year and appear undervalued on prospects of reviving global growth.

Manufacturing growth in the world's top metals user China expanded at its fastest clip in 18 months in July, an initial survey showed, while in general the U.S. economy has gathered pace, with a brightening picture seen in its labour market.

This week, second quarter growth in the United States, a jobless report, and an official reading of China's factory health are expected to show fresh signs that a global economic revival has taken hold.

"The macro environment is improving, putting base metals on a solid footing going into the second half, but it's not enough to tighten up the complex as a whole so the market is focusing on those with supply side issues. Clearly zinc and lead are some with the biggest," said ANZ strategist Daniel Hynes in Sydney.

Zinc supply in particular would suffer with several top mines drying up, including Century in Australia, while a recovering construction industry would revive demand from galvanisers.

"The direction is right. It's probably gone a lot quicker than I expected which opens it up for some profit-taking (but)...I wouldn't expect to see a significant sell off," he added.

Three-month zinc on the London Metal Exchange matched Monday's three-year peak of $2,416, signalling investors' appetite for the contract that has jumped nearly nine percent in July.

"The theme from the physical trading community is that zinc has risen too far, too fast... and that the market has to correct downwards. We know that it will, the question is just how high it goes first," said broker Triland in a note.

LME lead rose to $2,305, a new top since late February 2013. Prices moved into positive territory for the year in July and are now up almost four percent for the year.

Lead on the Shanghai Futures Exchange (ShFE) climbed as much as 2 percent, adding to 5 percent gains a day earlier, before trimming gains to 1 percent at 15,320 yuan ($2,500) a tonne by 0228 GMT.

LME copper edged up 0.1 percent to $7,124.50 after small losses in the previous session.

U.S. economic growth likely rebounded in the second-quarter from a winter-induced slump at the start of the year and will probably continue to gather momentum through the rest of 2014. The reading is due on Wednesday.

Elsewhere, the London Metal Exchange (LME) is likely to move quickly to implement its tough warehousing rules to cut backlogs if it is successful at an appeal hearing this week, metals market sources said.

MCX fails to get new chief; FMC deadline lapses

Multi Commodity Exchange has breached the 60-day deadline set by the commodity market regulator Forward Markets Commission for appointing a head to lead the exchange.

The Commission elevated Parveen Kumar Singhal, Executive Vice-President of MCX, as interim CEO on May 23 and gave two months’ time for the board to appoint a new Managing Director. Last Friday, MCX cancelled the interview call given to 15 candidates.

The interview for shortlisted candidates was called off abruptly after Kotak Bank acquired significant minority stake of 15 per cent in the exchange for ₹450 crore. The Kotak Group, which already has a commodity exchange under its belt, has made it clear that it will not claim a board seat in MCX.

The Managing Director and CEO’s post at the exchange has been vacant for over two months since Manoj Vaish put in his papers, just three months after assuming office.

It is reliably learnt that the next meeting of the Board is slated for August 13 to consider the financial results of the company.

Time ticking

The exchange is also fast running out of time to get its promoter Financial Technologies reduce its stake to two per cent. After the stake sale to Kotak Bank, Financial Technologies is left with five per cent stake which needs to be offloaded by August end.

Since the exchange trades contracts three to four months in advance, the promoters have to offload their stake by August end in order to get the FMC’s approval for launching next calendar year contracts. MCX has to come up with the January contracts in September.

The commodity market regulator had declared Financial Technologies and its promoter Jignesh Shah as not ‘fit and proper’ to own stake in commodity exchange after one of its group companies National Spot Exchange defaulted on ₹5,600 crore trade settlement.

Financial Technologies was directed to reduce its stake to two per cent.

Zambia's Q1 Copper Output Strikes at 400,000 t

 Zambia’s copper output in the first quarter of 2014 increased by more than 100,000 metric tonnes. During the first quarter of 2013, the production was about 300,000 tonnes.

During the period January to March, the exact copper output stood at 473,249 metric tonnes, rose from 399,515 tonnes of the same period previous year. Michael Gondwe, the Bank of Zambia Governor while announcing the copper production figures, said about the current developments taking place in the mining sector all over the nation.

He added that the copper output was increasing by 18 pct on YoY basis. Dr. Gondwe added in a statement that the first five months earnings from copper export rose by 7.4 pct to about US$3,209.1 million due to the hike in export volumes. And this figure during the same of last year was about US$2,987.5 million. 

The export volume has increased by 19.4 pct to about 477,485.3 metric tonnes from 399,919.8 metric tonnes of same period of 2013. But, the average realized copper price has declined by 10 pct to about US$6,720.86 per tonne from US$7,471.77 reported during the same period last year.

Dr Gondwe mentioned in the statement that copper price decline by 9.2 pct to about US$6,691.00 a tonne as at June 11 2014 from US$7,360 a tonne at December 2013 end, impacted on market sentiment. He added that the government was focusing to implement diversified export base by right interventions in economic sectors and significant activities for encouraging potential exports.

Gold falls on stronger US dollar

The price of gold inched lower Monday on a stronger US dollar but remained above $1,300 an ounce as mounting tensions over Ukraine and Gaza sustained safe-haven demand for the precious metal.

Spot gold changed hands at $1,303.30 an ounce around 1:30 p.m. EST, down $5.00 from Friday’s close of $1,308.30.

Gold futures for August delivery traded at $1,307.00 per ounce in the afternoon on New York’s Comex, up $1.70, or 0.13%, from $1,305.30 seen Friday.

Signs that the US economic recovery is strengthening boosted the dollar and lessened demand for gold as an alternative asset.

According to Reuters, the dollar floated near six-month highs against a basket of major currencies Monday, with speculation about an early US interest rate hike due to an improving jobs situation putting downward pressure on gold.

But fighting in Ukraine on Sunday between pro-Russian rebels and troops loyal to Kiev, along with Washington organizing to impose sanctions on Moscow, kept the yellow metal from falling below the $1,300 level.

Traders said gold is likely to remain around that level until Comex gold options for August expire later in the day, according to the news agency.

No end in sight

Continued conflict in Gaza has provided gold with additional support.

Although clashes there abated Sunday, no comprehensive deal to end the fighting between Hamas militants and Israel is in sight, the news agency said.

Investors tend to buy gold as a kind of insurance during times of political or financial turmoil.

Gold has experienced double-digit gains this year, hitting a 3.5 month high on July 10.