Freeport-McMoRan Inc's Latest Mine Trouble Singles Out a Huge Risk That Won't Go Away

By Markets Fool.com

Freeport-McMoRan Inc runs one of the world's largest copper and gold mines. The mine complex, known as Grasberg, accounted for 93% of the company's gold production and 16% of its copper production last year. That's why this on again/off again operation is a huge risk, and the recent work stoppage is just the tip of the iceberg.

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Not a good place to put a mine
The Grasberg mine complex is located in Indonesia. In recent years there have been political issues around mining in the archipelago nation, the most recent being a ruling by the government that raw copper can't be exported until it has been refined. There's not much refining capacity in the country, so that would be a big problem for Freeport. It's working with the government on the issue. There have also been ongoing questions about whether or not Freeport McMoRan's license to run Grasberg is valid. Right now it seems like it's OK to run the mine.

Source: CIA World Factbook, via Wikimedia Commons.

And then there's the not so small issue of political unrest. According to the company's 10-K: "Several separatist groups have sought increased political independence for the province of Papua, where our Grasberg minerals district is located." At the moment, Papua is still part of Indonesia. But put it all together and this mine -- which is really important to Freeport -- is in a lousy location.

But, believe it or not, none of this is why the miner just shut Grasberg down, if only temporarily.

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One way in, one way out
The problem that led Freeport to shutter this key asset was its employees. The recent strife, which seems to have been quickly resolved, appears to have been driven by 50 workers who are upset because they didn't get raises and promotions for not participating in an earlier labor dispute. So, Freeport solved one labor problem and got another one for its efforts.

Beyond the almost comical backdrop, you might be wondering how 50 people can cause Freeport to shut one of its most important mining operations. It's a good question that rests on logistics. There is, effectively, just one way to get to Grasberg -- a road. Shut down the road and you shut down the mine. In fact, according to Freeport, "We also continue to limit the use of the road leading to our mining and milling operations to secured convoys." So not only is there one road in and out, you can't go down it without an armed guard! So, yes, 50 people easily caused Freeport to cave in and shut Grasberg down.

Labor disputes leading to work stoppages at Grasberg aren't a new problem, however. There was an "...eight-day work stoppage in July 2011 and an approximate three-month strike that concluded in December 2011." That strike was ugly, with "civil unrest, transportation blockades, sabotage of important operating facilities and violence." But that isn't all. "Operations were also temporarily suspended during first-quarter 2012 when PT-FI experienced work interruptions in connection with its efforts to resume normal operations following the strike." And then there was October last year, when "...a large percentage of Grasberg open-pit operators did not report to their scheduled shifts..."

Grasberg Mine from space. Source: ISS Crew Earth Observations experiment and the Image Science & Analysis Group, Johnson Space Center, via Wikimedia Commons.

So Freeport's decision to shut down the mine this time around really isn't out of the ordinary. You might be tempted to ask if the mine is shut more often than it's open -- which is a scary thought, since the mine is so important to the company's operations. How important? This single mine accounted for roughly 15% of the company's sales last year. That's about $3.4 billion dollars, or, if you do simple math, around $9 million a day of sales.

Watch this mine
The current state of Freeport's operations at Grasberg is really just the most recent reminder that the Indonesian mine is a risky asset. It is listed in the company's annual report as a key risk. So it's really not all that surprising that the miner's shares fell dramatically on the news of the most recent issue. Politics, separatists, and employee strife are all factors the company has to deal with, and you have to watch.

And while the current work stoppage is in the press today, as an investor you need to see this in the larger context. Freeport has a great asset, but it's located in a lousy place. And that means Grasberg, in the best case scenario, will remain a headache. The worst case is that Indonesia revokes Freeport's right to the mine. . You'll need to factor in this not so small risk in when investing in Freeport McMoRan.

The article Freeport-McMoRan Inc's Latest Mine Trouble Singles Out a Huge Risk That Won't Go Away originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold,. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.