April was a roller-coaster ride for investors in Freeport-McMoRan Inc. (NYSE: FCX). The copper and gold miner kicked off the month on a strong note, only to give up all of its gains and more in the fourth week of April. By the end of April, Freeport-McMoRan stock registered its worst month so far this year, ending 13.4% lower according to data provided by S&P Global Market Intelligence.
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Specifically, the market dumped Freeport-McMoRan in the last week of April on the back of two negative developments.
Firmer oil and copper prices kept Freeport-McMoRan shares northward bound for the better part of April. For instance, Freeport-McMoRan shares gained 5% on a single day in trading on April 18 after crude oil and copper prices gained momentum.
The euphoria, however, was short-lived. Just as investors hoped Freeport-McMoRan was headed for better days, the miner dropped a bomb on April 24, sending the stock plunging.
To be fair, Freeport-McMoRan's first-quarter numbers, as reported on April 24, were great, what with the miner generating 46% higher revenue and growing its net income nearly threefold over Q1 2017. Yet, Freeport-McMoRan's adjusted net earnings per share of $0.46 fell short of analysts' estimates. It was the reason behind the shortfall, however, that spooked investors.
Lower gold production from Freeport-McMoRan's Grasberg mine in Indonesia, one of the world's largest copper and gold deposits, because of unplanned maintenance was largely to blame for the company's lower-than-expected earnings. Grasberg's been in a geopolitical muddle for years now, and the company has had to work through several deals with the government over the years to keep the mine running.
Fresh problems surfaced last quarter when the Indonesian government tightened environmental standards and gave Freeport-McMoRan six months to comply with the decree. During the miner's Q1 earnings call, CEO Richard Adkerson didn't just call it "a sensitive matter," but expressed shock over the Indonesian government's move. Adkerson even went on to say that he feared "political motivations" behind the decree, as what was expected of it from Freeport-McMoRan "just cannot be done."
Perhaps what struck investors even more was Adkerson stressing that it's "physically impossible" for anybody to mine according to the decree. Not surprisingly, the market interpreted it as a sign of growing resentment between Freeport-McMoRan and the Indonesian government, one that could eventually delay an extension of operating licenses for PT Freeport Indonesia (better known as PT-FI), the company's subsidiary in Indonesia that operates Grasberg and other mines.
Freeport-McMoRan believes that Indonesia's new environmental order is equivalent to revisiting a system to treat waste that was agreed upon by the company and the government 20 years ago, which sounds next to impossible.
Management is negotiating with relevant authorities and believes it will find a way out, but if history is anything to go by, any settlement could come at a price, as Freeport-McMoRan will likely have to cede to the demands of the government to keep its mines running. The reason is simple: Indonesia accounted for 26% of its copper and 99% of its gold production in 2017.
With the presidential elections in Indonesia also less than a year away, the risks for Freeport-McMoRan, unfortunately, are too real for investors to ignore.
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