Freeport Tumbles Most in S&P 500 Amid Doubts on Indonesian Asset

(Bloomberg) -- Freeport-McMoRan Inc. says it would be impossible to keep mining Grasberg, its flagship copper-and-gold asset in Indonesia, if it were to adopt new environmental standards unveiled by the state this month.

Within the last two weeks, the Phoenix-based miner was blindsided by “shocking and disappointing” environmental claims from the Ministry of the Environment and Forestry, Chief Executive Officer Richard Adkerson told analysts during the company’s first-quarter earnings call Tuesday. “Nobody could mine this ore body in consistency with these decrees. You just physically can’t do it.”

Located in Indonesia’s Papua province, the high altitude mine is surrounded by rain forest; Grasberg means “grass mountain” in Dutch. For 20 years, the world’s largest publicly traded copper producer has been dumping Grasberg’s tailings into a river, where they make their way downstream to be stored in a “cordoned off area.” This tailings arrangement was struck in the 1990s, after “transparent” discussions between Freeport, its joint venture partner and the government, Adkerson said on the call.

“It was always controversial,” but the system has been working ever since with “no unexpected environmental consequences,” he said.

Shares Plunge

Freeport shares accelerated their decline during the conference call, and finished the day down 15 percent at $16.08 in New York. It was the largest drop since January 2016 and made the company the worst performer on the S&P 500 index.

The market interpreted the news as a threat to ongoing divestment talks between Freeport and the government, speculating it could prolong those negotiations even further, Jeremy Sussman, an analyst at Clarksons Platou Securities, said Tuesday in an email. The fact that the company lowered production guidance for 2018 and 2019, and raised its cost guidance for this year, are also negatives, he said.

Indonesia is insisting Freeport sell some of its local unit, PT-FI, to domestic buyers as part of a deal to allow Freeport to keep operating in the country. Negotiations have dragged on for more than a year, complicated by production rights held by Rio Tinto Group which, if sold, could reduce the amount Freeport has to divest in order to bring local ownership to 51 percent.

While the talks grind on, PT-FI has been operating under temporary mining licenses; the current one expires June 30. PT-FI’s latest export license expires in February 2019, the company said Tuesday.

A key aspect of the new environmental standards appears to be how much of Grasberg’s tailings ultimately end up being recovered from the river. Historically, half of the mine’s tailings must be stored on land, but the ministry is now calling for that to be 90 percent, a level Adkerson said is simply not achievable. “It cannot be done with 6 months, 24 months, 5 years. This is so far out of bounds it cannot be done.”

The company has been given six months to discuss the issues with the environmental ministry,” Eric Kinneberg, a Freeport spokesman, said by email. “I would not characterize it as a deadline.”

Freeport has already reached out to Indonesian officials to work through the issue, Adkerson said. While an “academic” cost has been attributed to environmental damage in the area where tailings are stored, there is no specific claim or fine against Freeport, he and Chief Financial Officer Kathleen Quirk told analysts.

“They say that area was degraded by environmental impact. Of course it was. I mean, we had over two-and-a-half billion tons of ore to process, take the concentrate out, and deposit those tailings somewhere -- and that’s where we did it,” Adkerson said. He stressed that the tailings are chemically benign, that drinking water in the area meets local standards, and that there is a “thriving” mud crab industry in the area.

Adkerson also said the new standards appear to be politically motivated and don’t affect the company’s view of the asset’s value, as there is “no possibility” they will disrupt operations.

“You simply can’t say 20 years later we’re going to change the whole structure of what we’re doing,” he said. “You can’t put the genie back in the bottle.”

©2018 Bloomberg L.P.

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