FCX Freeport McMoRan Inc

By Alistair MacDonald 

Freeport-McMoRan Inc.'s veteran CEO Richard Adkerson struck a landmark deal late last year aimed at resolving long-running ownership issues at a massive mine in Indonesia.

Now the 72-year-old executive's legacy -- and the future success of the second-largest U.S. miner -- will depend largely on whether he can transform that mine and maintain its status as one of the world's largest sources of new copper and gold.

The goal is to turn Grasberg from an open pit mine into an underground operation, and to deploy techniques like those that have helped boost U.S. oil production. The change represents a significant technical challenge, and Freeport is considered one of the few miners with the expertise to do it.

Mr. Adkerson is well-known in mining circles, singing the Rodney Atkins song "If You're Going Through Hell" at a 2016 conference to describe tough times. While many investors had expected him to retire following the Grasberg deal with Indonesia, he said he is looking forward to seeing the company's largest-ever mining project through after spending years of negotiations.

"I have been traveling 200,000 miles a year for 15 years" going to Indonesia, he said. "We have now got Indonesia resolved, I want to be around for that."

Mr. Adkerson joined Freeport in 1989, a year after the discovery of the Grasberg deposit in Papua, Indonesia. Since then, Grasberg has produced 36 billion pounds of copper and 54 million ounces of gold. This year, the mine will account for around 3.7% and 1.5% of new global copper and gold supply, respectively, according to investment bank Jefferies.

Late last year, Indonesia took a 51% stake in Grasberg by paying $3.65 billion to Freeport and Australian miner Rio Tinto PLC. Rio Tinto left the venture, taking the lion's share of Indonesia's payment, and Freeport remains the mine's operator.

After the deal, which came after years of Indonesia refusing export permits and threatening new taxes, many investors expected Mr. Adkerson's retirement and a sale for the company.

"For some time it has been mentioned as a takeover target, and of Adkerson stepping down," said John Ing, the CEO of investment bank Maison Placements Canada Inc.

"But the key is the underground transition...they have a lot on their plate," he said.

Freeport estimates that there is still as much copper and almost as much gold left at Grasberg. To get to the ore, though, the company is using relatively new techniques that can be technically difficult. That includes using the sort of hydraulic fracturing usually associated with the oil industry, and so-called block cave mining, where miners dig beneath the ore body and allow gravity to collapse it into places where it can then be extracted.

The company says the mine should produce 1.7 billion pounds of copper and 1.8 million ounces of gold annually by 2023, if all goes well. But success isn't considered certain.

"There is a lot of debate in the market as to whether these projects will work," said Christopher LaFemina, a mining analyst at Jefferies.

Meanwhile, the company faces lower revenue and higher capital costs during the transition.

"The issue is, in the short term, the company is not generating cash, so you have to get through that and believe things will be better in three years," said David Lipschitz, an analyst at Macquarrie.

Few major miners are so dependent on the success of one project. Last year, Grasberg accounted for 58% of Freeport's attributable operating income. By 2023, that will be at 26%, given that the deal with Indonesia means the size of the company's stake in Grasberg has fallen.

Risks remain in Indonesia, some investors believe, including the government possibly demanding even more shares; unrest stoked by an often-violent separatist movement in Papua; and Freeport's practice of using rivers to transport its mine waste.

Rendi Witular, spokesman for PT Indonesia Asahan Aluminum, the government holding company that has the controlling stake in Grasberg, said the joint venture is going well and they have no interest in increasing their shares to more than 51%.

Mr. Witular said Freeport's contract expires in 2041 after which the government can take over entirely.

Mr. Adkerson said relations with the government are good. A company spokeswoman said using rivers to transport mine waste was extensively researched and data from biological sampling shows downstream estuaries are "functioning ecosystems."

Indonesia, and its risks, are cited by some investors as a poison pill that would put off other miners from buying Freeport. Rio Tinto, for instance, just sold out of Grasberg -- and Indonesia.

Bankers have argued that the Indonesia holdings could be separated from the company's other assets, and the two parts sold separately.

Outside of Indonesia, the company has copper mines in the U.S. and South America. Some analysts say the assets in Peru and Chile are particularly promising.

Mr. Adkerson said Freeport isn't for sale, though he adds that as a publicly listed company it would be shareholders' decision if a bid did arrive.

Mr. Adkerson was criticized for being in charge during a disastrous debt-fueled foray into oil and gas, where Freeport spent $9 billion in 2013 on assets that were mainly sold for around $2.6 billion three years later, but investors say he is well-regarded as a mine operator.

"He's respected, he has been around for a long time," Mr. LaFemina said.

Mr. Adkerson, who became Freeport's CEO in 2003, is in a bullish mood, particularly on Indonesia and copper. While the copper price took a hit in recent months amid concerns over tensions between the U.S. and China, the absence of major new mine projects will limit supply in the metal, according to some analysts and miners, likely boosting the market.

"And that is why I want to stick around," he said.

--Ben Otto contributed to this article.

Write to Alistair MacDonald at alistair.macdonald@wsj.com

(END) Dow Jones Newswires

August 04, 2019 08:14 ET (12:14 GMT)

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