Indonesian Mine Workers’ Strike Surprises Freeport

Freeport McMoran Copper (NYSE:FCX) now faces a new problem related to its Indonesian mining operations. The mining giant received yet another setback from its crown-jewel, the Indonesian Glasberg mine, when 8,000 mine workers started a 7-day strike today. ^[1] The Grasberg mine is the world’s largest copper and gold mine in terms of reserves and is the single biggest source of value for the company. The company is still dealing with the problem of low-quality ore from the mine, which forced the company to significantly reduce its copper production outlook for the year. The displeasure among workers at the mine will only aggravate the situation further. Freeport competes with other miners such as the Southern Copper (NYSE:PCU), Codelco and Newmont Mining (NYSE:NEM).

We have a $55.60 price estimate for Freeport’s stock, less than 5% above the market price. The importance of the Indonesian mine can be understood by the fact that these operations account for more than a quarter of this value according to our analysis.

If the strike gets extended, it could lower production levels further

Freeport’s management said that the strike is uncalled for as the workers neither started any negotiations with the company nor did the company reject any of their demands — either which could warrant a strike. The company maintains that there will be  no loss of production due to the strike.

But the company seems to be understating the situation at Glasberg. The fact that the entire workforce at the mine has decided to move a muscle will definitely impact production – more so if the strike gets extended further with the workers and management not meeting eye-to-eye.

In the long run, the strike can severely hit the mine’s profitability

One of the biggest advantages of the Glasberg mine for Freeport was the cheap labor cost in Indonesia. The workers at the mine throw light on the wage disparity across the company by stating that they earn about $1.5 per hour, in comparison to the $15-30 per hour the company pays as wages at other locations around the world.

The low labor costs have allowed the Indonesian mine to achieve margins in excess of 60% in past years. However, if the workers manage to get their demand for an increase in wages to $3 per hour, this could bring in a significant downside to the company’s $55.58 price estimate.

See our full analysis for Freeport McMoran stock

1. Thousands of Freeport Indonesia mine workers start 7-day strike, Reuters, Jul 3 2011 [↩]