Grasberg sounds like a bucolic little town with picket fences and tire swings nestled into the great heartland of America. Nope, it's a giant gold and copper mine complex in Indonesia. And if you're an investor interested in the precious metals or industrial metals industries, you'll want to know a lot more about the Grasberg mine. It's a top global producer, has 24 years to run if current production trends hold, and it's so troubled that Rio Tinto plc (NYSE: RIO) is thinking about walking away from its partnership there with Freeport-McMoRan Inc (NYSE: FCX) .
How big is big?
Grasberg is a collection of operating mines and mine projects in "The remote highlands of the Sudirman Mountain Range in the province of Papua, Indonesia, which is on the western half of the island of New Guinea." Don't pull out a map, just know that it's on the other side of the world near China, a key global commodities customer, and Australia. It was discovered in 1988.
To sum all of that up, the Grasberg mine complex is big, strategically located near a key customer, and it's going to be producing for a long time. You'd think partners Freeport-McMoRan and Rio Tinto would be ecstatic to have stakes in this property. You would be wrong. In fact, Rio Tinto is reportedly thinking about walking away from its stake in Grasberg.
The big problem right now is the Indonesian government's decision to enact new rules that have, effectively, halted copper exports from Grasberg. It's really a pretty complex political mess and Freeport-McMoRan is negotiating with the Indonesian government to come to a resolution that, "would be in the best interests of all stakeholders." (Work stoppages have also been something of an ongoing problem, with a current stoppage at a copper smelter adding to the mine's woes right now.)
It's so bad that Rio Tinto CEO Jean-Sebastian Jacques recently commented at an analyst briefing that, "Everyone was taken by surprise." And, "There is no doubt that Grasberg is a world-class resource. But the key question, especially in the light of what happened three weeks ago, is: is Grasberg a world-class business for us?"
The problem for Rio Tinto is that it currently only gets 40% of production over set production amounts. And, reportedly, that's meant that the global mining giant hasn't gotten anything from the mine since 2014. It might see some metal this year, but only if an agreement with the Indonesian government can be reached.
Its take is set to increase to 40% of all production in 2021, but that's still a few years away and the current issues are troubling, to say the least. Worse, according to Rio Tinto CEO Jacques, "If we want to have a meaningful offtake and stream beyond 2021, we would need to invest in a big way in the coming years." Why invest meaningful sums of money into a troubled mining operation?
Freeport-McMoRan's not as lucky as more diversified Rio Tinto, which focuses heavily on iron ore. Grasberg represents 31% of Freeport's copper reserves and 95% of its gold reserves. Freeport simply doesn't have the luxury of walking away without taking a huge hit. Which means the Indonesian government could have the upper hand in the negotiations to solve the current issue.
A mine to watch
Because of its size, the events occurring at the Grasberg mine complex could have a notable impact on global supply and demand. So, if you are interested in gold or copper, you should keep an eye on what's going down in Indonesia even if you've never heard of Grasberg. And if you are a Freeport-McMoRan or Rio Tinto investor you'll want to pay particular attention. Indeed, Grasberg is dealing with tense political issues that may have turned one of the world's biggest gold and copper mines into a serious liability.
10 stocks we like better than Freeport-McMoRan Copper and Gold
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Freeport-McMoRan Copper and Gold wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 6, 2017