Indonesia's importance to Freeport

This tax wouldn't bode well for Freeport that owns 90% of the Grasberg mine, one of the largest copper and gold mines in the world. While the company has diversified operations in North America, South America and Africa, the Grasberg mine remains a key asset. At the end of December 2011, the mine had about 32 billion pounds of recoverable copper reserves and roughly 32 million ounces of recoverable gold reserves. The mine, however, has experienced severe political strife in recent times, including the Indonesian government's decision to limit stakes and now this regulation.

We estimate that Freeport's copper sales from its Indonesian mines will increase from 1.24 billion pounds in 2012 to 1.3 billion pounds by the end of our forecast period. The company exports much of the produced copper to China, the world's largest copper consumer. We will likely have to revise our estimates should these regulations impact its operations at Grasberg.

Additionally, an increase in taxes would eat into the company's cash flows, which could have a material impact on its valuation. We estimate that nearly 20% of Freeport's value comes from its Indonesian copper mines.

Perhaps more importantly, this brings up the possibility that other governments could be prompted to take similar steps, which would have a significant impact on the industry as a whole. Such risks help to explain why many mining stocks haven't realized the same returns as their underlying commodities of late.

Our current price estimate for Freeport is $45, which is about 30% above the current market price. We may have to revise our shipments and tax rates once more clarity comes on this matter.

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