Newmont Mining (NYSE:NEM) will release its fourth-quarter and annual earnings results on Feb. 21. We expect the company's revenues to show a year-over-year decline as it was beset by production problems, labor troubles, and political issues in Indonesia and Peru. It didn't help that demand for copper remained weak due to the prevailing weak economic environment, which didn't allow prices to rise, and the cost of gold production shot up.
For the first nine months of the fiscal year, the company reported lower production figures for both gold and copper. Attributable gold production stood at 3.73 million ounces, down from 3.87 million ounces over the same period last year. Attributable copper production was 108 million pounds, down from 152 million pounds during the first nine months of 2011.
The cost applicable to sales (CAS) figures went up for both gold and copper. For the first nine months, CAS stood at $664 per ounce of gold and $2.23 per pound of copper, up 13% and 91%, respectively, year over year. Newmont said that the overall CAS figure for 2012 is likely to be at the higher end of its guidance of $650-$675 per ounce. This was attributed to issues at Tanami, Codding, and Waihi mines.
Newmont is estimated to be losing about a million dollars a day in cash flow due to lower output, and this situation is expected to continue in 2013. Let's examine some of the issues that Newmont faced this year and the likely implications for its financial performance.
Problems at Batu Hijau in Indonesia
In October, Newmont revised the 2012 gold production target for its Indonesian mine to 71,000 ounces from 114,000 ounces guided previously. Also, it lowered its annual copper output forecast from the Batu Hijau mine in Sumbawa island to 170.6 million pounds from 192 million pounds earlier.
Newmont attributed the lower production to the processing of lower grade ore from stockpiles as it prepared for a new phase of mining at the vast open pit in the mountains of Sumbawa. While lower production due to the processing of lower grade from stockpiles was one problem, it was not the only one. Newmont also faced problems from the Indonesian government over the increase in royalty payments, the obligation to process mineral ores in Indonesia, the use of local goods and services, divestment, contract extensions, and the size of mining areas.
The operating environment is already quite challenging for the mining companies. Foreign firms are required to divest 51% of mine assets after 10 years of production. The government has also decided to impose a 20% levy on raw ore exports and requires companies to start smelting all ore locally by 2014. Newmont has explicitly said no to building a smelter, which means that unless the government relents or compromises Newmont's exports could technically halt in 2014. In our opinion, the overall operating environment in Indonesia for Newmont is likely to be quite challenging for the foreseeable future. If the ban indeed comes into effect, it will have serious ramifications for Newmont’s exports.
Conga Trouble Threw a Wrench in the Works
Newmont had been backing on its Conga project in Peru in a big way to drive future growth. But the project has been beset by all kinds of troubles from the beginning and was put on the back burner in August this year in the face of strong resistance from local communities. In any case, it is a long way off from production even if finally approved. We think that it is difficult for it to commence production in 2014 as originally planned.
Conga could have an average annual output of 580,000 to 680,000 ounces of gold and 155 million to 235 million pounds of copper during its first five years of operation. This project is important for Newmont's future growth prospects.
We believe that if the Conga project eventually gets cancelled, it will have serious ramifications for Newmont. The company will find it extremely difficult to meet its annual production target of 7 million ounces by 2017, up from the present production levels of 5.2 million ounces. Production in 2011 had declined by 4% over that in 2010. Production shortfall has obvious implications for revenue as well. In order to salvage its revenue growth and gold operating margins of $971 an ounce, the company would have to find another source of production quickly.
The Road Ahead
Newmont's African production is expected to grow over the next few years, primarily through the development of Akyem in Ghana, which is progressing very well. The Akyem project is approximately 78% complete and on budget, with first production expected in late 2013. This is expected to be followed by a ramp-up in production over a period of three to six months. The Batu Hijau Phase 6 project in Indonesia is expected to commence in 2013 and result in significant growth in copper and gold production between 2013-15. However, we doubt if these can compensate for the potential loss of production from Conga. Newmont needs to decide in 2013 whether to keep betting on Conga or start looking for a suitable alternative.
We will be looking out for Newmont management's comments on future growth strategies and prospects and further updates on the Conga project. We have a Trefis price estimate for Newmont Mining of $59, which will be revised after the fourth-quarter earnings results.
Disclosure: No positions.