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Summary

  • Newmont is facing issues regarding the ownership of its Indonesian mine.
  • Freeport has signed a MoU with the Indonesian government which indicates that there is still hope for Newmont to continue exports, albeit at high production costs.
  • Newmont has completed the sale of its Jundee Mine while it is also trying to restart the Minas Conga project.

Newmont Mining Corp. (NYSE: NEM) is engaged in the production of gold and copper through its diversified base of mines around the world. It has been unable to break the resistance level of $26 per share in its stock price. This may have been due to the unstable situation in Indonesia as there is a disagreement between the company and the government regarding new export rules. It is also lagging behind with a dividend yield of 0.40% while Freeport-McMoRan (NYSE:FCX) and Barrick Gold (NYSE:ABX), its peers, have dividend yields of 3.60% and 1.10% respectively.

Indonesian Mine at Risk

Newmont operates a mine in Indonesia, which holds around 3.3 billion pounds of copper and 3.4 million ounces of gold and accounts for roughly 40% and 4% of the company's total copper and gold reserves respectively. However, it comes with a heavy cost as last quarter the company reported that the all-in sustaining cost of copper from this region was $4.63 and the all-in sustaining cost of gold was $2,167.

The Indonesian government has recently levied a new tax on the export of copper ore in order to push miners to export processed copper. The aim of this move is to improve the country's balance of trade as ore is cheaper than processed copper. The two U.S. based companies, Freeport and Newmont, decided to continue with their production but halted ore exports. According to Reuters, both companies account for around 97% of Indonesia's total copper production, which means that they are vital for the country's trade. The government aims to push miners to start processing the concentrate within the country. To achieve this aim Indonesia introduced new export rules to implement an initial tax of 25%, increasing to 60% in the second half of 2016, and leading to a complete export ban in 2017.

It appears that Freeport may have been better off as the company continued talks with the Indonesian government to find a middle ground regarding the new tax policy. Finally, Freeport announced that both parties have agreed on a Memorandum of Understanding (MOU). The MoU has not been signed yet but some of the details indicate that Freeport is close to resuming its copper exports. Indonesia's Industry Minister stated that Freeport will pay $115 million for smelter construction along with royalties of 4% and 3.75% on copper and gold sales respectively (up from 1%). Furthermore, Freeport will also be divesting 30% of its Indonesian assets under the MoU. These figures do not look so good when viewed in isolation but I believe that Freeport has made the right decision to protect the mining rights of its Grasberg mine which holds around 30 billion pounds of copper and 29.8 million ounces of gold.

On the other hand Newmont adopted an aggressive approach and applied for international arbitrage rather than choosing to resolve the issue through talks. This action was disliked by the government and it threatened to cancel Newmont's mining rights when the company decided to halt its copper production due to storage issues. The Freeport MoU indicates that there is a chance that Newmont can also find a middle ground through talks. However, the cost structure of the company indicates that it will be facing high costs.

Newmont's costs will go up if it is offered the same royalties as Freeport. This will make it difficult for the company to continue operating the mine. The Indonesian mine contributed 42% and 0.6% to the company's total copper and gold production respectively and accounts for 40% of its total copper reserves. These high levels of copper production and reserves indicate that Newmont should try to resolve the issue, even if a resolution increases the costs. The company can control production costs in the future and should avoid the closure of such a valuable mining operation.

Completed Sale of Jundee Mine

Newmont has finally completed the divestment of its Jundee Mine in South America for $91 million. This sale was part of a planned divestment of non-core assets, which has generated around $800 million for the company, during the last 52 weeks, from sale proceeds. This mine produced around 63,000 ounces of gold in the last quarter at an all-in sustaining cost of $841 an ounce, which is a reasonable cost compared to Newmont's other mines.

Now that the sale has been finalized Newmont's gold production guidance will decrease to between 4.8 million and 5.1 million ounces while the capital expenditure will decrease by $25 to $35 million. These figures exclude the ongoing battle between the company and the Indonesian government. In addition to marginally improving its cash and cash equivalent balance the deal will also enable the company to focus on major operations, leading to better operational efficiency and margins.

Peru Regional Governor Facing Charges

Newmont's Minas Conga project in Peru was suspended in 2011 when it faced opposition from the governor of Cajamarca, Gregorio Santos, who claimed that it will cause pollution and deplete water resources. Newmont tried to appease the governor by offering to build a water reservoir but it failed to get the go-ahead for its project.

Governor Santos was recently convicted of bribery and corruption and jailed for 14 months. Now that the governor is in jail, Newmont is trying to revive its project but at a smaller than planned scale. The removal of Mr. Santos will open new doors for Newmont as well as many other interested parties. Conga will average an estimated 650,000 to 750,000 ounces of gold and 160 million to 210 million tons of copper production on an annual basis for its first five years at a cash cost of $300 to $400 per ounce for gold and $0.95 to $1.25 per pound for copper.

If the company is able to restart its $4.8 billion Minas Conga project (in which it holds a 51.35% stake) it will generate around 310 billion to 470 billion pounds of copper per year. This indicates that Newmont may well have the luxury to dispose its Indonesian mine, which only holds 3.3 billion pounds of copper reserves, when Cajamarca gets a new governor after elections and the company gets the opportunity to revive its Minas Conga project.

Bottom Line

Newmont should try to negotiate with the Indonesian government regarding the export tax issue because the mine is vital for its current growth. However, if the situation in Peru develops in the company's favor it should try to bring the Minas Conga project online as soon as possible and sell the Indonesian mine as its operating costs are very high. For now it would be best to hold on to the stock until updates are released regarding Peru's regional governor elections as it can be an important growth catalyst.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.