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Summary

  • Newmont Mining restarts copper concentrate exports from Indonesia.
  • The company's hard stance proved wrong.
  • Despite the news, Newmont Mining continues to lack upside catalysts.

Indonesia was a constant headache for Newmont Mining (NYSE:NEM) ever since the country announced a controversial copper concentrate export tax back in January. Since then, Newmont Mining was trying to negotiate terms that would have allowed it to export copper from the country. Contrary to Freeport-McMoRan (NYSE:FCX), which also produces copper in the country, Newmont Mining took the hard line and filed for international arbitration. In my article on Barrick Gold (NYSE:ABX), I briefly touched this subject and stated that the decision to file for international arbitration was a wrong move for Newmont Mining. An opposite view was presented in the comments section by a reader, greenkm, who believed that Newmont's stance gave it an advantage in negotiations.

It turned out that Newmont Mining decided to withdraw its arbitration claim on August 26 to proceed with negotiations with Indonesian officials. Now that Newmont Mining has signed a Memorandum of Understanding with the Indonesian government, it's time to evaluate how the company handled the situation and what the solution means for its shares.

A wasted month

Newmont Mining will pay an export tax of 7.5% on copper concentrate, a 3.75% royalty on gold and a 4% royalty on copper - the same terms that Freeport-McMoRan got earlier. I view this as a satisfactory outcome for Newmont Mining, as it was able to get the same terms like Freeport-McMoRan despite its hard stance. However, the opinion that Newmont Mining's actions will improve its positions in the negotiations proved wrong.

Eventually, the decision to file for international arbitration just led to a waste of time. Freeport-McMoRan received the export approval on July 25, while Newmont Mining is going to start exports next week. Did Newmont Mining gain anything from taking the hard stance? No. Should the company have taken a dovish approach like Freeport-McMoRan, it would have already been exporting copper from Indonesia. I strongly believe that Newmont Mining made a wrong move when dealing with the export tax issue. The good thing is it did not take long before the company realized it was necessary to return to the negotiation table.

Is the export restart positive for Newmont Mining's shares?

I think that just as in the case of Freeport-McMoRan, the restart of exports from Indonesia won't add upside to Newmont Mining's shares. The terms are far from stellar, and the sole fact of export restart does not change the big picture for Newmont Mining. On the other hand, further delay of export permissions would have been a negative factor for Newmont Mining, so the resolution of the problem could be viewed as slightly positive for the company.

In my view, the company remains inferior to its peers Goldcorp (NYSE:GG) and Barrick Gold. Newmont Mining's decision to develop the Merian gold mine in Suriname will eventually bring production growth, but this won't happen until 2016. Newmont Mining targets to produce 4,725-5,000 million ounces of gold this year, and projects a decline to 4,600-4,900 million ounces of gold in 2015. The outlook for all-in sustaining costs (AISC) is not impressive either, and Newmont Mining lags its peers on this front. Newmont estimates that this year's AISC will be in the range of $1075-$1175 per ounce. In comparison, Goldcorp targets AISC of $950-$1000 per ounce this year, while Barrick Gold targets AISC of $900-$940 per ounce.

Bottom line

I view the export restart as neutral news for Newmont Mining. In general, I believe that Newmont will lag Barrick Gold and Goldcorp over the next few years due to cost underperformance and muted growth prospects in the next few years.

Source: Newmont Mining: Thoughts On The Indonesian Deal