Newmont Mining: About The $2 Billion Bid For Batu Hijau

| About: Newmont Mining (NEM)

Summary

An Indonesian group is preparing a bid for PT Newmont NUSA Tenggara.

The share prices of Newmont and P.T. Medco Energi International jumped after first revelations.

This financial operation looks like a forced sale.

An Indonesian group is preparing a bid for PT Newmont NUSA Tenggara, the company that owns BATU Hijau, the second-biggest copper and gold mine in Indonesia:

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Batu Hijau is a porphyry copper deposit with small amounts of gold and silver. Batu Hijau's copper concentrate is shipped to a number of smelters in the country and overseas. Batu Hijau means "green rock" in Bahasa Indonesian.

Originally discovered in 1990, commercial production began in 2000. The Batu Hijau mine is located in the southwest region of the island of Sumbawa, in the District of Sekongkang, West Nusa Tenggara Province, Indonesia.

Last January the offer was $3.2 billion according to the reader:

this week a Internet news release stated that Indonesia is now forming an Investment Group to offer $3.2 Billion for a Buyout of a Majority Interest in Newmont's huge Gold Mine in Indonesia (the world's 2nd largest); (Comment by James to one of my articles).

But according to the last news about this deal, the offer that the Indonesian consortium is going to make is $2.0 billion and not $3.2 billion.

Newmont Mining Corporation (NYSE:NEM) owns 31.5 percent economic interest in BATU Hijau, the second-biggest copper and gold mine in Indonesia, after Freeport-McMoRan's (NYSE:FCX) Grasberg mine, which contains the world's biggest gold reserves.

Newmont Mining Corp. has 31.5% interest in PT Newmont NUSA Tenggara that owns Batu Hijau:

Look at the picture above, 56.25% x 56% = 31.5%.

The interest of Newmont Mining Corp. in PT Newmont NUSA Tenggara will be reduced to 27.6% from 31.5%, if the interest of NUSA Tenggara Partnership BV in PT Newmont NUSA Tenggara will be reduced from 56% to 49%.

"Our ownership interest in PTNNT may be reduced in the future to as low as 27.5625%, with NTPBV's interest in PTNNT reduced to 49%, thus potentially reducing our ability to control the operations at Batu Hijau or apply our operating standards." (here).

If the deal will be closed, it is not clear how much Newmont Mining Corp. will get, since other companies are involved: Sumitomo corporation of Japan (24.5%), PT Multi Daerah Bersaing ("PTMDB"), 24%; P.T. Pukuafu Indah ("PTPI"), 17.8%; and PT Indonesia Masbaga Investama ("PTIMI"), 2.2%. All of these companies have interests in Newmont Nusa Tenggara ("PTNNT"), that owns BATU Hijau, the second-biggest copper and gold mine in Indonesia. The bid is for controlling the 80% of the local operating company PT Newmont Nusa Tenggara.

The impact of the news and the rise in the gold price on the share price of Newmont:

this is one reason why NEM gained sharply on that day ! As Gold price continues to rise throughout 2016 as per my above paragraph, that Indonesian Investment Group will need to continue to increase its Offering Bid, so that if they buy in Dec 2016 when Gold price is at $1,500 per ounce, that Bid Offer would likely need to be at least $9 Billion to consummate the deal with NEM likely at $52 per share in Dec 2016 ! Jan 29, 2016 at 10:51 a.m. PST. (Comment by James to one of my articles).

I don't believe that gold price will be at $1,500 per ounce in Dec. 2016. However, in my opinion, it is not really the price of gold (or the stock market) that matters in this case to make the share price of Newmont jump from $16.68 (January 22, 2016) to the current prices, but the news itself that is circulating since the end of January 2016. The historical beta market of Newmont is 0.01 and the ttm beta market is 0.12.

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I calculated a historical exposure of Newmont's returns to the changes in gold price and this is 0.9. Even if the gold price will trade at $1,500.00 per troy ounce in December 2016, I don't think the share price will trade at around $52. This means that the bid offer doesn't have to be at the level said by the reader to consummate the deal with Newmont Mining Corp.

However the only certainties concerning this news are:

  1. The share price of Newmont stock has jumped 50% in about two weeks (between the end of January and the beginning of February).
  2. The share price of P.T. Medco Energi International (a Jakarta listed oil and gas producers), the company that together with Agus Projosasmito will be the shareholder of "PTNNT" if the offer will materialize, has jumped 81 percent since the start of the year, outpacing the 5.4 percent rise in the benchmark Jakarta Stock Exchange index.

This financial operation looks like a forced sale:

I agree with the reader: Newmont Mining Corp. is going to sell its interest in PT Newmont NUSA Tenggara because Indonesia government banned raw ore shipments in January 2014 and put a progressive tax on concentrates that should boost revenue by turning the country into a manufacturer of higher-value products and encourage construction of domestic smelters and refineries.

Also two state-owned lenders (PT Bank Negara Indonesia and PT Bank Mandiri) will lend funds to the Indonesian consortium that is interested in the buyout. The banks will lend about $1 billion to the investment group for this financial operation.

I don't think that the Indonesian government will ever encourage the construction of domestic smelters and refineries in case of black smoke…

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.