Newmont Mining (NYSE:NEM), the world's second ranked gold producer, has revised its 2012 gold production target for its Indonesian mine to 71,000 ounces from 114,000 ounces guided previously. Also, it has 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 cuts Indonesia copper, gold mine output forecast, Reuters)) Production in the first six months of this year was about 90 million pounds of copper and 40,000 ounces of gold. Newmont has attributed the lower production to the processing of lower grade ore from stockpiles as it prepares for a new phase of mining at the vast open pit in the mountains of Sumbawa.
In its Q2 2012 earnings results, the company had projected lower production figures for this year, which led to a steep fall in its share price. Newmont is losing about a million dollars a day in cash flow due to lower output, and this situation is expected to continue in 2013.
To top it all, the company may face difficulty in negotiating with workers in November over wages and jobs due to lower expected production, and this could lead to a new wave of strikes and general labor unrest.
The Expected Fallout
With the production figures expected to be low for some time, Newmont is looking to cut costs across the board in all ways possible. This includes mining, processing, and support costs as well as a review of contract services, parts and supplies, and salaries and wages.
We think given the long history of protests and violence against mining companies in Indonesia, this will turn out to be a daunting prospect. Newmont had earlier announced that there will be two rounds of job cuts at the Batu Hijau mine, which employs 8,000 people. The exact number of cuts has not been announced thus far.
To make matters worse, Newmont will start wage negotiations with thousands of workers in November for the coming year. The workers will be hoping for hefty pay rises, following a 37% rise in wages given by Freeport McMoRan Copper (NYSE:FCX) in December 2011 to end a three-month strike that had paralyzed output and lifted copper prices. Part of Newmont's own workforce earlier went on strike in November 2011. 
There is also the possibility of intervention by the Indonesian government, which is quick to take miners to task over perceived abdication of social responsibility. The mining companies operating in Indonesia are currently in negotiations with the government. These negotiations are focused on six main issues: an 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. The companies have bitterly opposed the latter rule, saying there is global overcapacity of smelters, which in any case cost hundreds of millions and take years to build. 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.
We think it is unlikely that the government will carry out its threat of shutting down Newmont's exports, but it could, nevertheless, use it as leverage to force Newmont to preserve jobs and/or give substantial pay hikes.
Our assessment is that the outcome of the negotiations with workers will depend on a host of factors. If the workers decide to go on strike, Newmont's response will depend on the degree of arm-twisting by the government, its own perceived capability to sustain losses, and the potential for give-and-take arrangements with the government. We find it difficult to believe that Newmont expects to be able to cut jobs and provide only modest pay hikes in the operating environment prevailing today, without any backlash from the government.
You can examine the impact of lower gold shipments from Asia Pacific on the Trefis price estimate for Newmont using the interactive graph below:
We have a Trefis price estimate for Newmont Mining of $58 which is in-line with the market price.
- Newmont to face labour woes as Indonesia mine output declines, MineWeb
- Indonesia Seeks to Increase Royalties From Mineral Mining to 10%, Bloomberg Businessweek
Disclosure: No positions