Newmont Mining: Commentary On The Indonesian Bid For Batu Hijau

| About: Newmont Mining (NEM)
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Indonesian Group is going to prepare $2 billion Newmont Mine Bid.

I wonder if this bid can be considered satisfying.

I don't see any reason for Newmont Mining Corp. to sell its asset in Indonesia.

According to Bloomberg, an Indonesian consortium, led by veteran investment banker Agus Projosasmito, is preparing a bid for PT Newmont NUSA Tenggara, the company that owns BATU Hijau, the second-biggest copper and gold mine in Indonesia.

It is not clear if Newmont will get $2B according to the news released on April 1, or $3.2B according to the news released by Bloomberg on January 26, 2016.

The Indonesian investor group plans to bid for about 80 percent of the local operating company PT Newmont Nusa Tenggara which owns the Batu Hijau mine in Indonesia, which is controlled by several companies. 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.

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.

A rough valuation:

I wonder if this bid can be considered satisfying based on Newmont's 2015 reserves of gold, copper and silver at Batu Hijau.

Newmont's 2015 proven and probable reserves were calculated at a gold price of $1,200 per ounce.

  • Batu Hijau open pit: 2,030,000 ounces
  • Batu Hijau stockpiles: 640,000 ounces

Total P&P of gold reserves: 2,670,000 ounces X $1,200 = $3.2B

2015 reserves of copper were calculated at a price of $2.75 per pound.

  • Batu Hijau: 606,500 tonnes
  • Batu Hijau stockpiles: 576,300 tonnes

Note that 1 metric tonne = 2 204.62262 pounds

Total P&P of copper reserves: 1,182,800 tonnes X 2204.62262 pounds X $2.75 = $7.2

2015 reserves of silver were calculated at a silver price of $19.00 per ounce

  • Batu Hijau open pit: 5,800,000 ounces
  • Batu Hijau stockpiles: 3,160,000 ounces

Total P&P of silver reserves: 8,960,000 ounces X $19.00 = $170M

Total reserves of gold, copper and silver: $10.5B

I propose another valuation:

Annual gold production at Batu Hijau: 328,000 attributable ounces

2015 average gold price: $1,160

Annual copper production at Batu Hijau: 240,000,000 pounds

2015 average copper price: $2.50

328,000 ozs x $1,160 = $380,480,000

240,000,000 pounds x $2.50 = $600,000,000

The total annual gold and copper production is $980,480,000.

Assuming an average mine life of 11 years: $980M x 11years = $10.8B.

What will Newmont do with the money?

In my opinion, every kind of reasoning on how the company will spend the cash is useless, if the Indonesian investment group is going to offer only $2.0B for Newmont's operations at Batu Hijau mine. And my calculations are based on 2015 gold prices which are the lowest over the 5 years before.

In my opinion, there isn't any reason for Newmont Mining Corp. to sell its asset in Indonesia. Newmont can easily generate $2B in cash flow from operating activities in just 1 year's time and has enough cash on hands to invest in mining projects.

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.