Newmont Mining (NYSE:NEM) will soon resume work on its Conga gold project as the miner has accepted the Peruvian government's condition to build water reservoirs to ensure water supply in the nearby areas.
The Conga project is the largest gold project in Peru and holds approximately 6.1 million attributable ounces of gold reserves and 1.7 billion attributable pounds of copper reserves, as of December 2010. The project has a capacity to produce close to 350,000 ounces of gold and up to 120 million pounds of copper annually (Conga Fact Sheet, Newmont Website). The Conga project was earlier estimated to start production by late 2014 to early 2015, but is now revised to 2017 – a delay of almost two years – following protests by local residents and authorities since November. The project cost could also jump to $5 billion from earlier $4.8 billion as new water reservoirs may cost about $200 million.
We have revised our price estimate for Newmont's stock to $59, a nearly 25% premium to the current market price, to reflect the delay in Conga project.
Weak economic conditions have taken a toll on most miners, as even precious metals like gold have seen significant declines over the last few months, hurting margins. Any further delays in setting up the project will harm the company even more due to rising costs and debt amid falling commodity prices.
While we are bullish on the future gold demand and estimate total shipments to rise from 5.8 million ounces in 2011 to 6.5 million ounces in 2017, we are wary of its lower ore grades as they offer no immediate respite to the company's production woes. Lower grades will likely hurt Newmont in the near term, with the company's 2012 attributable production pegged at 5.2 million ounces of gold and 170 million pounds of copper. We expect the South American gold shipments to decline in coming years before the Conga mine will commence production in 2017.
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