Newmont Mining (
) didn't enjoy a particularly good year in 2012. The company was
beset by production problems, labor troubles, and political issues
in Indonesia and Peru. It didn't help that demand for copper
remained weak due to the prevailing weak economic environment which
didn't allow prices to rise, and the cost of gold production shot
up. For the first nine months of the fiscal year, the company
reported lower production figures for both gold and copper.
Attributable gold production stood at 3.73 million ounces, down
from 3.87 million ounces over the same period last year.
Attributable copper production was 108 million pounds, down from
152 million pounds during the first nine months of 2011.
The Cost Applicable to Sales (
) figures went up for both gold and copper. For the first nine
months, CAS stood at $664 per ounce of gold and $2.23 per
pound of copper, up 13% and 91% respectively
year-over-year. Newmont said that the overall CAS figure for
2012 is likely to be at the higher end of its guidance of $650-675
per ounce. This was attributed to issues at Tanami, Codding and
Newmont is estimated to be losing about a million dollars a day
in cash flow due to lower output, and this situation is expected to
continue in 2013.
See our complete analysis for Newmont here
Problems At Batu Hijau In Indonesia
In October, Newmont revised the 2012 gold production target for
its Indonesian mine to 71,000 ounces from 114,000 ounces guided
previously. Also, it 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
Newmont attributed the lower production to the processing of
lower grade ore from stockpiles as it prepared for a new phase of
mining at the vast open pit in the mountains of Sumbawa. While
lower production due to the processing of lower grade from
stockpiles was one problem, it was not the only one.
With a decline in output, there is a possibility of renewed
friction with mine workers. Negotiations are slated to begin
shortly over wages. The workers will be hoping for hefty pay rises,
following a 37% rise in wages given by Freeport McMoRan Copper
) 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.
Newmont also faced problems from the Indonesian government
over 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. In our opinion, the overall operating environment in
Indonesia for Newmont is likely to be quite challenging for
the foreseeable future.
Conga Trouble Threw A Wrench In The Works
Newmont had been backing on its Conga project in Peru in a big
way to drive future growth. But the project has been beset by all
kinds of troubles from the beginning and was put on the back burner
in August this year in the face of strong resistance from local
Newmont said in the third quarter earnings conference call that
it is moving ahead with a "Water First" approach of constructing
reservoirs before building production facilities or beginning
mining. It is making efforts to enhance its credibility in
urban and rural community in order to contribute to the improvement
of social conditions necessary to move forward with the
In any case, it is a long way off from production even if
finally approved. We think that it is difficult for it to commence
production in 2014 as originally planned.
Conga could have an average annual output of 580,000 to 680,000
ounces of gold and 155 million to 235 million pounds of copper
during its first five years of operation. This project is important
for Newmont's future growth prospects.
We believe that if the Conga project eventually gets cancelled,
it will have serious ramifications for Newmont. The company will
find it extremely difficult to meet its annual production target of
7 million ounces by 2017, up from the present production levels
of 5.2 million ounces. Production in 2011 had declined by 4%
over that in 2010. Production shortfall has obvious implications
for revenue as well. In order to salvage its revenue growth
and gold operating margins of $971 an ounce, the company would
have to find another source of production quickly.
The Road Ahead
Earlier this month, Newmont announced its decision to sell its
Hope Bay project in the Canadian Arctic for $1.5 billion. The
project was a long way off from gold production and would have
needed substantial capital expenditure prior to that. The company
is keen to invest in projects which are closer to production.
For example, Newmont's African production is expected to
grow over the next few years, primarily through the development of
Akyem in Ghana, which is progressing very well. The Akyem project
is approximately 65% complete and on budget, with first production
expected in late 2013. This is expected to be followed by a ramp-up
in production over a period of three to six months.
We think that it makes sense to deploy scarce capital in areas
which can contribute to production quickly. The cash flows
generated from higher production could then be deployed in long
term, more capital-intensive projects. However, Akyem is not a
project on the scale of Conga and cannot compensate for the
potential loss of production. Newmont needs to decide in 2013
whether to keep betting on Conga or start looking for a suitable
alternative. Waiting for too long might just choke Newmont's growth
We have revised the
Trefis price estimate for Newmont Mining to $59
after the earnings results for the third quarter.
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