Newmont Mining’s (NYSE:NEM) $5 billion Conga project in Peru is facing some really serious challenges. The first significant opinion poll conducted on the issue in the Cajamarca province by Ipsos, the most respected polling firm in Peru, revealed that only 15% of the population is in favor of the project, while 78% opposes it. The rest didn’t have an opinion. The survey sample size was 250. The figure for those in opposition went up to 83% in the rural areas. ((Most of Peru region opposes Newmont mine-poll, Reuters))
Why Locals Are Stridently Against The Project
The Conga project is an expansion of the Yanacocha mine in Cajamarca, and is located 73 kilometers from the city of Cajamarca. Protests in Cajamarca and surrounding districts have stalled the project, with opponents saying that water supplies will be threatened. There are also fears that the mine, being open-pit, will contaminate water supplies. A number of protests and rallies have been held thus far and people have even died in clashes with security forces. Protesters reject President Humala’s claim that the project would generate thousands of jobs and huge tax revenues. ((Peru Poll: 78% In Cajamarca Reject Minas Conga Mine Project, Fox Business))
The Conga project has become a lightning rod for larger debates about whether mining can benefit local communities without damaging the environment, and whether national economic interests should trump local opposition to mining activities.
What Newmont Has Done To Win Over The Opposition
CEO Richard O’Brien says that construction of the mine will only go ahead after water supplies are ensured. Newmont is building reservoirs on high-mountain lake areas to ensure water supplies for the locals and this activity is likely to continue until well into 2013. The company says that these reservoirs will provide year-round water supplies in areas that currently suffer during the dry season.
Newmont has stressed time and again that it will go ahead with the project only if it is able to garner support from the local communities. O’Brien recently stated in an interview that it will take significant changes to create an environment that will allow the hobbled project to move to production. This, we believe, is a tacit admission that the probability of the project going ahead is very low. ((Newmont CEO: Conditions Not There for Peru’s Minas Conga to Proceed, Fox Business))
What If The Project Is Scrapped
We believe that if the Conga project 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. As of now, it is working on developing two mines in Ghana, as well as The Hope Bay project in the Canadian Arctic. The latter doesn’t figure in Newmont’s strategic growth plans as of now but that may have to change if the Conga project is scrapped.
We believe that the Conga project is unlikely to go ahead and will assume so in our valuations. We shall be updating our estimates soon.