Newmont Mining (NYSE:NEM) reported its third quarter earnings on November 2. It reported an adjusted quarterly net income of $426 million or 86-cents per share, down from $635 million or $1.29 per share over the comparable period last year. Lower production at its mines in Indonesia and Australia was also responsible for the drop. This decline in production was offset to some extent by higher production from Nevada in North America and Yanacocha in Peru. Newmont declared attributable gold and copper production figures of 1.2 million ounces and 35 million pounds respectively. While gold production declined by 5% year-over-year, copper production declined by 38%. Attributable gold and copper sales figures stood at 1.2 million ounces and 37 million pounds respectively. While gold sales declined by 4% year-over-year, copper sales decreased by 27%.
Cost Applicable to Sales (CAS) figures went up for both gold and copper. CAS stood at $693 per ounce of gold and $2.38 per pound of copper, up 11% and 116% 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 Waihi mines. 
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.
For the first nine months of the year, Newmont reported attributable gold production of 3.73 million ounces, down from 3.87 million ounces over the same period last year. Attributable copper production of 108 million pounds of copper was reported for the first nine months of 2012, down from 152 million pounds during the first nine months of 2011. 
Batu Hijau Responsible For Production Decline
Newmont’s Batu Hijau operation in Indonesia was the main culprit for the huge fall in gold production year-over-year. Lower production was attributed to the processing of lower grade ore from stockpiles as the company prepares for a new phase of mining at the vast open pit in the mountains of Sumbawa, the island where the Batu Hijau mines are located. There was a reduction of 89% in gold output and 54% in copper output. The Batu Hijau mine only produced 7,000 ounces of gold in Q3 as against 65,000 ounces a year ago. 
While lower production due to processing of lower grade from stockpiles is one problem, it is not the only one. 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). 
Newmont is also facing problems from the Indonesian government with which it is currently involved in negotiations 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.  In our opinion, the overall operating environment in Indonesia for Newmont is likely to be quite challenging for the foreseeable future.
Status Of The Conga Project In Peru
Newmont’s problems at Conga in Peru persist. The government put the project on the back burner sometime in August this year in face of strong resistance from local communities. Newmont said in the latest 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 the urban and rural community in order to contribute to the improvement of social conditions necessary to move forward with the project.
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. 
Africa 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.
In the fourth quarter, Newmont expects slightly higher production from North America and Asia Pacific to offset slightly lower production from South America and relatively flat production from Africa. The capital expenditure guidance for the year remains intact and is expected to be between $2.7-3 billion.
We have a Trefis price estimate for Newmont Mining of $58 which will be revised shortly now that the earnings results for the third quarter are out.Notes:
- Newmont Announces Quarterly Revenue of $2.5 Billion, Cash Flow from Continuing Operations of $578 Million, Newmont News Release [↩]
- Weak Asian/Pacific mine performance hits Newmont 3Q results, MineWeb [↩]
- Production, labour, cost issues weigh down the world’s top gold miners, MineWeb [↩]
- Newmont to face labour woes as Indonesia mine output declines, MineWeb [↩]
- Indonesia Seeks to Increase Royalties From Mineral Mining to 10%, Bloomberg Businessweek [↩]
- Peru’s Buenaventura to Start Production at New Gold Mine, 4-traders.com [↩]