Newmont’s Stalled Conga Project In Peru Adds Risk To Outlook
Newmont Mining (NYSE:NEM) is keeping all options open as far as its Conga project in Peru is concerned. According to the company’s 2012 annual report, while it remains committed to the $4.8 billion project for the time being, continued opposition may force it to divert investments elsewhere. This may be a sign that Newmont is looking for an exit strategy from the project.
Newmont is making all efforts to mend fences with the local communities by focusing on building water reservoirs first before resuming mining activities. Nevertheless, Conga remains exposed to political and social unrest risks. Newmont may be unable to move ahead with the project eventually, potentially affecting its growth prospects because it is crucial to achieving future production targets.
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Background To The Conga 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 or not national economic interests should trump local opposition to mining activities.
The project was suspended on November 30, 2011, at the request of Peru’s central government following increasing protests in Cajamarca by anti-mining activists.
Following the suspension of the Conga project in 2011, at the request of the Peruvian central government, the environmental impact assessment report previously approved in 2010 was reviewed by independent experts. The effort was to resolve allegations around the environmental viability of Conga. This review concluded that the environmental impact assessment complied with international standards and provided some recommendations to improve water management.
Newmont has therefore adopted the “Water First” approach of constructing reservoirs before building production facilities or beginning mining. It 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. 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 project. [1]
According to the presentation accompanying the company’s annual earnings conference call, Newmont plans a capital expenditure of approximately $150 million this year on Conga. Of this, $110 million will be spent on equipment, engineering support and other costs, $20 million on completing reservoir construction and the rest on roads, water systems and other costs. [2]
Importance Of Conga For Newmont
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. This project is important for Newmont’s future growth prospects. [3]
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 million ounces. The production shortfall has obvious implications for revenue as well.
In order to salvage its revenue growth and gold operating margins of $985 an ounce, the company would have to find another source of production quickly. The company has acknowledged in its 2012 annual report that any inability to continue to develop the Conga project could have an adverse impact on its growth if it is not able to replace the expected production.
Newmont pointed out in the annual report that the regional government remains stridently opposed to the viability of the project in contrast to the stand adopted by the central government. This it fears could make operating difficult. It could face more protests as well as new and tougher regulations and taxes. If unable to continue, the company will change priorities and reallocate capital to development alternatives in Nevada, Australia, Ghana and Indonesia.
We have a Trefis price estimate for Newmont Mining of $47.
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Notes:- Newmont 2012 Annual Report, Newmont Website [↩]
- Newmont 2012 Earnings Presentation, Newmont Website [↩]
- Peru’s Buenaventura to Start Production at New Gold Mine, 4-traders.com [↩]