Addressing delegates at the Denver Gold Forum, Newmont Mining (NYSE:NEM) CEO Gary Goldberg said that Newmont was considering expanding its presence in the copper business. He cited the need to diversify in view of rising operating costs in the gold mining industry at a time when gold prices are no longer very attractive. Newmont already has three copper-gold projects in its portfolio at Phoenix, Boddington and Batu Hijau and thinks that it can leverage its copper expertise to get into pure copper projects. 
Newmont took a cautious line on the stalled Conga project. While a Peruvian minister had announced a few days back that the Conga project would soon resume, Mr. Goldberg said that a restart was not immediately on the cards. He said that he doesn’t plan to approach Newmont’s board for a final decision on Conga till early 2015. This would definitely give some clarity to investors who are unsure of Newmont’s plans for Conga. 
Why More Copper?
Mr. Goldberg emphasized that his vision for the future was to generate returns in the top quartile for shareholders, through all business cycles. He said that Newmont would achieve this by continuing to focus on returns over volume growth. The long term thinking about moving into the copper business in a bigger way seems to be driven by this core objective. This is because Newmont’s bread-and-butter gold business is no longer fetching the returns it used to. According to Goldberg, operating costs have been relentlessly rising while gold prices are very volatile and nowhere near their peak values some years back. The premium that gold producers used to command is now a thing of the past. 
Even while signaling a greater push into the copper business, Mr. Goldberg emphasized that Newmont doesn’t have a specific volume target in mind. The company is simply aiming to leverage its existing capabilities in the copper business to pursue growth opportunities. It will only opt for projects that promise to generate value, take the company to a lower point on its overall cost curve, and don’t involve taking unmanageable social and political risks. The emphasis on avoiding undue risk is undoubtedly due to Newmont’s ongoing woes at the Conga project. 
While a diversification strategy is fine, we think that copper prices may remain subdued for the next 2-3 years as China re-balances its economy and reduces its copper consumption. New growth frontiers would have to be found for copper prices to keep climbing upwards and generate significant returns for producers.
The Conga Project
Conga is a copper-gold mining project in Peru that was suspended on November 30, 2011, at the request of Peru’s central government following increasing protests by anti-mining activists. The main concerns revolve around the fear that the Conga project will threaten water supplies for the local population due to its extensive water requirements. Also, the local residents fear that the run-off from the open-pit mine will contaminate water resources. The Peruvian government asked Newmont to build infrastructure for additional water storage and provide social funds and the company accepted.
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 and Newmont may be unable to move ahead with the project eventually.
According to the latest available figures, Conga has attributable reserves of 6.5 million ounces of gold and 1,690 million pounds of copper. Once production begins, it could have an average annual attributable output of 300,000 to 350,000 ounces of gold and 80 million to 120 million pounds of copper during its first five years. In 2012, the company had a total attributable gold production of nearly 5 million ounces of gold and 143 million pounds of copper. 
While Newmont has decided to make an effort to gain social acceptance before proceeding with the Conga project, its decision-making has been complicated by the economic viability of the project in current circumstances. Newmont says that at its assumed gold and copper prices of $1,200 per ounce and $3 per pound, the Conga project has a positive internal rate of return (IRR) but doesn’t meet the hurdle rate. The company needs a price of $1,400 per ounce of gold and $4 per pound of copper for the project to cross the risk-adjusted hurdle rate. The prices of gold and copper are currently hovering around 1,300 per ounce and $3 per pound respectively and we see no catalyst to drive them past Newmont’s desired rates any time soon. 
While the Peruvian government is impatient for Conga to resume in order to gain access to taxes and royalties important for its budget, the CEO doesn’t envisage a final decision till 2015. We think that when Newmont’s board takes a final call on Conga, it will take into account not just social and political conditions in Peru, but also the project’s economic viability. The latter, in turn, will depend on the prevailing gold price scenario. QE tapering, which is negative for gold prices, is largely expected to have occurred by then. Right now, it is difficult to predict the equilibrium price level for gold once the market factors in the winding down of monetary stimulus. Notes:
- Newmont CEO says open to adding more copper production, Reuters [↩]
- Top US gold miner Newmont announces move towards copper, Mining.com [↩]
- Gold Price Charts, Kitco [↩]
- Newmont Mining’s CEO Presents at Denver Gold Forum, Seeking Alpha [↩]
- Newmont Mining 2012 10-K, SEC [↩]
- Newmont Mining Investor Day 2013 Conference Call, Seeking Alpha [↩]
- Billions of dollars worth of Peru mining projects to resume soon, Mining.com [↩]