Newmont Mining (NYSE:NEM) has announced that it is keeping its legal options open even as it plans to meet Indonesian government officials about the new export duty and restrictive conditions to obtain an export permit. 
While the much feared export ban that came into effect on January 12 will not affect the company due to a last-minute rule, a new export duty has nevertheless made things difficult for Newmont. The new levy violates the contract between the company and the government which clearly states that Newmont will not be subject to any new duty, tax, levy or fee of any kind other than those agreed upon at the time of signing. The latest duty not only violates contract terms, it has the potential to make exports economically unviable for Newmont.
We have a Trefis price estimate for Newmont Mining of $24, which is nearly the same as the current market price.
How Did The Export Duty Come About?
A mining law enacted in 2009 prohibited export of unprocessed minerals from Indonesia after January 12, 2014. The purpose was to increase the value of commodity exports and encourage development of the local processing industry. On the designated date, this ban came into effect but the government used its discretionary powers to provide selective relaxation for some minerals and metals till 2017. The copper content in the ore exported has to be greater than 15%. Both Newmont and Freeport McMoran export copper concentrates with a higher percentage of the metal than the designated minimum and account for nearly 97% of Indonesia’s total copper exports. 
The problem mining companies like Newmont faced with the original ban is that there is a shortage of smelters in Indonesia even if they were ready to process all of their ore before exporting it. Right now, Indonesia has just one copper smelter and Newmont sends as much copper ore to it from its Batu Hijau mine as the smelter can take. To process the rest of the copper ore, it has negotiated and signed conditional concentrate supply agreements with two Indonesian companies that have announced plans to build copper smelters in the country. However, neither of these smelters will come online before 2017.
Along with the regulation that was aimed at providing temporary exemption to companies like Newmont, the Indonesian government introduced a new export duty on the copper concentrate. This will start at 25% in 2014 and increase to 60% in 2016. Newmont has indicated that this seems to be a duty on revenues rather than profits so the cost of production cannot be deducted before the duty payable is calculated. This will play havoc with the economic viability of its exports. 
How Will The New Duty Impact Newmont?
The duty is not expected to have any immediate adverse impact on Newmont. The company completed its previously scheduled shipments in early January, and has no plans to make further shipments until later this quarter. Newmont plans to meet government officials for further information and clarity on the new proposals and says that it is still evaluating the full impact to its operating plans at the Batu Hijau mine. It will provide further updates on January 31 when it connects with investors over the 2013 preliminary sales and operating results. However, in addition to engaging with officials to resolve the issue, Newmont will continue to explore all options, including legal remedies, in the meantime. The export duty constitutes a clear breach of the bilateral contract between the company and the Indonesian government so we wonder how the latter will defend its actions in a court of law. Another affected party, Freeport, has already said that it will explore the option of going for a legal arbitration, if required. Newmont may eventually choose to do the same.Notes:
- Newmont Provides Update on Export Ban in Indonesia, Newmont News Release [↩]
- Here Are the Winners of Indonesia’s Ore Ban, Daily Finance [↩]
- Newmont Mining seeks clarification on Indonesian copper taxes, Denver Business Journal [↩]