Newmont Files for Arbitration as Export Tax Negotiations in Indonesia Remain Deadlocked

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Newmont Mining (NYSE:NEM) has filed for international arbitration against the Government of Indonesia, as a deadlock over mineral export restrictions remains unresolved. [1] Newmont had halted production and processing of copper concentrate at its Indonesian operations in June, after its copper concentrate storage facilities were filled to capacity. ((PTNNT Suspends Operations at Batu Hijau, Newmont Press Release)) The company is seeking interim, injunctive relief to resume the export of copper concentrate, so that its Batu Hijau operations can be restarted.

The company had halted exports from Indonesia in January, as a law banning exports of unprocessed minerals from the country came into effect. Though last minute changes to the law permitted Newmont to export its copper concentrates, they imposed a 25% tax on exports. This tax would progressively rise to 60% by 2016, culminating in a ban on unprocessed mineral exports in 2017. The company claimed that this tax violated the terms of its original investment agreement, or contract of work with the Indonesian government. ((Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes))

The suspension of operations at Batu Hijau will impact production at the company’s Indonesian operations and is likely to have an impact upon revenues as well.

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The Indonesian Situation

A law enacted in Indonesia in 2009, banned exports of unprocessed minerals from the country with effect from January 12, 2014. The intent behind this law was to provide a boost to the development of the Indonesian mineral processing industry and simultaneously increase the value of the country’s commodity exports. However, last minute changes to the law deferred the ban on exports to 2017. Exports of copper concentrate were permitted but under new rules. The government introduced new regulations in order to get an export permit and also imposed an export duty of 25%, which will rise progressively to 60% by 2016. Newmont contends that the export tax violates the terms of its contract with the Indonesian government and will also impact the economic viability of the project. The company halted its exports from Indonesia in January pending negotiations with the government over these regulatory changes. Though the Indonesian government has displayed some leniency in its stance on the tax issue, it has still not been resolved. [2]

Newmont has a 48.5% effective economic interest in PT Newmont Nusa Tenggara (PTNNT), the entity that operates the Batu Hijau mines. [3] In April 2014, PTNNT received approval from the Ministry of Trade as a ‘registered exporter’. However, it has not secured an export permit. With the negotiations between the company and the Indonesian government not yielding satisfactory results, Newmont has opted for arbitration to restart export of copper concentrate. However, the company expects a permanent resolution to the situation through dialogue with the government, outside of arbitration.

The Batu Hijau mine has been placed under care and maintenance. Newmont will continue selling copper concentrate from its storage facilities to PT Smelting in Gresik, Indonesia’s only copper smelter, through the remainder of 2014. This will allow for the shipment of 58,400 tons of concentrate between now and the end of the year. But, PT Smelting has capacity limitations and cannot purchase sufficient quantities of Newmont’s copper concentrates to allow for normal operations to continue at Batu Hijau. ((Arbitration Filed over Export Restrictions in Indonesia, Newmont Press Release))

Impact On Newmont

Batu Hijau accounts for around 70% of Newmont’s estimated consolidated copper production of approximately 370 million pounds in 2014. [4] Batu Hijau produced 48 million pounds out of a total of 77 million pounds of copper produced by Newmont in the first quarter. [5] The suspension of operations at Batu Hijau could result in a substantial drop in copper production in 2014, depending on how long these operations remain suspended for. However, the impact on shipments will be lower than the loss in production, as the company is selling copper concentrate from its storage facilities. This would mitigate the potential loss in revenue from copper sales.

In terms of gold production, Batu Hijau accounts for less than 3% of Newmont’s estimated consolidated gold production of around 5.2 million ounces in 2014. [4] Thus, the suspension of operations at Batu Hijau will not affect Newmont’s gold production significantly.

The Road Ahead

At the moment, there seems to be no clarity on how long it will take for the situation to be resolved and normal operations to resume. Copper producer Freeport McMoran (NYSE:FCX), which is also engaged in negotiations with the Indonesian government over the export tax issue, is more optimistic about a solution. [6] A swift and satisfactory resolution of the situation is vital for Newmont’s business prospects in the region.

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Notes:
  1. Arbitration Filed over Export Restrictions in Indonesia, Newmont Press Release []
  2. Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes []
  3. Newmont’s 2013 10-K, SEC []
  4. Newmont’s 2014 Production, CAS, AISC And Capital Outlook, Newmont Website [] []
  5. Newmont’s Q1 2014 10-Q, SEC []
  6. Freeport Still in Talks with Indonesia, Says No Arbitration Plans, Reuters []