Newmont To Revert To Negotiations In Order To Resolve Indonesian Standoff
Newmont Mining (NYSE:NEM) announced that it has requested discontinuance and withdrawal of an arbitration claim against the Government of Indonesia at the International Center for Settlement of Investment Disputes (ICSID) over restrictions on mineral exports from the country. The company has received commitments from senior government officials to open formal negotiations to conclude a Memorandum of Understanding (MoU) post the withdrawal of the arbitration claim. [1]
This could be a potential breakthrough for Newmont in its efforts to restart production and exports from the country. The company had halted mineral exports from Indonesia in January pending negotiations with the government over new regulations governing mineral exports from the country. However, Newmont failed to reach an agreement and halted production and processing of copper concentrate in June as its storage facilities were filled to capacity.
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The Indonesian Situation
A law enacted in Indonesia in 2009 banned exports of unprocessed minerals from the country effective January 12, 2014. The intent behind this law was to boost 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 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. [2]
As negotiations with the government did not yield satisfactory results, Newmont was forced to halt production and processing activities in Indonesia in June, as its copper concentrate storage facilities were filled to capacity. [3] Newmont continued selling copper concentrate from its storage facilities to PT Smelting in Gresik, Indonesia’s only copper smelter. However, PT Smelting has capacity limitations and cannot purchase sufficient quantities of Newmont’s copper concentrates to allow for normal operations to continue at the company’s mines at Batu Hijau, Indonesia. The company later opted for international arbitration to restart export of copper concentrate from the country, before deciding to withdraw its arbitration claim and reverting to negotiations. [4]
Impact on Newmont
Batu Hijau accounted for around 70% of Newmont’s estimated consolidated copper production of approximately 370 million pounds for 2014, at time of the declaration of the company’s Q4 2013 results. [5] Due to the export restrictions and the ultimate suspension of operations in Indonesia, Newmont’s consolidated copper sales stood at $101 million in the first half of the year, significantly lower than the figure of $169 million for the corresponding period last year. [6] The suspension of operations at Batu Hijau will result in a substantial drop in copper production in the second half of 2014. However, the fall in revenues will be lesser than the fall in production as the company will sell its stocks of concentrate from its storage facilities. The exact impact of the suspension of operations at Indonesia will depend on the duration of time for which these operations remain suspended.
In terms of gold production, Batu Hijau accounted for less than 3% of Newmont’s estimated consolidated gold production of around 5.2 million ounces in 2014, at a time of the declaration of the company’s Q4 2013 results. [5] Thus, the suspension of operations at Batu Hijau will not affect Newmont’s gold production significantly.
The Road Ahead
Post the withdrawal of its arbitration claim, the company will negotiate an MoU with the government. As far as the potential outcome of these negotiations is concerned, we can get some idea from the deal between the Indonesian government and Freeport McMoran (NYSE:FCX), which allowed Freeport to restart exports of copper concentrate from Indonesia. Among the terms of Freeport’s deal with the government, the company is expected to pay a duty of 7.5% on its export of copper concentrate and contribute towards the development of smelting capacity in Indonesia. The duty on concentrate exports will reduce as smelter development progresses. [7] Though Newmont is yet to negotiate the terms of its MoU with the Indonesian government, the duty on exports and contributions towards the construction of smelting capacity appear likely. Though the terms of the MoU are yet to be decided, a swift resumption of normal operations in Indonesia is vital for Newmont’s prospects in the region.
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Notes:- PTNNT Discontinues and Withdraws Arbitration Claim in Anticipation of Formal MoU Negotiations with Indonesian Government, Newmont News Release [↩]
- Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes [↩]
- PTNNT Suspends Operations At Batu Hijau, Newmont News Release [↩]
- Arbitration Filed over Export Restrictions in Indonesia, Newmont Press Release [↩]
- Newmont’s 2014 Production, CAS, AISC And Capital Outlook, Newmont Website [↩] [↩]
- Newmont’s Q2 2014 10-Q, SEC [↩]
- Freeport-McMoRan Announces Resumption of Exports from Indonesian Subsidiary, Freeport Press Release [↩]