Newmont To Resume Normal Operations In Indonesia As Standoff With Government Ends
Newmont Mining (NYSE:NEM) has announced signing a Memorandum of Understanding (MoU) with the Government of Indonesia, which will result in the company receiving a permit to resume its export of copper concentrate from the country. The company is expected to resume exports this month itself. [1] This MoU will bring to an end Newmont’s standoff with the Indonesian government over new regulations governing mineral exports from the country and enable the company to resume normal operations in Indonesia. The company had halted mineral exports from Indonesia in January, pending negotiations with the government over the new regulations. However, it had failed to reach an agreement and had gone on to halt production and processing of copper concentrate in June, even as its storage facilities were filled to capacity.
See our complete analysis for Newmont Mining
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 was of the view that the export tax violated the terms of its investment agreement or contract of work (COW), with the Indonesian government and would 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] The company 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 concentrate 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]
As per the terms of the MoU signed by Newmont with the Government of Indonesia, the two parties will negotiate an amended COW to address various dimensions of the company’s operations in Indonesia. The negotiations over the amended COW are expected to be completed over a period of six months. Effective with the signing of the MoU, the company has agreed to provide a $ 25 million assurance bond to demonstrate its commitment for smelter development in Indonesia. [1] The company has also agreed to pay higher royalties of 4% for copper and 3.75% for gold, up from 3% and 1% respectively. [5] Newmont will now pay a revised duty of 7.5% on its copper concentrate exports, which will decline to 5% when smelter development progress exceeds 7.5%, and 0% when development progress exceeds 30%. ((PTNNT to Resume Operations and Copper Concentrate Exports, Newmont News Release)) The terms of the MoU are along expected lines, with similar terms previously offered to Freeport McMoran (NYSE:FCX) that enabled it to resume mineral exports from Indonesia. [6]
Impact on Newmont
Batu Hijau accounted for around 70% of Newmont’s estimated consolidated copper production of approximately 370 million pounds for 2014, at the time when the company declared it’s Q4 2013 results. [7] 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. [8] The suspension of operations at Batu Hijau throughout July and August 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.
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 the time of the declaration of the company’s Q4 2013 results. [7] Thus, Newmont’s overall gold production for the year will not be significantly impacted by the suspension of the company’s operations, as a result of its standoff with the Indonesian government.
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)| Get Trefis Technology
Notes:
- PTNNT to Resume Operations and Copper Concentrate Exports, 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 signs MoU with Indonesia govt, to resume copper exports next week, Reuters [↩]
- Resumption Of Exports From Indonesia Provides A Boost To Freeport McMoran, Trefis [↩]
- Newmont’s 2014 Production, CAS, AISC And Capital Outlook, Newmont Website [↩] [↩]
- Newmont’s Q2 2014 10-Q, SEC [↩]