Why Newmont Mining Is Selling Off Its Stake In The Batu Hijau Mine

July 5th, 2016 by Trefis Team
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Newmont Mining announced the signing of a binding agreement to sell off its stake in its Batu Hijau mine last week, a development that will allow the company to exit its Indonesian operations, which have been beset by regulatory uncertainty over the past couple of years. [1]  Newmont had temporarily halted production at its Batu Hijau mine in 2014 over changes to Indonesia’s mining regulatory regime which were aimed at encouraging the development of domestic smelting capacity and made it harder for foreign firms to do business in the country. Though operations resumed under a more stringent regulatory and taxation regime later on, mining operations in Indonesia have been under a cloud of higher political and regulatory risk ever since. Newmont plans to reinvest part of the proceeds (totaling $1.3 billion including $403 million of contingent payments) of the transaction in construction activities at its Merian and Long Canyon projects as well as the expansion of the operating CC&V and Tanami mines. [2] These operations are located in the U.S. and Australia, which are more predictable and lower risk regulatory jurisdictions as compared to Indonesia.

Apart from the regulatory risk, Newmont Mining is nearing the end of Phase 6 mining operations at Batu Hijau, with around two years of mine life remaining for Phase 6 operations. The decision to exit the Indonesian operations at this stage precludes significant capital expenditure for the development of Phase 7 mining operations at Batu Hijau, which could extend the mine’s life till 2033. [3] Moreover, investment in its existing Merian, Long Canyon, Tanami, and CC&V projects (labeled ‘Other Projects’ in the table shown below) will give the company access to higher production rates for a longer time without the regulatory uncertainty that Phase 7 operations at Batu Hijau would present. Part of the proceeds  of the Batu Hijau sale could also be used for debt reduction, which would help strengthen the company’s balance sheet. [2]

NEM Batu Hijau Sale

All in all, given that the company can divert a portion of the proceeds of the transaction towards existing projects which would help the company make up the loss in production from foregoing the development of Phase 7 operations at Batu Hijau, and exit a risky regulatory regime at the same time, the sale of Newmont Mining’s stake in the Batu Hijau mine seems a shrewd move by the management.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Newmont Mining

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Notes:
  1. Newmont Enters Agreement to Sell Interest in Indonesian Assets, Newmont Mining News Release [↩]
  2. Newmont Mining Conference Call, Newmont Mining Website [↩] [↩]
  3. Newmont Mining 2015 10-K, SEC [↩]