Newmont Mining Preview: Lower Revenues As Future Growth In Question

Newmont Mining (NYSE:NEM) will release its third quarter earnings results on November 2. We expect the company’s revenues to show a year-over-year decline. This is primarily due to lower gold and copper output from its Asia Pacific mines. Newmont recently revised its 2012 gold production target from its Indonesian mine to 71,000 ounces from 114,000 ounces guided previously. It has lowered its annual copper output forecast from the Batu Hijau mine in Sumbawa island to 170.6 million pounds from 192 million pounds earlier. ((Newmont cuts Indonesia copper, gold mine output forecast, Reuters)) Lower production was attributed to the processing of lower grade ore from stockpiles as the company prepares for a new phase of mining at the vast open pit in the mountains of Sumbawa. Production was also impacted by lower mill availability and recoveries at Boddington and lower ore tonnes and grade mined at Tanami in Australia. ^[1]

In an announcement earlier this month, Newmont reported preliminary third-quarter attributable gold and copper production of 1.24 million and 35 million pounds, respectively.

In its Q2 2012 earnings results, the company projected lower production figures for this year, which led to a steep fall in its share price. Newmont is losing about a million dollars a day in cash flow due to lower output, and this situation is expected to continue in 2013. To top it all, the company may face difficulty in negotiating with workers in November over wages and jobs due to lower expected production, and this could lead to a new wave of strikes and general labor unrest.

See our complete analysis for Newmont here

Problems In Indonesia

While lower production due to processing of lower grade from stockpiles is one problem, it is not the only one.

Newmont is looking to cut costs across the board in all ways possible. This includes mining, processing and support costs as well as a review of contract services, parts and supplies, and salaries and wages. We think given the long history of protests and violence against mining companies in Indonesia, this will turn out to be a daunting prospect. Newmont had earlier announced that there will be two rounds of job cuts at the Batu Hijau mine, which employs 8,000 people. The exact number of cuts has not been announced thus far.

To make matters worse, Newmont will start wage negotiations with thousands of workers in November for the coming year. The workers will be hoping for hefty pay rises, following a 37% rise in wages given by Freeport McMoran Copper (NYSE:FCX) in December 2011 to end a three-month strike that had paralyzed output and lifted copper prices. Part of Newmont’s own workforce earlier went on strike in November 2011. ^[2]

There is also the possibility of intervention by the Indonesian government, which is quick to take miners to task over perceived abdication of social responsibility. The mining companies operating in Indonesia are currently in negotiations with the government. These negotiations are focused on six main issues: an increase in royalty payments, the obligation to process mineral ores in Indonesia, the use of local goods and services, divestment, contract extensions, and the size of mining areas. ^[3]

The operating environment is already quite challenging for the mining companies. Foreign firms are required to divest 51% of mine assets after 10 years of production. The government has also decided to impose a 20% levy on raw ore exports and requires companies to start smelting all ore locally by 2014. The companies have bitterly opposed the latter rule, saying there is global overcapacity of smelters, which in any case cost hundreds of millions and take years to build. Newmont has explicitly said no to building a smelter, which means that unless the government relents or compromises, Newmont’s exports could technically halt in 2014.

We think it is unlikely that the government will carry out its threat of shutting down Newmont’s exports, but it could, nevertheless, use it as leverage to force Newmont to preserve jobs and/or give substantial pay hikes.

Problems At The Conga Project In Peru

Newmont’s problems at Conga in Peru persist. The government put the project on the back burner sometime in August this year in face of strong resistance from local communities. The local communities claimed that water supplies would be threatened. They also feared that the mine, being open-pit, would contaminate water supplies. A number of protests and rallies were held and people even died in clashes with security forces. While Newmont hasn’t abandoned the project so far, it has been relatively silent about further updates. In any case, it is a long way off from production even if finally approved. We think that it is difficult for it to commence production in 2014 as originally planned.

Conga could have an average annual output of 580,000 to 680,000 ounces of gold and 155 million to 235 million pounds of copper during its first five years. This project is important for Newmont’s future growth prospects. ^[4]

Newmont also warned earlier this month that it is expecting to take a $27 million charge for Hope Bay care and maintenance, along with another charge of $50 million for restructuring severance and other related costs in other expenses for the third quarter.

In the upcoming earnings results, we will be interested in Newmont management’s comments on the situation in Indonesia and Peru. We will also be interested in contingency plans, if any, if the Conga project in Peru doesn’t go through.

We have a Trefis price estimate for Newmont Mining of $58 which will be revised once the earnings results are out.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Newmont to take $77m in charges for 3Q, MineWeb [↩]
2. Newmont to face labour woes as Indonesia mine output declines, MineWeb [↩]
3. Indonesia Seeks to Increase Royalties From Mineral Mining to 10%, Bloomberg Businessweek [↩]
4. Peru’s Buenaventura to Start Production at New Gold Mine, 4-traders.com [↩]