A Closer Look At Newmont Mining’s Stalled Conga Project In Peru

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Newmont Mining

Newmont Mining (NYSE:NEM) operates mines in North America, South America, Asia Pacific and Africa. The company has mainly gold and copper in its portfolio and competes with other mining companies such as Barrick Gold Corporation (NYSE:ABX), Goldcorp Inc. (NYSE:GG) and Freeport McMoran Copper (NYSE:FCX).

In this article, we take a closer look at Newmont’s Conga project. It is a copper-gold porphyry deposit located 75 kilometers northeast of the city of Cajamarca, Peru and 24 kilometers northeast of Newmont’s Yanacocha gold mine. Newmont owns 51.35% stake in Conga, Compania de Minas Buenaventura owns 43.65% while the International Finance Corporation owns the remaining 5%. The project was suspended on November 30, 2011, at the request of Peru’s central government following increasing protests in Cajamarca by anti-mining activists. The main concerns revolve around the fear that the Conga project will threaten water supplies for the local population due to its extensive water requirements. Also, the local residents fear that the run-off from the open-pit mine will contaminate water resources.

Newmont is making all efforts to mend fences with the local communities by focusing on building water reservoirs first before resuming mining activities. Nevertheless, Conga remains exposed to political and social unrest risks. Newmont may be unable to move ahead with the project eventually, potentially affecting its growth prospects because it is crucial to achieving future production targets.

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Conga’s Potential

According to the latest available figures, Conga has attributable reserves of 6.5 million ounces of gold and 1,690 million pounds of copper. Once production begins, it could have an average annual attributable output of 300,000 to 350,000 ounces of gold and 80 million to 120 million pounds of copper during its first five years. In 2012, the company had a total attributable gold production of nearly 5 million ounces of gold and 143 million pounds of copper. [1]

Problems At The Project

As already mentioned, water is an issue of grave concern among the local populace. A number of protests and rallies were held and people even died in clashes with security forces. Protesters rejected President Humala’s claim that the project would generate thousands of jobs and huge tax revenues. ((Peru Poll: 78% In Cajamarca Reject Minas Conga Mine Project, Fox Business))

The project was finally suspended by Newmont on November 30, 2011, at the request of Peru’s central government following increasing protests.

Following the suspension of the Conga project in 2011, at the request of the Peruvian central government, the Environmental Impact Assessment (EIA) report previously approved in 2010 was reviewed by independent experts. The effort was to resolve allegations around the environmental viability of Conga. This review concluded that the environmental impact assessment complied with international standards and provided some recommendations to improve water management. These recommendations included provision of additional water capacity and social funds, which Newmont largely accepted.

What Newmont Is Doing Now

On June 22, 2012, Newmont announced its decision to move forward with a “water first” approach of constructing reservoirs before building production facilities or beginning mining. It is building reservoirs on high-mountain lake areas to ensure water supplies for the locals and this activity will continue throughout 2013. According to a company official, construction of the first such reservoir was completed in May. Work on an access road and other infrastructure projects in the area associated with the project is going on simultaneously. [1]

Newmont says that these reservoirs will provide year-round water supplies in areas that currently suffer during the dry season. It is making efforts to enhance its credibility in urban and rural community in order to contribute to the improvement of social conditions necessary to move forward with the project.

The Future

The Conga project has become a lightning rod for larger debates on whether mining can benefit local communities without damaging the environment and whether or not national economic interests should trump local opposition to mining activities. In an interaction with analysts on Investor Day, Newmont’s management acknowledged that the lack of a social license to operate can have a huge impact on its business strategy. It cited a 2011 study by the Wharton Business School which concluded that while gold miners trade at an average discount of 72% to their actual value, almost 83% of the discount can be explained by low levels of stakeholder engagement. The lack of engagement translates into conflicts around the company’s project and operations. Newmont stressed that it is trying to do better on the stakeholder engagement front now.

Another potential concern at the moment centers around the economic viability of the project itself. Newmont says that at its assumed gold and copper prices of $1,200 per ounce and $3 per pound, the Conga project has a positive internal rate of return (IRR) but doesn’t meet the hurdle rate. The company needs a price of $1,400 per ounce of gold and $4 per pound of copper for the project to cross the risk-adjusted hurdle rate. ((Newmont Mining Investor Day 2013 Conference Call, Seeking Alpha))

If the Conga project gets cancelled, it will have serious ramifications for Newmont’s production volumes and revenues. The company will find it extremely difficult to grow its production volumes, up from the present levels of 5 million ounces. While the earlier target was 7 million ounces of gold by 2017, it has been revised to 5.25 million ounces for 2016. The production shortfall has obvious implications for revenue as well.

In order to salvage revenue growth and gold operating margins of $985 an ounce, the company will have to find another source of production quickly. The company has acknowledged in its 2012 annual report that any inability to continue to develop the Conga project could have an adverse impact on its growth if it is not able to replace the expected production.

Newmont pointed out in the 2012 annual report that the regional government remains stridently opposed to the viability of the project in contrast to the stand adopted by the central government. This it fears could make operating difficult. It could face more protests as well as new and tougher regulations and taxes. If unable to continue, the company will change priorities and reallocate capital to development alternatives in Nevada, Australia, Ghana and Indonesia.

We have a Trefis price estimate for Newmont Mining of 22.

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  1. Newmont Mining 2012 10-K, SEC [] []