Newmont Suspends Indonesian Operations As Minerals Export Issue Remains Unresolved
Newmont Mining (NYSE:NEM) has announced the suspension of operations at its Batu Hijau mines in Indonesia. This follows the halt in production and processing of copper concentrate at its Indonesian operations after its copper concentrate storage facilities were filled to capacity. [1]
The company had halted exports from Indonesia in January, as a law banning exports of unprocessed minerals from the country came into effect. Though last minute changes to the law permitted Newmont to export its copper concentrates, they imposed a 25% tax on exports which would rise to 60% by 2016. The company claimed that this tax violated the terms of its original investment agreement, or contract of work, with the Indonesian government. The company is engaged in negotiations with the government regarding the export duty, leading to resumption of its exports from the country. ((Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes)) The company invoked the force majeure clause of its contract of work, in order to suspend operations, after its storage facility was filled to capacity and production could not be continued.
The suspension of production will impact Newmont’s quarterly and annual results, though the extent of the impact will be determined by the duration for which operations remain suspended.
See our full analysis for Newmont Mining here
The Indonesian Situation
A law enacted in Indonesia in 2009 banned exports of unprocessed minerals from the country with effect from January12, 2014. The intent behind this law was to provide a boost to 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 in order 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 of work 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. Though the Indonesian government has recently displayed some leniency in its stance on the tax issue, it has still not been resolved. [2]
Newmont has a 48.5% effective economic interest in PT Newmont Nusa Tenggara (PTNNT), the entity that operates the Batu Hijau mines. [3] In April 2014, PTNNT received approval from the Ministry of Trade as a ‘registered exporter’. However, it has not secured an export permit. As the ongoing export restrictions prevent production from continuing, the company has invoked the force majeure clause of its contract of work. This would allow it to renege on supply commitments without paying any penalties, as the event triggering a breach of commitment in this case was beyond its control.
The Batu Hijau mine will be placed under care and maintenance as the company continues negotiations with the government to resolve the issues. Newmont will continue selling copper concentrate from its storage facilities to PT Smelting in Gresik, Indonesia’s only copper smelter, through the remainder of 2014. This will allow for the shipment of 81,000 tons of concentrate between now and the end of the year. PT Smelting has capacity limitations and cannot purchase sufficient quantities of Newmont’s copper concentrates to allow for normal operations to continue at Batu Hijau. ((PTNNT Suspends Operations At Batu Hijau, Newmont News Release))
Impact On Newmont
Batu Hijau accounts for around 70% of Newmont’s estimated consolidated copper production of approximately 370 million pounds in 2014. [4] Batu Hijau produced 48 million pounds out of a total of 77 million pounds of copper produced by Newmont in the first quarter. [5] The suspension of operations at Batu Hijau could result in a substantial drop in copper production in 2014, depending on how long these operations are suspended. This would result in a corresponding drop in revenues as well.
In terms of gold production, Batu Hijau accounts for less than 3% of Newmont’s estimated consolidated gold production of around 5.2 million ounces in 2014. [4] Thus, the suspension of operations at Batu Hijau will not affect Newmont’s gold production significantly.
The Road Ahead
During its first quarter conference call, the company management had said that Newmont was halfway through the process of obtaining an export permit. The company had secured ‘registered exporter’ status and was awaiting approval of its 2014 work plan. Approval of the work plan is a prerequisite for receiving recommendation from the Indonesian Ministry of Mines for an export permit. With this recommendation, the company will have to apply for an export permit from the Ministry of Trade. [6]
As far as the issue of export taxes are concerned, it seems Newmont will have to pay certain duties in order to restart exports. The exact quantum of duty to be levied is yet to be decided. However, the company is still involved in negotiations with the Indonesian government and nothing has been finalized yet. [7] A quick resolution is necessary for Newmont to resume normal operations in Indonesia.
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Notes:- PTNNT Suspends Operations At Batu Hijau, Newmont News Release [↩]
- Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes [↩]
- Newmont’s 2013 10-K, SEC [↩]
- Newmont’s 2014 Production, CAS, AISC And Capital Outlook, Newmont Website [↩] [↩]
- Newmont’s Q1 2014 10-Q, SEC [↩]
- Newmont’s Q1 2014 Earnings Conference Call, Seeking Alpha [↩]
- Indonesia’s Mines Ministry Seeks Sharp Cut In Freeport Export Tax, Reuters [↩]