Newmont’s woes mount in Indonesia

Less than a year after being acquitted of pollution charges on Sulawesi Island in Indonesia, Newmont Mining (NMC-T, NEM-N,) is back in hot water again at another mine in the Southeast Asian nation.

In a warning letter from Indonesia’s Mines Ministry on Feb. 11, the Denver-based company was told that its license to extract copper and gold from the Batu Hijau mine on the remote eastern island of Sumbawa could be cancelled if it doesn’t divest a 10% stake in the project to a local entity by Feb. 22.

In a prepared statement today, Newmont said it was as committed as ever to divesting its stake in the mine, and pointed out that its offers to divest had been rejected by the government on two separate occasions.

The Batu Hijau copper-gold porphyry deposit, discovered in 1990 in the south-central portion of the Indonesian archipelago, started commercial production in 2000 and is expected to last until 2034.

Newmont holds a 45% stake in Batu Hijau mine through its shareholding in PT Newmont Nusa Tenggara, or PTNNT. PTNNT owns and operates the mine.

Newmont and its partner, an affiliate of Japan’s Sumitomo Corp., which owns a 35% share, must collectively divest a 31% stake in PTNNT to Indonesian parties between now and 2010.

Newmont and its partner offered to sell a 3% interest in the mine to the Indonesian Government for $109 million in 2006, and a further 7% to the Indonesian Government for $282 million in 2007, Newmont said in a press release.

But the central government declined the offers. The Indonesian Ministry of Energy and Mineral Resources then requested that shares in PTNNT be offered to local government entities.

On Jan. 28, Newmont and its partner signed an agreement to transfer a 2% interest in PTNNT to an entity controlled by the Kabupaten Sumbawa government.

In the meantime, the companies said they are continuing to work hard on selling the remaining 8% stake.

“We were puzzled [by the letter] since progress was being made,” Omar Jabara, a company spokesman, told The Northern Miner. “We signed one deal and offers to the other local governments have been made for months, and we renewed the offers again just recently, so we’re not sure what’s going on.”

In the deal signed late last month with the Kabupaten Sumbawa government, Newmont provided risk-free loans to enable them to purchase the shares. “They don’t have to pay anything out of pocket, the loans will be repaid from dividends on the shares,” Jabara says.

In addition, Newmont is providing the local government with a guaranteed cash income every year from the shares, whether the company makes money or not, he explains.

“It’s a goodwill gesture so they can realize some benefit from owning the shares,” Jabara adds. “It’s to help them with their cash flow. They can demonstrate immediate benefit from owning the shares. Even if we’re having a bad year and we’re not getting that amount, they’ll get that amount.”

Jabara also notes that there is talk the Feb. 22 deadline may be extended.

Newmont’s shares on the Toronto Stock Exchange closed up 58 to $49.21 on a trading volume of 13,681.

In New York, Newmont shares rose 71 to close at $49.20, with 6 million shares changing hands.

Newmont released its 2008 operating outlook for Batu Hijau on Feb. 7. In it the company forecasts that the mine’s equity gold and copper sales will fall to between 150,000 and 165,000 oz. gold and to between 155 and 165 million lbs. copper this year, as mining shifts from the high grade bottom of the pit into a lower grade mine sequence during 2008 and a portion of 2009.

Costs applicable to sales are expected to rise this year to between $285 and $325 per oz. gold and to between $1.30 and $1.40 per lb. copper, driven by lower production and higher operating costs.