Indonesia Uncertainty Remains an Overhang for Newmont Mining Corp Shares

Newmont Mining (NYSE: NEM  ) reported first quarter operating EPS of $0.22, topping Wall Street estimates of $0.19 by 16%. Both stronger than expected gold production of 1.2 million ounces and costs applicable to sales of $722 per ounce drove the better than expected results.

The strong quarterly results were led by the company's African operations, which posted better than expected production at significantly lower than expected costs. Moreover, Nevada production and costs were also better than expected but were offset by lower Mexican production due to explosives permitting issues in the quarter.

African production guidance raised
Newmont maintained its 2014 production guidance and expects to produce 5.0-5.4 million ounces of gold at cash costs of $740-$790 per ounce. However, the company raised production guidance for its African mine, Ahafo, by 10,000 ounces and decreased costs applicable to sales to the African region by $70 per ounce. Ahafo underwent a mine plan optimization, which resulted in a 2.6% increase in production guidance and 16% decrease in expected cash costs.

Indonesia issue remains unresolved
Similar to its U.S. peer Freeport McMoRan Copper & Gold (NYSE: FCX  ) , Newmont's Indonesian export issues remain unresolved. Due to the Indonesian export ban introduced in January this year, Newmont was unable to export 25% of its copper from the country in the first quarter.

The company has stated that contingency plans to scale back production would be taken into consideration if delays continue in obtaining approvals for 2014 exports. This could potentially impact Newmont's ability to achieve its 2014 production guidance.

Newmont indicated that it has made some progress in obtaining export permit. The company is approximately halfway through the process of receiving its export permit for copper concentrate shipments. The company believes that it will receive its export permit in the coming weeks and has completed two of the four steps necessary to secure an export permit.

Newmont is now awaiting approval of its 2014 work plan from the Ministry of Mines, which will allow it to apply for an export permit with the Ministry of Trade. These are separate from the export tariff dispute, which is under the Ministry of Finance. Although the company hopes to get clarity on the export tariff over the next couple of weeks, Newmont noted that it will reach copper concentrate storage capacity in late May and that if a resolution to its permit and tax issue is not reached by then, it will have to potentially ramp down operations, specifically reducing overburden stripping.

Merian decision in 2Q14
Newmont expects to make its go-forward decision on its Merian project in Suriname sometime during 2Q14. Board approval is one of the final steps left, as the company already has mineral agreements and government approval in place.

Given that Newmont Venture Limited, a fully owned subsidiary of Newmont, recently acquired Alcoa's 20% ownership interest in the project for $28 million and that Newmont said the project is value accretive, chances are that the project will be approved by the Board.

Merian has an estimated build period of 1.5-2 years with development costs of $0.9-1.0 billion. In the first five years of its production, Merian is expected to produce 400,000-500,000 ounces of gold at cash costs of $500 per ounce and all in sustaining cash costs of $800-$900 per ounce.

Solid operational results overshadowed by merger talks
Newmont reported solid operational results; however, results have been overshadowed by talks about a potential merger deal between Barrick Gold (NYSE: ABX  ) and Newmont Mining. Newmont's shares benefited from the merger discussions reported by several news groups and were up ~8% in the last week. However, shares took a major hit on Monday after Barrick Gold reported that Newmont has terminated the merger discussions.

"Although Barrick believes the interests of shareholders are best served through the completion of this business combination, Newmont's Board has determined that the interests of Newmont's shareholders are best served by remaining independent," said Barrick Gold in a statement issued on Monday.

According to a Bloomberg report, the merger would have resulted in $1 billion in annual savings for both companies. However, talks fell apart due to disagreements over the proposed spinoff of some of the combined company's mines.

Over the years both these companies have made several attempts to merge and cut expenses in Nevada, where both Newmont and Barrick have multiple mines. However, the latest fall-out exploded into the public domain and may have killed any future merger discussions.

Bottom line
Merger talks aside, Newmont has started 2014 on a good note. The company has made significant operating cost improvements in the Australia/New Zealand and Africa regions. Given the solid cost improvements in the first quarter, the company is well positioned to achieve the lower end of its cost guidance.

The company remains confident that it can leverage its success at Ahafo to other operations by improving mine plans. However, despite an operationally strong quarter, Indonesia uncertainty remains an overhang for the shares and puts a cap on valuation in the current environment.

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