Indonesia Threatens to Crush Newmont Mining

Newmont Mining's Batu Hijau, Indonesia. Source: Wikimedia Commons.

Indonesia threatened to bring the hammer down on Newmont Mining (NYSE: NEM  ) if it didn't withdraw its international arbitration case against the government over its mineral export ban, and now it's planning on crushing the miner by revoking its license and turning its Batu Hijau copper mine over to a state-run company.

The government is demanding the miner restart production, which was halted last month when Newmont declared force majeur, or be declared in default on its contract, after which Indonesia will expropriate the mine. Newmont insists, however, that it can't begin operations again because its storage facilities are at full capacity. It says it wants to begin negotiations anew with the government, but Indonesia says that until the arbitration case is withdrawn, there can be no negotiating.

In polite circles, this is called extortion. In an attempt to boost domestic processing facilities, Indonesia enacted a ban on the export of unprocessed ore or face a usurious tax as a consequence. Newmont and fellow miner Freeport-McMoRan (NYSE: FCX  ) both protested the fee, stating they have long-standing contracts with the country that exempt them from paying them.

Because the country's infrastructure is woefully inadequate, and in many cases, it would be prohibitively expensive and uneconomical to build new smelters for some metals, the miners entered into separate long-term contracts with facilities in other countries to accept the unprocessed ore, and they cannot break them without penalty. Now Indonesia is threatening Newmont with its license and loss of its property if it doesn't kowtow to the government's demands.

This just serves to show why Freeport may have been the smarter of the two. Rather than meet force with force, as Newmont did, Freeport chose the conciliatory approach. Earlier this month, it reached something of a detente with the government that may allow it to begin operations again. The framework for the memorandum of understanding would, if approached, extend the miner's contract for work at its massive Grasberg mine as well as changing its mining and exploration area, divestment policies, royalty payments, and covers plans to build a domestic smelter.

Of course, Freeport's stance was predicated on its exposure to Indonesia. Whereas Newmont relies upon the country for just 6% of its annual sales, nearly one-fifth of Freeport's revenues come from its Grasberg mine. It was forced to walk more gingerly than its rival in negotiations, though Newmont can't be so bullheaded as to allow its relationship with the government to fall to such a level that the Batu Hijau mine is seized. There's a line responsible management can walk up to in hardball negotiations, but it can't go any further.

Newmont is also trying to run out the clock here. The devastating consequences of the government's position also have a time limit on them after presidential elections in the country saw a new president elected last week who offered far more conciliatory language toward Newmont. Right after the current administration issued its ultimatum to the miner, the likely new president (results are being contested) extended an olive branch, saying he would handle the situation differently and would take Newmont's position into consideration.

The risk for Newmont, of course, is that in between the time it takes for a new government to be seated, the old one will act spitefully, carrying out its threat and taking the property from it.

It's a bit of brinksmanship that Newmont Mining is engaging in, and though it may come out on top in the end, the risk it took in its hardline stance could be viewed as unnecessarily jeopardizing shareholder assets. Freeport-McMoRan may have accepted half a loaf, but it ensured its bread and butter business was never unduly risked.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3034650, ~/Articles/ArticleHandler.aspx, 9/4/2015 7:13:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


Today's Market

updated Moments ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:02 PM
FCX $9.71 Down -0.42 -4.15%
Freeport-McMoRan C… CAPS Rating: ****
NEM $15.70 Down -0.49 -3.03%
Newmont Mining Cor… CAPS Rating: ***