Like Freeport-McMoRan (NYSE:FCX) before it, gold and copper mining giant Newmont Mining (NYSE:NEM) said Indonesia's export ban on unprocessed ore that was imposed in January hurt shipments, raised costs, and will create problems down the road if a resolution is not reached.
In an effort to promote domestic industries, Indonesia adopted regulations that prohibit the export of ores mined in the country unless they are first processed at local smelters. But because it lacks the infrastructure necessary to do the processing, and building new smelters not only takes years but would be uneconomical regardless, the miners -- which already have long-term contracts in place with foreign smelters for their ore -- are caught in a bind.
Together, Freeport and Newmont are responsible for 97% of the country's copper production, with the former having a production target of around 500,000 tonnes of copper at its Grasberg mine for this year, and the latter planning to produce 95,000 to 110,000 tonnes.
According to the World Bank, Indonesia's economy relies on minerals for about 5% of its exports, and as the world's 11th-largest copper producer, Goldman Sachs puts the country's contribution to the global copper supply at 3% while being the world's largest exporter of nickel ore, thermal coal, and refined tin.
Although Newmont's earnings release maintained its production forecast of between 160,000 tonnes and 175,000 tonnes of copper and 4.6 million to 4.9 million ounces of gold, it's quickly approaching full capacity at its copper concentrate barn in Indonesia, which, if that happens, would force it to scale back production and miss those estimates. It maintains a brave front and says it's sure it will reach a rapprochement with the government and begin exporting again soon, but exports from its Batu Hijua mine have been suspended since January, and I'm not so sure Newmont should be so hopeful.
Published reports indicate Indonesia's mining ministers remain unconcerned about the hardship being placed on the miners, believing that by tightening the screws, they're forcing them to invest in the country. Newmont says it supports the building of infrastructure there, but for someone else to do it. It says there's already plenty of smelting capacity in China, so "the economics of running a smelter just aren't there."
Freeport has also dramatically realigned operations in Indonesia, scaling back production to about half capacity at 118,000 tonnes per day. It noted in its own first-quarter earnings report that its results were negatively affected by the export ban. And at least for Newmont, it's able to rely more on its gold operations to sustain it than can Freeport, which relies primarily on copper production for its revenues.
In contrast, Vale (NYSE:VALE) has said it anticipates no problems at all from the export ban because its nickel mining operations process ore at a smelter it operates in Soroako, and it plans to increase capacity further. It estimates Indonesia represents more than 80% of the critical saprolite ores used in the production of ferro-nickel in China and over 20% of world's refined production, meaning that if the export ban remains in place, it would have a significant impact on the market in the coming years, including the price of the metal. I've said previously Vale is likely to be one of the big winners from the regulation.
Newmont has a lot on its plate at the moment. Gold's price still hovers around $1,300 per ounce, the takeover by Barrick Gold it had been negotiating fell through and has little chance of being resurrected anytime soon, and Indonesia remains a sticking point. Yet it was able to reduce its all-in sustaining costs on gold by nearly 8% even though the metal's price dropped more than 20% and achieved higher gold production from its Australian and African operations while reducing capital expenditures to help rein in costs.
Indonesia's a problem, and likely to be more of one by the end of the month, when its storehouse of copper concentrates are full, but there is a chance a deal is reached with the government or it's vindicated in court if it's forced to sue. Although its stock has lost a quarter of its value from its 52-week highs, it's bounced 20% above its lows, and I continue to see Newmont Mining with a golden chance for further appreciation.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.