Newmont Mining's (NEM 4.28%) decision to take a hard stance over copper concentrate export restrictions in Indonesia is backfiring for the company. Early in July, Newmont Mining filed for international arbitration, while Freeport-McMoRan (FCX 5.00%) continued talks with the Indonesian government to resolve the issue. I've already argued that Newmont Mining's approach was risky and counterproductive, and recent news confirm this thesis.
Indonesia stated that it could terminate Newmont Mining's contract if the company doesn't withdraw its claim for international arbitration. The country could declare that Newmont Mining defaulted as it stopped production, and could revoke the contract 90 days after this. In my view, the threat is real.
Half of Newmont Mining's copper production is at stake
Newmont Mining stopped production at its Batu Hijau mine at the beginning of June, and put 3,200 workers on leave at reduced pay. Newmont Mining planned to receive 45,000–55,000 tons of copper from Batu Hijau this year, and now those plans are on fire. If export challenges did not exist, Batu Hijau would have been Newmont's lowest cost copper mine. However, given the current situation, costs will rise significantly.
In terms of attributable production, Batu Hijau was expected to deliver 47% of Newmont's copper and 1% of the company's gold. Thus, by losing Batu Hijau (if this eventually happens), Newmont Mining will lose half of its copper production. As Newmont Mining is primarily a gold producer, Batu Hijau is not as important for the company's future as Grasberg is for Freeport-McMoRan. Perhaps this was what Newmont's management was thinking when it chose to oppose the Indonesian government. However, the government is more powerful than the company is, so this decision looks reckless.
The threat is real
Revoking Newmont Mining's contract and offering it to someone who is already operating in the country, like Rio Tinto (RIO 3.11%), is a viable option for the Indonesian government. Currently, Rio Tinto owns a share of production above specified levels in the Freeport's huge Grasberg mine. Indonesia has already shown the political will to force copper producers to build smelters within the country, and it is unlikely to take a dovish approach while dealing with Newmont Mining.
Proceeding with international arbitration is going to put Newmont Mining's future in the country at an enormous risk. It is possible that Newmont Mining is ready to say goodbye to its Indonesian assets, but will it receive any compensation for that should this scenario unfold?
One could argue that Freeport-McMoRan had no other option than to negotiate with Indonesian government given Grasberg's importance for the company's copper production. At the same time, the economics of building a smelter could be worse for Newmont Mining. However, the path chosen by Newmont Mining will not lead to success. Importantly, the company still has time to return to the negotiation table. The Indonesian government has to find a solution to the issue, as the absence of copper exports hurts revenues, and it shows it is ready to continue talks with Newmont Mining.
Bottom line
There's little surprise that Indonesia wants to force Newmont Mining back to negotiations. What's more, the country looks close to reaching a mutually satisfying agreement with Freeport-McMoRan, further jeopardizing Newmont Mining's tactics. Freeport-McMoRan has already agreed on a Memorandum of Understanding with Indonesia, but it is yet to be signed. The signing of this memorandum will be a major signal to Newmont Mining that it's time to return to negotiations. Otherwise, the company risks losing its Indonesian operations.
