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It says it wants to begin negotiations anew with the government, but Indonesia says that until the arbitration case is withdrawn, there can be no negotiating.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.