Newmont Mining Corp (NYSE:NEM) has to find new sources of gold if it wants to grow its business, like all miners. Although its core operations are in the safe and boring United States, it's ventured into some far off locals to acquire gold reserves and build mines. Sadly, 6.5 million ounces of gold sitting un-mined in South America provides a poignant example of what can go wrong in the quest for gold.
But we're friends ...
Newmont mining for gold in Peru isn't new. The company's Yanacocha operation has been producing gold in the country since 1993. In 2014, it mined nearly a million ounces of gold in the country, though not all of it belonged to Newmont since it's stake in the company that actually owns the mines there is just a touch over 51%. These active Peruvian mines are about 375 miles north of Lima, a city you've probably heard of, and 30 miles away from Cajamarca, one you probably haven't heard of but that plays a key role here.
One interesting fact about the area in which Yanacocha's mines are located is that it's, "... primarily accessible by road." Believe it or not, that simple, perhaps unassuming, fact changes the dynamics here quite a bit.
At first blush, opening a new mine in Peru would have seemed like a no-brainer. That's why Newmont was willing to start investing in what was expected to be a $5 billion copper and gold mine nearby to its existing operations. The Conga project, as it's known, was scheduled to begin production this year. It got approved by the country's president in 2010.
But then things got ugly. According to Newmont: "Construction activities on our Conga project were suspended on November 30, 2011 at the request of Peru's central government following increasing protests in Cajamarca by anti-mining activists led by the regional president." By "increasing" the company is politely saying violent. It's also important to note that a local politician was behind the protests. And since the ability to get to the mine site is limited to travel by road, the protestors only needed to block a single road to effectively shut Newmont's new mine down. This new mine should have been so simple ...
Now what's a gold miner to do?
So Newmont is pretty much on hold, and has been for a long time. According to the annual report, Newmont basically has no idea whether the central government, which appears to support the mine, or the regional government, which doesn't, is going to win the day. In a troubling turn of events, the anti-mine regional Governor was reelected in the Cajamarca region late last year.
No wonder Newmont has warned that, "Should we be unable to continue with the current development plan at Conga, we may reprioritize and reallocate capital to other alternatives, which may result in a potential accounting impairment." In other words, the company might have wasted a lot of time and money on a project that will never get built.
But that's a pretty big deal. Those 6.5 million ounces of yellow metal are sitting in Newmont's gold reserves. Over the last three years its gold reserves have fallen roughly 17%. If it has to write off Conga, it will take a financial hit, but it will also pull those reserves out of the future mining opportunities it has. When a gold miner runs out of gold to mine, it effectively goes out of business. Right now, this miner's reserve numbers are heading the wrong way and killing the Conga project won't help.
Save the gold!
So this is a bad situation and there's no easy answer right now. Holding on until it gains enough political support is one way to go, but that costs money. Another option is finding a partner to help pay for the mine, effectively offsetting some of the risks Newmont is facing head on. But there's no way to tell what's going to happen with the mine at this point, so it might be hard to find someone willing to step in to this mess. And based on the recent reelection of an anti-mine politician the future doesn't look like it will be any brighter than the past for at least another four years.
If you own Newmont, keep a close eye on Peru. It could have more than just a dollars and cents impact on the company's future. But this tale is broader than that, because almost all gold miners operate in areas where local opposition can stall or destroy good mining opportunities. That's clearly true even in countries that have been good partners in the past.