Mining green gold
Newmont Mining Corporation, the world’s largest gold producer, has been operating in Indonesia for 25 years. Over that time, reports SK Zainuddin, it has seen many ups and downs.
There are still obstacles, but the company is looking ahead to another 25 years with optimism and confidence following a new find at Elang, Sumbawa. As it surveys the lay of the land for the next quarter century, Newmont Indonesia has some tough choices to make. It is currently engulfed in a bitter ownership tussle with shareholder Jusuf Merukh over a 31% stake in its subsidiary Newmont Nusa Tenggera (NNT). Merukh, whose firm PT Pukuafu Indah has a 17.5 % stake in NNT, has filed a case in the South Jakarta District Court for transfer of the 24% of shares that has already been sold to a consortium comprising the local governments in its mining and the Bakrie Group. Its Batu Hijau copper and gold mine on Sumbawa island is in its fifth phase of operation and there is an urgent need to expand.
The capital cost for developing new mines has risen dramatically. In the past, a mining company needed $500 million for a basic engineering study. Today, a similar study requires between $2 billion to $3 billion. Despite these problems, Newmont, operating in Indonesia for the past 25 years, is optimistic about its future. Demand for metals is rising steadily on the back of an expanding global economy while resources are growing ever scarcer. The general rule of thumb in the mining industry is that for every one million tons of production, another one million tons must be sourced either through exploration or acquisition. “That is our number one challenge,” president director of NNT Martiono Hadianto tells GlobeAsia. “When we talk about sustainability, we often refer to human rights, the environment and CSR (corporate social responsibility) but in order to be sustainable, we have to have access to land, permits and capital.” In addition, ore grades, especially for gold, are falling as more and more resources are mined.
The rise of China and India has raised demand for minerals but supply is shrinking, especially for precious metals. “It is amazing how far the grade of gold has fallen over the past 15 years,” says Blake Rhodes, president director of PT Newmont Pacific Nusantara. “Before, we talked about how many ounces of gold we could mine per ton. Today, we talk in terms of grams.” Twenty years ago, no gold mine could be profitable extracting less than one gram of gold per ton of ore. “Today we are operating mines that are less than 0.5 grams per ton but at a market price of $1,200 per ounce,” he notes. Newmont is still a highly profitable company but Blake concedes that “in the scheme of things, we are always on the edge.” For 2010, the company expects to book revenues of over $2 billion from its copper production and $1 billion from its gold production.
New find Such large revenues and the prospects from its Elang copper and gold deposit, however, have the company upbeat about the future. Elang, which is located 60 km from Batu Hijau, falls under the existing contract of work and thus does not require a new agreement between Newmont and the government. “We expect that the deposits in Elang, which are estimated at 2 billion tons of ore, could last for another 50 years,” said Blake. More importantly, development cost will be reduced as NNT can leverage on its existing infrastructure at Batu Hijau. “If we can put in an overland conveyor, we can save on capital cost,” he said. “This is a huge potential for NNT to grow its existing business and Newmont as a company wants to stay in Indonesia.” Blake adds that there are not many countries where Newmont has maintained operations for 25 years. “We would like to be here for another 25 to 50 years and we feel quite confident operating under the current contract of work.” Drilling at Elang to determine the size of the deposit could start in mid-2011 when the dry season returns.
National asset Given the change in its ownership composition, as there are now multiple shareholders, NNT will have to alter the way it raises funds for its operations, says Martiono. In the past, it relied solely on shareholders to provide the majority of development financing. “When we built NNT, we used project financing. After 2010, we will have to move to corporate financing because we are not sure that other shareholders will be willing and able to provide the necessary funds,” he notes. NNT is in the process of negotiating with three banks to provide it loans of between $600 million and $800 million for its operational and exploration needs. The company is also planning an initial public offering to list 10% of its total shares to raise an additional $350 million. “This will be used to finance phase 6 and phase 7 of the Batu Hijau mine,” says Martiono. “We estimate that we will need $1.5 billion over the next five years for Batu Hijau and more when we decide to develop Elang.
This is why we are eager to go public.” Apart from new financing channels, the decision to go public is also aimed at making NNT an Indonesian company so that ordinary Indonesians can own part of a national asset. NNT is also widely recognized as a responsible and sustainable mining company. It is ranked at number 16 out of 200 companies listed on the Dow Jones Sustainable Index. Its record of adhering to sustainable and responsible business practices allowed the company to survive one of the most challenging periods of its history in Indonesia. In 2007, the Manado District Court cleared PT Newmont Minahasa Raya (NMR) and its president director, Richard Ness, of charges of polluting North Sulawesi’s Buyat Bay with mining waste. “We fought the case for three years to prove that we had no effect on the environment,” recalls Martiono. That decision proved crucial for the company as more and more jewelry retailers are now demanding “Greed Gold”.
Mining companies have to obtain certification that they are not paying blood for gold and exploiting local communities. As regulations get tougher and public demand for more environmentally sustainable operations rises, mining companies will find it harder to stay ahead of the curve going forward. That will mean a reliance on technology and proper planning to stay profitable. GA