World’s Second-Largest Gold Miner Under Stress

The Boddington Gold Mine

Newmont Mining Corporation is the second largest producer of gold in the world. As of December 31, 2011, Newmont had 99 million ounces of gold in its reserves. At current prices, this is more than $164 billion worth of the precious metal. Last year, Newmont produced 5.9 million ounces of gold and 352 million pounds of copper. The company has a global footprint, with North America accounting for one-third of its total gold production, South America accounting for 23%, the Asian Pacific region accounting for 35%, and Africa accounting for 10%.

Obviously, Newmont is a major player in the gold game, and therefore, its operating costs have a significant influence on the price of gold. Last year, Newmont’s operating costs were above average, and this year, things are definitely going to get worse.

Newmont’s Mines

Newmont’s mining operations are concentrated in the following mines:

  • The Boddington mine in Australia
  • The Batu Hijau mine in Indonesia
  • Mines in the U.S. state of Nevada
  • The Yanacocha mine in Peru
  • The Ahafo mine in Ghana

Additionally, Newmont has two major advance-state projects in its pipeline: the Conga mine in Peru, and the Akyem mine in Ghana.

Virtually all of these mines are under some form of unanticipated stress.

The Boddington Mine

The Boddington Gold Mine

The Boddington mine, more commonly known as the Boddington Gold Mine, is a gold and copper mine located about 10.5 miles northwest of the tiny Western Australian town of Boddington. Operations began in 1987, but ceased in 2001 after the known oxide ore resources had been depleted. In 2002, a previously unknown bedrock of 20 million ounces was discovered, and in 2005, Newmont Mining purchased a 22.23% stake in the mine. In 2009, Newmont purchased the remaining interest in the mine from competitor AngloGold Ashanti. This effectively converted Newmont from a primarily U.S.-centered mining company with its operations concentrated in the U.S. state of Nevada, to one with an Asia-Pacific focus.

The Boddington mine was originally expected to produce roughly 1 million ounces of gold per year and 70 million pounds of copper, but these estimates appear to have been overly optimistic. What’s more, Boddington is the primary culprit in causing Newmont’s increased operating expenses, and things are expected to get much worse in this regard in 2012. The ore deposits are of a lower quality than expected, and this has both increased mining costs and lowered mining output.

The Batu Hijau Mine

The Batu Hijau Mine

The Batu Hijau Mine is Newmont’s other key asset in the Asia-Pacific region. It is a copper and gold mine in Indonesia. Right now, the mine is in a stripping stage, and thus, it is producing a lower quality of ore. Production costs are high. This may improve in 2013, but in Indonesia, there is always the specter of political risk.

For instance, the government there has stipulated that Newmont must sell shares of its interest in the mine, in the name of preventing a “monopoly.” Since it is known that Newmont must do this, or potentially face confiscation and redistribution of the shares, the price buyers are willing to pay is depressed. Additionally, the Indonesian government is notoriously corrupt in its issuance of permits and levying charges of pollution, engaging in what amounts to rank extortion.

Nevada

One of Newmont's Nevada mines

Newmont’s gold mines in Nevada have traditionally been the anchor of its operations. These mines produced 2 million ounces of gold in 2011 at a price of $594 per ounce. Newmont has made investments in its Nevada mines’ infrastructure over the years, and this accumulated capital not only keeps current costs down, but makes it possible to add incremental bits of production at low costs, too.

Unfortunately for Newmont, Nevada is in the United States, where permission from government bureaucrats is a necessity for almost everything. Furthermore, unlike the thugs in Indonesia, U.S. officials can’t always be bribed on the cheap. This reality is undoubtedly what prompted Newmont to shift the basis of its operations out of the U.S., but that calculated risk has not paid off as of yet. Nevada’s operations are stable and profitable, but in order to make a big impact, a mega project would be required, and that’s just not all that likely amid the current U.S. political climate.

The Yanacocha and Conga Mines

The Yanacocha Mine

The Peruvian Yanacocha Mine is one of Newmont’s largest and lowest-cost mines. In 2011, it produced 1.3 million ounces of gold at a price of $560 per ounce. However, Yanacocha’s best days are behind it – production is now on the decline. This spurred Newmont to try to develop the adjacent Cerro Quilish deposit, which was met with harsh local opposition. Those efforts were thus abandoned in 2004.

Now, Newmont is trying to develop the nearby Conga gold and copper deposit and is struggling to do so. Capital costs for Conga are expected to exceed $4.5 billion, and while the national government of Peru is supportive of Conga’s development, local opposition – the same factor that caused Newmont to abandon Cerro Quilish – is not. As a result, Conga’s fate is uncertain.

The Ahafo and Akyem Mines

The Ahafo Mine in the African country of Ghana produced just 566,000 ounces of gold for Newmont in 2011, but it did so at a cost of just $474 per ounce. Also in Ghana, the Akyem project is in development and is expected to produce around 400,000 ounces of gold each year at a cost of $500 per ounce. So far, there have been no problems with either the Ahafo or Akyem mines, but political stability in Africa is always in question, which is one of the reasons Newmont has avoided doing much business in this gold-rich continent.

Conclusion

There is a misconception that high gold prices strictly benefit gold producers, when the reality is that, to an extent, high gold prices are a function of problems faced by gold producers. Gold miners will not produce gold if the prevailing market price does not allow them to operate profitably, and the resulting scarcity can drive up the price of gold. With Newmont, the world’s second largest producer of gold, under so much stress, this can only be bullish for gold in 2012 and beyond.