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Contingencies for Newmont Receiving Full Payment for Batu Hijau

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Jul. 6 2016, Updated 4:06 p.m. ET

Batu Hijau stake sale

Newmont Mining’s (NEM) stake sale in its Batu Hijau mine in Indonesia was very much anticipated by investors. For more information, you can read Can Newmont Offer an Upside due to These Positive Catalysts?

Batu Hijau is mainly a copper deposit, with small amounts of gold (GLD) and silver. It’s the second-largest copper deposit after Freeport-McMoran’s (FCX) Grasberg mine.

Newmont Mining (NEM) said it will sell its 48.5% economic interest in the mine for $920 million in upfront cash and an additional $403 million in contingent payments. This makes the 100% gross valuation more than $2.5 billion.

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Contingencies

The contingencies relate to the metal price upside and the development of the Elang mine project on Sumbawa Island. During the conference call, Newmont management elaborated that the contingency trigger is divided into two parts.

The first part relates to the copper price upside in which ~$135 million will be payable to Newmont on prices above $3.75 per pound. This trigger is for Phase 7 production. Also, if the price of copper exceeds $2.75 per pound during Phase 7 or during the Elang production, ~$150 million is payable.

The second part involves the remaining $118 million, payable after commercial production starts at Elang.

Precedent conditions

Below are some conditions that are precedent to the sale:

  • approvals and valid permit from the Indonesian government
  • concurrent disclosure of 24% the PTMDB (PT Multi Daerah Bersaing) sale to buyers
  • resolution of certain tax matters
  • material adverse events clause

The buyer is PT Amman Mineral Internasional (or PTAMI), an Indonesian company that’s primarily funded through three domestic banks. Newmont doesn’t expect any cash taxes on the proceeds. However, it does expect to book a non-cash loss of $500 million, which could be booked in the third quarter of 2016.

Newmont’s peers such as Barrick Gold (ABX), Goldcorp (GG), Kinross Gold (KGC), and AngloGold Ashanti (AU) have completed similar sale and purchase transactions in the past to improve their portfolios.

In the next part of this series, we’ll see how the sale proceeds from the Batu Hijau transaction will be utilized by the company and how that could potentially impact Newmont.

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