The Batu Hijau stake sale
On June 30, 2016, Newmont Mining (NEM) announced the much-awaited stake sale in its Batu Hijau copper-gold mine in Indonesia. The company agreed to sell its 48.5% economic interest in the mine for $920 million in upfront cash and $403 million in contingent payments. (For more information, you can read “Newmont Mining and the Batu Hijau Sale: Good for Everyone?“)
Use of proceeds
The company will use the proceeds from this sale to repay part of its debt. The other use of the proceeds mentioned by Newmont management relates to the development of its highest margin projects. These projects include the recently approved Northwest Exodus, expansions at Ahafo, mill expansion, and Subika Underground.
While Newmont has favorable geographical exposure, its geopolitical risks will decline significantly with the Batu Hijau sale. Newmont management said during the conference call that after the deal closes, it will have ~75% of its reserves in the United States (DIA) (QQQ) and Australia. These are considered attractive mining jurisdictions. About three-quarters of its expected 2016 production will also be from the United States and Australia.
Not only will Newmont’s geographic profile improve after its sale of Batu Hijau, but its commodity exposure will also become more gold-focused. Gold will make up 92% of its reserves, as compared to 87% with Batu Hijau.
Its reliance on copper will reduce significantly. As you can see in the above graph, Agnico Eagle Mines (AEM), AngloGold Ashanti (AU), and Kinross Gold (KGC) will still have higher proportions of gold reserves than Newmont. Barrick Gold (ABX), Yamana Gold (AUY), and Goldcorp (GG) will have lower proportions.
Let’s continue to the next part of this series for a discussion of Newmont’s declines in financial leverage as seen through its 2Q16 results.