Newmont (NEM) Slashes Gold Production Estimates at Batu Hijau

After Newmont Mining (NEM) announced its gold and copper production estimates were significantly lowered, it also said it plans on cutting workers and other costs at it Batu Hijau Indonesian mine.

Saying it is now costing the company $1 million a day in cash flow to work the mine because of the low quality of the rock it is now mining.

Gold production for 2012 was downwardly revised from 114,000 ounces to 71,000 ounces. Copper production estimates were cut from 192 million pounds to 170.6 million pounds.

In 2011 the mine produced approximately 282 million pounds of copper and 318,000 ounces of gold for Newmont and its partners Sumitomo (8053.T) and Bakrie Group.

Expectations are low production will continue through 2013. Going into 2014 and 2015, the firm sees production rebounding at the mine as they tap into the more productive core ore body once again. The coming is preparing to widen the pit in the near future.

The lower production appears to present more problems for Newmont, as in November negotiations with workers will begin, with expectations high on their part of major wage increases after Freeport McMoRan Copper & Gold (FCX) workers gave its workers a huge 37 percent boost in wages over a two-year period in the latter part of 2011.

According to Newmont, it's looking at cutting costs, which will surely strain negotiations with workers.

Batu Hijau general manager, Ian McGaffin, said, "We are looking at trimming costs from all facets of our business including mining and processing and support costs. This includes reviews of contract services, parts and supplies, and salaries and wages."

Also a challenge for Newmont and other miners working in Indonesia is the change in rules in 2012 which now require companies to divest 51 percent of their mine assets after operating in the country for a decade. At that time they are also expected to pay a 20 percent levy on raw ore exports.

What is highly unlikely even though made a rule for miners, is all ore is to be smelted locally in Indonesia by 2014. No one thinks that will have any teeth to it, as no miners have plans in place to add more smelting capacity in the world, as there are already more than are needed.

Newmont does have to walk a fine line though, as Elang, another mining resource discovery close to Batu Hijau, could have more resources than that mine. That has yet to be confirmed though.

Newmont closed Friday at $56.01, falling $0.53, or 0.93 percent.