Newmont to face labor woes as Indonesia mine output sags

BATU HIJAU, Indonesia Fri Sep 28, 2012 5:37am EDT

1 of 7. Workers stand at the top of a mountain of waste rock at Newmont Mining Corp's copper and gold mine on Indonesia's Sumbawa island September 21, 2012.

Credit: Reuters/Neil Chatterjee

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BATU HIJAU, Indonesia (Reuters) - Newmont Mining Corp (NEM.N) plans to shed workers and cut costs at its giant Indonesian copper and gold mine as it loses a million dollars a day in cash flow because of low output that will continue through next year.

The world's no. 2 gold producer has revised down 2012 target production figures for its Batu Hijau Indonesian mine, to 71,000 ounces of gold from an earlier forecast of 114,000 ounces and to 170.6 million pounds of copper from 192 million previously, spokesman Rubi Purnomo told Reuters.

Newmont has already flagged that its attributable output from Indonesia is likely to be lower this year, as it processes lower grade ore from stockpiles while it prepares to widen its vast open pit to prepare for a new phase of mining.

"We're losing cash -- a million a day," Ian McGaffin, the mine's general manager, told Reuters at the mine's headquarters in the mountains of Sumbawa island in eastern Indonesia.

"It will be a relatively poor year in 2013, similar to 2012," said McGaffin, adding that 2014 and 2015 will be good, when the firm starts digging into the mine's richer core ore body again. The open pit will be around a kilometer deep when finished.

Batu Hijau, or "green stone", the top mine by copper output for Newmont and also part owned by Japan's Sumitomo Corp (8053.T) and Indonesia's Bakrie Group, in 2011 produced about 282 million pounds of copper and 318,000 ounces of gold.

POTENTIAL FOR INDUSTRIAL ACTION

More than 100 trucks a day now rumble away from a mountainous ore stockpile, taking 550,000 metric tons of rock to the firm's nearby processing plant, but just two percent ends up as copper concentrate shipped to buyers from Indonesia to Japan.

With many of Newmont's shipments made on term contracts of three to five years, the mine's output is not affected much by a global slowdown in commodity demand.

The lower value rock means cost constraints that may prove a problem for Newmont when it starts wage negotiations in November for the coming year with thousands of workers, who hope for hefty pay rises following a closely-watched deal late last year by fellow miner Freeport McMoRan Copper & Gold Inc (FCX.N).

"There's certainly that expectation from some of our employees. Given our financial situation, these are expectations we have to manage," said McGaffin, adding that meant a "potential" for industrial action.

Freeport, which runs the country's biggest copper and gold mine to the east of Sumbawa in Papua, in December lifted worker pay by 37 percent over two years to end a three-month strike that paralyzed output and lifted copper prices.

Around 400 of the Newmont mine's 8,000 workers went on strike last November, part of a wave of industrial action around the sprawling archipelago following the Freeport strike. The country's workers are pushing for a better share of profits from strong economic growth, after years of a mining boom.

The number of workers at Batu Hijau mine, which also produces silver, has surged in recent years, but will now be reduced in two rounds, said McGaffin, declining to give exact numbers since the plans have not been announced.

Workers' pay also went up 25 percent in the past two years.

"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," said McGaffin.

The community now expects employment, he said, after the miner's transformation of nearby Maluk from a small village without a road connection, known only to hardcore surfers, into a bustling town where locals have motorbikes and smartphones.

Social responsibility and government relations are the biggest challenges for the firm in Indonesia, said McGaffin, an Australian with over a decade of experience in the country.

NO SMELTER

Newmont has said that another discovery, Elang, nearby on Sumbawa, has the potential to out-produce Batu Hijau, though at the moment the firm is still trying to define its resources.

Mining in the country may be hurt by a series of government rules this year that require foreign firms to divest 51 percent of mine assets after 10 years of production, and impose a 20 percent levy on raw ore exports and a requirement to smelt all ore locally by 2014.

Miners complain there is a global overcapacity of smelters, which cost hundreds of millions and take years to build. The government says it has received 185 smelter proposals.

"We have no plans to build a smelter," said McGaffin, adding that smelting was not the firm's core business and in any case it realized 95 percent of the value of the copper in its ore. This means technically the state could halt its exports in 2014, though officials have hinted the rules could be flexible.

"We haven't seen any real solid plans to build a copper smelter," McGaffin said. "Do they want to get into a situation where they shut us down? I don't think so."

(Editing by Clarence Fernandez)

(neil.chatterjee@thomsonreuters.com; + 62 21 3199 7170)

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