(NEM) Newmont Mining Under Review in Jakarta by the Corruption Eradication Commission

The U.S. mining group, Newmont Mining Corp. (NEM) is under scanner in Jakarta by the Corruption Eradication Commission (KPK) for breaching rules on the foreign ownership of mining assets.

The officials are probing whether Newmont should retain a controlling stake in Newmont Nusa Tenggara (PTNNT). PTNNT is Newmont’s most profitable Indonesian business.

Newmont is required to reduce its stake in the subsidiary, which operates the vast Batu Hijau copper and gold mine in eastern Indonesia, to a minority holding, according to rules aimed at protecting assets considered as national interest.

The Indonesian government would sell 7% stake that it will buy in the Indonesian unit of Newmont to local governments with an aim to diffuse opposition from some lawmakers against central government’s plan to buy  stake in PTNNT.

Newmont together with its Japanese partner Sumitomo would be left with a minority ownership of 49%. The KPK is also investigating a separate 2.2% stake, which it suspects Newmont is indirectly holding through a friendly shareholder — PT Indonesia Masbaga Investama (PTIMI) — which would lift foreign ownership to 51% of PTNNT.

If the KPK finds any wrong doing, Newmont could face legal action for allegedly violating its contract or be subjected to prolonged arbitration proceedings. A legal confrontation would certainly damage its relationship with authorities, who issue crucial operating permits.

Newmont reported adjusted net income of $513 million or $1.04 per share in the first quarter of 2011, up from last year’s $408 million or $0.83. The result eclipsed the Zacks Consensus Estimate of $0.96 per share. Total revenue was $2.5 billion, up 10% year over year, below the Zacks Consensus Estimate of $2.6 billion. Attributable gold and copper production was 1.3 million ounces and 57 million pounds, respectively, in the quarter at costs applicable to sales were $557 per ounce, and $1.11 per pound on a co-product basis.

The mining industry has been impacted by increased demand for critical resources, such as input commodities, drilling equipment, tires and skilled labor. These shortages have, at times, impacted the efficiency of the operations, and resulted in cost increases and delays in construction of projects; thereby impacting operating costs, capital expenditures and production and construction schedules.

In the gold industry, gold grades have plummeted approximately 27% since 2003. As operations mature, gold producers, including Newmont, are forced to extract ores with lower grades that are often accompanied by higher separation and extraction costs. Lower-than-expected ore grades are affecting gold production at the Boddington mine. For fiscal 2011, the company reiterated its previous expectation of attributable gold production of approximately 5.1 million to 5.3 million ounces, with attributable copper production of 190 to 220 million pounds. Costs applicable to sales are expected to be between $560 and $590 per ounce for gold.  Costs applicable to sales are expected to be between $1.25 and $1.50 per pound of copper.

However, Newmont faces stiff competition from AngloGold Ashanti Ltd. (AU), Barrick Gold Corporation (ABX) and Gold Fields Ltd. (GFI).

We maintain our Neutral recommendation on Newmont. Currently, it holds a Zacks #3 Rank (Hold).

BARRICK GOLD CP (ABX): Free Stock Analysis Report

ANGLOGOLD LTD (AU): Free Stock Analysis Report

GOLD FIELDS-ADR (GFI): Free Stock Analysis Report

NEWMONT MINING (NEM): Free Stock Analysis Report

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