Trouble with Indonesian government leads to Newmont downgrade

Newmont Mining (NYSE:NEM) made it clear last week that its problems with the Indonesian government were pressing: CEO Gary Goldberg said the company might curtail operations if the issue over a new export tax isn’t resolved over the next few months, Reuters reported.

Now analysts at JP Morgan have downgraded the world’s second biggest gold miner from an ‘overweight’ to a ‘neutral’ rating, citing the Indonesian impasse as a reason.

“Newmont reported a strong Q4 result but this was overshadowed by the demands of the Indonesian host government on Newmont’s Batu Hijau project for more domestic value add via the local smelting of the concentrate,” the research note read, as reported by Barron’s Blog.

Indonesia recently introduced highly controversial restrictions on ore shipments in order to the boost the domestic processing industry. It also hiked the export tax on metal concentrates; for copper, this will rise the tax to a maximum of 60% of a shipment’s value by the second half of 2016, according to Reuters.

Newmont claims that it is exempt from these taxes based on its initial ‘Contract of Work’ with the Indonesian government and argues that it is not economically viable for the company to build its own smelter, though it has negotiated and signed conditional concentrate supply agreements with two Indonesian companies that plan on building their own copper smelters.

Analysts say that the Indonesian government has created a “very uncertain” investment climate, but that it’s not the only one: The researchers point to the Dominican Republic and Ecuador as examples of governments becoming increasingly concerned about how much they’re getting from the resource extraction industry.

Meanwhile, TD Securities cut its price target for Newmont from $28 to $24, according to Ticker Report. Analysts at Sterne Agee have cut their price target for the company to $30, but have a ‘buy’ rating on the stock.

Analysts at RBC already downgraded the miner last week after the company released production targets for 2014.

Newmont’s share price was unchanged on Tuesday, trading at $21.02. Over the past five days the miner has dropped around 16%. The share price has lost more than half its value over the past 12 months.