Yandal derivatives timebomb keeps ticking

Newmont Mining (NEM-N) has revealed that on May 21, its wholly owned Australian subsidiary Newmont Yandal received a notice from a gold-hedge counter party “alleging a right to terminate a gold-hedge counter-party contract with Yandal before its scheduled maturity.”

Newmont says the termination is based on an alleged occurrence of an early termination event under the contract, and estimates that the payment required to be made under the contract would be about US$46 million based on a spot gold price of A$560 per oz. (US$369 per oz.)

Newmont also intends to make an offer to buy all of the 8 7/8% senior notes at Yandal that it doesn’t already own, and to buy all of the gold-hedge counter-party contracts entered into between Yandal and counter-party banks (presumably at a discount).

While Yandal was cash flow positive in the first quarter, the crux of the matter is that mine has 3.7 million oz. gold hedged but only 3 million oz. of gold in reserves. The 700,000-oz. difference amounts to about US$258 million at today’s spot gold prices.

Newmont acquired the 650,000-oz.-per-year Yandal operation through its takeover last year of Australia’s Normandy Mining.

However, Yandal is financially isolated from the rest of Newmont’s assets. This means that Newmont could walk away from the property, though this would do tremendous damage to the company’s relations with its counter-party banks.