Australia the key for Newmont

 Newmont Mining’s (NMC-T, NEM-N) Boddington mine has, at last, swung in to production.

The mine — which will be the largest gold mine in Australia once it ramps up to full production in 12 months time — represents the realization of a global strategy that has targeted Australia and the Asian Pacific as the key growth region for the company.

Such a desire was underlined at the end of June when Newmont showed it wasn’t content to have a partner in the project and acquired AngloGold Ashanti’s (AU-N, AGG-A) 33.33% interest in the project.

Sitting 130 km southeast of Perth Newmont is expecting to get roughly 1 million oz. per year out of Boddington at a cost of just US$300 per oz. for the first five years of operation. The project has a mine life of roughly 24 years.

All of those ounces will be coming from a massive deposit which has proven probable reserves of 793.6 million tonnes grading 0.79 grams gold and 0.11% copper for 20.1 million oz. of gold and 873,000 tonnes copper.

And while those are eye catching numbers, Newmont believes it will continue to add to them. If its recent drilling is any indication, the company stands a fair chance of doing so considering that in 2007 reserves stood at 16.6 million oz. of gold.

But a mine of Boddington’s size, in a political stable, mining friendly country doesn’t come cheaply.

Newmont had to pay AngloGold US$750 million in cash at the closing of the deal, plus another $240 million that could be paid in either cash or Newmont common stock, at Newmont’s option, in December. AngloGold also got a royalty capped at US$100 million.

And then there’s the cost of building the mine. Newmont estimates that when all is said and done capital costs will be between US$2.6 and US$2.9 billion.

Such high costs were behind the projects initial delays back in 2008. The company pushed production back into mid-2009 because of inflationary cost pressure.

More recently, delays came thanks to difficulties in getting the wet plant into commissioning. Newmont blamed the delay on wet weather and a decline in contracted workforce productivity.

Such delays didn’t come without costs to the company’s bottom line.

The later start-up date at Boddington forced Newmont to lower its gold sales forecast for operations in Australia and New Zealand to between 1.4 and 1.5 million oz. It had previously given guidance of 1.5 and 1.6 million oz. for the region.

Delays also had a negative impact on overall costs. Newmont now says costs for 2009 will be between US$460 and US$500 per ounce, higher than the previously announced outlook guidance of US$440 to US$480 per ounce.

With both the size of the Boddington project and its delays, grabbing so much attention, what Newmont has already done in the region can easily be overlooked.

To do so, however, would be a mistake.

When a mine in Indonesia and another in New Zealand are taken into account, the Asia Pacific region as a whole has grown to become Newmont’s largest asset.

In Australia specifically, the company’s mines have benefitted recently from a combination of lower diesel costs and a weaker Australian dollar.

For the second quarter alone Newmont produced 283,000 oz. of gold from its Australian and New Zealand operations with average cash costs of $500 per oz.

One of its most productive mines is Jundee. Currently the mine is only an underground operation, but Newmont says there is open pit potential looking out a year into the future.

For the first half of 2009 the mine managed to produce 202,000 oz. of gold at a cost of US$345 per oz. down from the US$410 it cost to produce an ounce of gold at the mine the year previous.

Newmont also has the Tanami mine in the country which produced 173,000 oz. of gold for the first half of the year at cash costs of US$586 per oz.

Production at Tanami, however, was lower this year than last due to lower mill ore grade. For the first half of 2008 the mine produced 190,000 oz. of gold.

Over at its Kalgoorlie – Australia’s second largest mine – attributable production came in at 146,000 oz. which was up from the 132,000 oz. produced over the same period last year.
Kalgoorlie is a 50/50 joint venture with Barrick Gold (ABX-T, ABX-N) and in January the two companies won an environmental approval that will allow them to expand the site.

The trend towards lower costs carried over to Kalgoorlie as well, where costs fell to US$625 from US$817 an oz. a year earlier. Lower costs were coupled with a 13% increase in gold sales thanks to higher mill ore grade, throughput and recovery.

Over in New Zealand the results weren’t quite so robust. An electrical fire at its Waihi mine had the mill out of operation for over two months. The shut-down cost Newmont roughly $50 million in lost revenue and caused production to slip to 56,000 oz. from 65,000 oz. in the first half of the year. In early August, however, the company had the mill back up and running.

Despite the continued strength in the price of gold, and resurgence in gold mining stocks that began in late March, Newmont hasn’t been able to translate its large gold operations into market success.

Since the beginning of the year Newmont shares have trade relatively flat, beginning 2009 at US$41.39 and trading for US$41.40 at presstime.

Newmont can only hope that all the ounces getting ready to pour from Boddington will help carry it up to more lofty market heights.