Newmont and Sumitomo to join forces in S.E. Asia

Although still subject to a definitive agreement, Newmont Gold (NYSE) and Japanese-based Sumitomo plan to develop jointly the Batu Hijau copper-gold porphyry deposit on the Indonesian island of Sumbawa.

An agreement-in-principle allows Sumitomo to earn a 35% interest in the project, with Newmont retaining 45%. The remaining 20% is held by Indonesian-based P.T. Pukuafu Indah.

To complete its earn-in, Sumitomo must contribute its pro rata share of Newmont’s initial investment in the project (US$70 million to date) through closing. It will also pay roughly US$100 million toward Newmont’s share of future development costs, and fund its own pro rata equity share of those costs. The Japanese company will also provide, or arrange for, 60% of the project’s financing, up to US$800 million.

Ross Bhappu, director of business development for Newmont, says Sumitomo meets all of Newmont’s criteria for forming a partnership.

“We were looking for someone with copper mining and marketing experience,” he says, adding, “they also have financial strength and operating experience in Indonesia.”

The project will be managed jointly, and Sumitomo will have seats on the board of directors of the operating company, P.T. Newmont Nusa Tenggara.

Sumitomo has interests in copper projects around the world, including 15% in Morenci in Arizona and 20% in Candelaria in Chile. Batu Hijau represents its first foreign direct joint-venture mining project in which it will have an active management interest.

Discovery of the Batu Hijau deposit can be traced to the 1980s, when Newmont began exploring for epithermal gold deposits in Indonesia. The program turned up several favorable results, including the Minahasa gold project.

When it was discovered in 1990, the Batu Hijau was recognized chiefly for its gold mineralization; the tremendous copper potential was recognized only later.

A classic copper-gold porphyry, the deposit features bornite and chalcopyrite mineralization hosted in tonalite intrusives within andesitic volcanic rocks. The company expects the operation to be one of the lowest-cost copper-gold producers in the world, owing to the significant gold credits.

The resource is estimated at 920 million tons of mineralized material grading 0.61% copper and 0.016 oz. gold per ton (equivalent to 11.2 billion lb. copper, 14.7 million oz. gold and 27.6 million oz. silver).

Construction of an open-pit mine and mill is expected to last three years, and the mine is expected to operate for more than 20 years. On an annual basis, the mine will yield 245,000 tons of copper and 500,000 oz. gold in concentrates.

The joint venture has not decided where the copper concentrates from the mine will be sent. However, Sumitomo has a copper smelter in Japan, as well as a 27% interest in the Jinlong smelter in China.

Capital costs are estimated to total US$1.5 billion for an open-pit mine, mill and infrastructure (including employee housing, a port and electrical generation facilities).

The joint venture will control 198,000 hectares on the islands of Sumbawa and Lombok. The exploration potential of the contract of work area is considered excellent. “Once we found Batu Hijau, we reallocated exploration funds away from other targets to define the deposit, but those targets are still there,” says Bhappu.