A subsidiary of Macmahon Holdings has entered into final agreements to carry out the Phase 8 scope of work at PT Amman Mineral Nusa Tenggara’s Batu Hijau copper-gold mine in Indonesia.

PT Macmahon Indonesia and PT Amman Mineral Nusa Tenggara (AMNT) currently have an alliance-style mining and leasing services agreement in place for Batu Hijau, a large open-pit, porphyry copper gold deposit on Sumbawa Island in Indonesia. This is a cornerstone project that underpins Macmahon’s long-term outlook, the contractor says.

Given the success of the Batu Hijau mining contract to date and AMNT’s expected outlook for copper and gold prices, AMNT has made the decision to expand the Batu Hijau mine by undertaking a further cutback of the pit, known as Phase 8. Under the revised Batu Hijau Mine Plan, it is expected to extend in-pit mining to approximately June 2028.

In keeping with the life-of-mine nature of the existing contract between AMNT and Macmahon Indonesia, AMNT intends to maintain the engagement of Macmahon Indonesia as Head Mining Services Contractor for the Phase 8 expansion. Accordingly, AMNT and Macmahon Indonesia have entered into a new Mining and Leasing Services Contract under which (subject to Macmahon shareholder approval) Macmahon Indonesia will carry out the Phase 8 scope of work and continue with Phase 8 works currently underway, on updated commercial terms.

Macmahon explained: “Factors relating to the Phase 8 expansion made it difficult to apply the current commercial framework under the existing mining and leasing services contract (executed in 2017 and amended in 2018) to the additional Phase 8 works. In particular, the original $145 million of equipment on site at Batu Hijau acquired in 2017 has been depreciated to nil over a five-year term.”

The written-down value of all Macmahon-owned equipment on site is an important driver of return for Macmahon given that Macmahon receives part of its remuneration as a return on capital employed.

Under the new arrangements, Macmahon Indonesia will acquire from AMNT certain Caterpillar equipment (including dozers and trucks) with an independently-assessed market value of not more than $35 million, for use in performing the Phase 8 works and as security for the third-party financier. Macmahon Indonesia will also have the right (but not the obligation) to fund certain budgeted rebuilds or refurbishments of, and new components for, some of AMNT’s plant and equipment, along with other capital expenditure (which may include new trucks or other new plant and equipment).

Macmahon Indonesia will recover its capital investment on the assets acquired from AMNT and the amounts funded on rebuilds, refurbishments and new equipment through monthly depreciation charges paid by AMNT over the expected useful life of each item (with the asset to be transferred back to AMNT once Macmahon Indonesia has recovered its full capital investment). Macmahon Indonesia will also earn a monthly return on capital fee equivalent to a 15% return on the average written down value of its capital investment.

In addition, Macmahon Indonesia will have the opportunity to earn key performance indicator (KPI) fees (of up to $5.1 million per six-month period) based on overall project performance against project KPIs (although there is no certainty that any such KPI fees will become payable to Macmahon Indonesia).

Macmahon Indonesia also intends to implement third-party funding arrangements under which Macmahon Indonesia would recover a portion of its capital expenditure immediately from a financier, and would then repay the financier via monthly repayments that approximate the monthly depreciation charges recovered from AMNT. The financier would, of course, charge a fee for this arrangement, but Macmahon Indonesia would only seek to obtain finance where the costs of the financing are significantly less than the return on capital fee payable to Macmahon Indonesia in respect of the financed equipment.

Replacing the existing mining and leasing services contract will result in the current Macmahon Indonesia mining fleet (which has now been fully repaid by AMNT and depreciated to nil) being transferred to AMNT in accordance with the termination provisions of the existing contract. Because AMNT is a substantial shareholder in Macmahon, these transfers, and some of the other arrangements noted above, require Macmahon shareholder approval.

A notice of meeting setting out further details in relation to the new arrangements and seeking shareholder approval will be released to the ASX following this announcement.

The new commercial framework will, once approved, deliver a number of benefits to Macmahon, it say, including:

• Confirmation of increased tenure at Batu Hijau given the Phase 8 expansion and resultant extension of mine life;
• Furthering the relationship with AMNT, enhancing Macmahon’s ability to pursue opportunities at Elang and other growth opportunities; and
• An ability for Macmahon Indonesia to provide a sustainable investment in equipment and/or major rebuilds at Batu Hijau which will permit Macmahon Indonesia to generate a return on capital fee.

Macmahon’s Managing Director and CEO, Michael Finnegan, said: ”AMNT has a world-class asset and our relationship with them at Batu Hijau is highly valued. Phase 8 is an important opportunity to continue our relationship. Pleasingly, with the support of AMNT, we have been able to simplify the contract to remove zero margin revenue which will enhance operating margin, reduce working capital investment and improve our return on capital during the expected 5.5-year life extension.

“During the term of the contract, we also have flexibility to discuss how much capital to invest and with the agreed return of 15% on capital invested, this determines how much earnings are generated. This extension will generate improved project earnings, cash flows and financial returns that support our capital allocation and investment when compared to the existing contract.

“We look forward to continuing our relationship with AMNT at their highly productive, world-class Batu Hijau operation and with a partner who values technology and ESG. I would also like to thank our team, in particular our Chief Financial Officer, Ursula Lummis, for their efforts in positioning Macmahon to win the Phase 8 expansion work.”