Freeport-McMoran Digs A Heap of Trouble in Indonesia

Freeport-McMoran Digs A Heap of Trouble in Indonesia Europe, Indonesia, Netherlands, News, North America, Pacific, Regions, USA, West Papua
March 2, 2012

Source: Forbes Magazine via Free West Papua

Cave In: Freeport-McMoRan Digs A Heap Of Trouble In Indonesia

Mining giant Freeport-McMoRan dug up a heap of trouble in Indonesia’s most tenuous territory, and it won’t get better soon. Investors beware.

Sitting on a concrete floor just before the holiday at a modest home in Timika, Indonesia surrounded by dense, mountainous jungle, a warehouseman named Yonatan Iyai invites me to partake in a lunch and hear about life in the Grasberg copper mine.

“This is a risky job,”

says the 33-year-old, in outlining why he and 8,000 colleagues had completed a three-month strike that will result in a phased-in 40% wage hike (Iyai’s current pay: $460 a month),

“and we deserve a better salary.”

Fate underscores his point.

As we share fish curry and steamed cassava in the valley, violence erupts in the clouds, where Grasberg, at 14,000 feet elevation, rests in perpetual fog. A helicopter ferrying workers and their families to Christmas vacation runs into a hail of bullets, wounding two women.

The company promptly suspends flight services for a week, forcing employers to travel on a 72-mile access road that snakes up the mountainside.

Last year at least six workers, including two security personnel, were shot dead along this route, which is off-limits to outsiders.

Two more contract workers were killed in another roadside attack on Jan. 9.

Remote locations, labor unrest, violence—this is the fracturing foundation on which the mine’s owner, Freeport-­McMoRan Copper & Gold, is building its future.

Freeport’s CEO, Richard Adkerson, says via e-mail when I ask him about this:

“These issues have posed risks for the company throughout its over 40 years of operations in Papua.”

“Freeport has successfully managed these risks and developed the Grasberg mine as a highly profitable operation. We have confidence in our ability to manage the current issues.”

And even though the stock cratered 37% in 2011, as once booming copper prices slumped on fears of a slowdown in China, many analysts predict a share price turnaround for Freeport, which mines copper, gold and molybdenum on four continents. It earned $4.6 billion last year, up from $4.3 billion in 2010. David Gag­li­ano of Barclays Capital says:

“In my view the stock is significantly undervalued.”

That’s easy to say from New York or Phoenix, where Freeport is officially based. But make no mistake: Freeport is an Indonesian company—it derives 45% of its income from there.

And as I crisscrossed the region I came away with an impression very different from Adkerson’s or Gagliano’s, one that has nothing do with higher wages for workers like Iyai and that will remain even if the price of copper rebounds.

Boiled down, Freeport has a Papua problem.

Indonesia tries mightily to pry eyes away from this heavily militarized home of the Grasberg mine. It’s difficult for foreign journalists to report freely from Timika or for tourists to get a permit to visit; restrictions for Jakarta-based diplomats were recently tightened. Locals who speak their mind run a risk: Human Rights Watch says that 90 are currently in jail for peaceful political activities.

But the company’s story is interwoven with that of this tenuous territory, a former Dutch colony in the western half of New Guinea, the world’s second-largest island. (The eastern half is now Papua New Guinea.) The native population is racially and culturally distinct from the rest of Indonesia, more akin to Pacific Islanders than East Asians.

Until the 1930s tribes in Papua’s rugged interior lived a Stone Age existence, unknown to the Europeans who stuck to the mangrove-ringed coastline. Yet their remote highlands held a glittering prize, which a Dutch geologist discovered in 1936: a mountain of ore at 14,000 feet, just shy of the highest peak (16,000 feet) east of the Himalayas.

It was like finding “a mountain of gold on the moon,” he wrote. And there the ore stayed for 30 years.

It took the technical know-how, political savvy and risk appetite of Freeport to crack open the safe.

By then Papua had been handed over to Indonesian rule with the support of President Kennedy and the promise of a popular referendum.

Australian Prime Minister Robert Menzies warned Kennedy that it would be “the substitute of brown colonialism for white colonialism.”

But a self-ruled Papua, a dream that persists today, wasn’t in the cards.

In 1966 General Suharto ousted left-leaning president Sukarno and began courting foreign investors. Freeport was the first to sign a contract, the start of a long and deep relationship with the regime. Papuans living around the mine had no say in the matter. A farcical UN-observed 1969 referendum to confirm Indonesia’s sovereignty unfolded “like a Greek tragedy, the conclusion preordained,” cabled a U.S. diplomat.

Freeport brought rapid development to Papua, building roads, schools and hospitals in the poverty-stricken area. But tax revenues largely stayed in Jakarta, where Suharto and his clan hosted Freeport executives and cooked up a back-scratching deal. Now democracy has unleashed Papuan ­resentment at the exploitation of their resources and their ­paltry return. Kevin O’Rourke, a political analyst in Jakarta, says:

“This is their worst crisis in over 40 years… And that’s saying something.”

Much of Freeport’s workforce, and the majority of senior staff, are Indonesians from other islands. Laborers like Iyai complain that they’re stuck on the bottom rung. Former employees say racism is common among Javanese managers, who see Papuans as primitive. Company spokesman Eric Kinneberg says over 500 staff-level managers are Papuans.

For every job at the mine, another 37 are added locally. But Papuans say this mostly benefits carpetbaggers, not the native-born who make up roughly half of the 3 million people in the California-size territory. The rest are newcomers, including migrants resettled by the government from other islands.

Socratez Sofyan Yoman, the chairman of Papua’s Alliance of Baptist Churches, says:

“Migrants dominate the economy, and locals are marginalized on their own land,”

While officials blame separatist rebels for attacks like the helicopter shooting, many Papuans point the finger at Indonesian paramilitary police and military units who are paid by the company to guard the mine. The apparent motive: squeeze more money from Freeport by justifying their deployment in the area.

“If there’s no conflict, there’s no money,”

says Reverend Yoman.

“It’s like an ATM.”

Indonesian forces have been implicated in a sabotage of Freeport’s pipelines last October. The pipelines, which transport copper and gold slurry, were cut at multiple points parallel to the access road to Timika. Sources close to Freeport say that aerial photos show Indonesian troops supervising the cutting by gangs of illegal miners, who then extract the concentrated gold. When engineers later went out to repair the pipelines they came under fire. In some cases, these sources say, acts of sabotage occurred within earshot of police checkpoints, yet no arrests were made.

A military spokesman in Jakarta denied any military involvement in the violence. He noted that armed civilian groups often wear army fatigues. He said swift action would be taken against any soldiers if there were firm evidence against them, and he invited human rights groups to report their findings to the military.

“If we find our men were guilty, we’ll take action. We will enforce the law. We will send them to military court,”

says Rear Admiral Iskandar Sitompul.

Whoever is doing the shooting and looting, Freeport’s security budget is rising. As well as paying Indonesian troops for protection, a controversial yet common practice in the mining industry, Freeport spent $28 million in 2010 on its own security force, up from $22 million in 2009. It has also brought in Triple Canopy, a private security firm staffed by former U.S. Special Forces that replaced Blackwater in guarding U.S. missions in Iraq. While such costs are relatively small compared with the lode emerging from those mountains, it’s hard to have security certainty if security expenditures just lead to more chaos.

Freeport must also deal with the freelancers. In the last decade thousands of small-scale miners have flocked to the area, tracking the upward march of gold. Timika, a dusty town of 120,000 people, has over 40 gold shops where specks are weighed and sold. While some miners pan for grams in lowland rivers, others travel closer to the mine, where higher concentrations are found in the waste rock. Far from deterring the trade, Indonesian security forces allegedly organize the transport of miners and supplies to camps inside restricted zones, taking their cut from the rich pickings.

For Freeport the surge in illegal miners adds the risk that they will start using mercury for extraction, posing a severe health risk to themselves and to the river system. Some gold shops already use mercury. Freeport is working with local authorities to discourage the practice and educate miners and merchants about the dangers, according to Kinneberg. It has installed monitoring devices in Timika and along the river.

Arguably the biggest risk of all emanates from Jakarta, 2,000 miles and two time zones away. As Indonesia’s economy revs up, politicians are playing hardball with foreign companies in the resources sector. Under a 2009 mining law foreign entities must divest to local partners 20% of equity in new mines within five years of production. Government officials now propose raising this level to 51%, effectively handing over control to the locals. They argue that the law also allows for the renegotiation of existing contracts to bring them into line, which is anathema to mining executives.

As Indonesia’s largest taxpayer, Freeport should enjoy some goodwill in Jakarta. Since 1991 it has paid over $12 billion into Indonesian coffers. But as with its security headaches, money can’t buy you love. To its critics Freeport remains a tainted symbol of foreign privilege under the 32-year dictatorship of President Suharto, which ended in 1998. Environmentalists accuse it of despoiling a pristine landscape. Rights activists in Papua see it as a partner of an occupying military. And politicians are jumping on the bandwagon, calling on Freeport to stop complaining and start renegotiating.

“We’re not Bolivia or Venezuela. We’re quite nice. We just ask them to be nicer than before,”

says Satya Yudha, a lawmaker on a mines and energy commission. One provision in the mining law that could apply to Freeport requires miners to process more metals at the source.

“Let them keep it and be the operator. No nationalization. But in return for that, build a smelter here,”

says Hashim Djojohadikusumo, a blue-blooded tycoon whose brother leads an opposition party.

In fact Freeport already smelts 25% of its copper at a plant in Indonesia. What really perks up politicians and their backers is the prospect of a compulsory divestment of the mine. A troubled asset could be on the market, with a potential windfall for the lucky buyer. “Everyone is using [the mine] as a battleground,” says Tony Wenas, an executive of the Indonesian Mining Association and former legal counsel for Freeport.

Kinneberg says Freeport isn’t required to divest equity in two locally incorporated units, though it has offered to sell shares in one unit to Papua’s provincial government (the central government has a 9% stake in the other). He says Indonesia has “consistently indicated” that it will honor existing contracts.

“We believe our contract is fair to all parties,”

Kinneberg says via e-mail.

Surrender is not an option. Grasberg’s copper and gold reserves are so immense that Freeport is spending $600 million a year to build a vast network of tunnels below its open-pit mine. It knows it can keep digging profitably in Papua for decades. The richness of the ore explains its low production costs: $0.60 per pound of copper in Papua, compared with $1.25 in Peru and Chile.

“The geology is the easy part. The regulatory side is multidimensional chess, with electrical shocks for the wrong move,”

says a Jakarta-based consultant to U.S. ­corporations.

The vice minister of mines and energy, Widjajono Partowidagdo, insists that Freeport must be flexible on buying local content and equity divestment. He acknowledges, though, that foreign companies don’t want to give up control. He says:

“Fifty-one percent [divestment] is our first position, and then we can go in the middle. We have to acknowledge the needs of our nation, and we should also consider the needs of foreign investors”

There’s a precedent for this game of chicken. In 1991 Freeport signed a new 30-year contract, with options for two 10-year extensions, subject to government approval. (“They have a very good deal,” notes Widjajono.) The agreement was sealed shortly after the company sold a 10% stake in the mine to the politically connected Bakrie family for $213 million, of which $173 million was financed by Freeport. A year later the Bakries sold half of the shares back to Freeport for $212 million, effectively giving them a free 5% stake that they sold in 1996 at a substantial profit.

Could this formula work again? O’Rourke says that the highly leveraged Bakries may be ready to buy another cheap stake in Freeport, in return for using its political clout to resolve its regulatory risk. Analysts say the Bakries would face competition from other tycoons in the resources sector, if Freeport took this route. Asked if any Indonesian companies had made approaches, Kinneberg declined to comment.

A discounted equity sale would be bad for Freeport shareholders. It’s also not clear that it would end the insecurity at the mine, which remains hostage to political and ethnic tensions. The sins of the past, some of which Freeport had a hand in, many of which it did not, now represent a risk premium on the company’s stock.

At this point, there isn’t much Freeport can do but keep digging and hope for the best.

The man who shut the mine

One evening I slip out of my hotel to visit Sudiro, the mechanic who led the strike. It’s nearly midnight, and several burly guards wait just inside the gate. Inside the house I meet a trim, soft-spoken 43-year-old Javanese in shorts and a black Freeport polo shirt. As a TV plays in the background, he describes his journey from tae kwon do champion to union firebrand who defied a mighty U.S. corporation.

Born into a military family, Sudiro (one name) joined Freeport in 1992. One of his trainers at the mine was a U.S. pilot from the Vietnam War, who praised him for his work ethic. He rose to the highest grade as a mechanic, worth $615 a month in basic pay. In October 2010 he was elected union leader and began researching wages at Freeport’s South American mines. He decided that Indonesians were being underpaid, and last July he made a dramatic demand: an eightfold wage hike. When Freeport brushed him off, he staged a walkout of 8,000 workers in September.

Three months later Sudiro sat across from Freeport CEO Richard Adkerson in a Jakarta boardroom to discuss a revised pay deal. Adkerson, who had called the initial demands “excessive and unreasonable,” adopted a friendly tone, says Sadiro.

“He told us, ‘Please help our company to survive.’”

Sudiro replied that he hoped Adkerson had come

“to provide a solution to our problems.”

The deal was signed later that day, and Sudiro flew overnight to Timika, where thousands of Papuans were waiting at the airport to give him a hero’s welcome.

Why did the strike succeed? Sudiro says he drew on his strict military upbringing to lead the workers and press their demands. A Muslim from Java, he invoked Jesus to rally Papuans, who are mostly Christian. His ethnicity also made it harder for authorities to label unionists as separatists and crack down, though shots were fired at his house and car.

“If the strike was started by Papuans it would have been crushed a long time ago,”

says a rights activist in Jakarta. One miner offers his own explanation. He says:

“We had the power of God behind us.”

Freeport should be so lucky.


posted by:

Leave feedback
1 Comment »

Spread the Word

Related Posts


, , , , , , , , , , ,

One Comment

    Leave a Comment