MAC: Mines and Communities

Protests Grow Over Group's Grasberg Revenues

Published by MAC on 2006-04-11
Source: The Financial Times

Protests grow over group's Grasberg revenues

By Rebecca Bream and Shawn Donnan, Financial Times

11th Apr 2006

Freeport-McMoRan has faced a litany of criticism in recent months over the operation of its Grasberg copper and gold mine in Indonesia's remote and conflict-torn Papua province.

Its practice of paying the Indonesian security forces to safeguard the open pit mine - a legacy of Freeport's ties to the regime of former strongman Suharto - has for years prompted allegations of human rights abuses. The policy has also led to investigations by the US Securities and Exchange Commission and the US Justice Department following a request from shareholders.

The company is facing increasing calls from Indonesian nationalists for its contract to be reviewed, and growing protests by pro-independence Papuan students demanding the mine's closure. One demonstration in Jayapura, the provincial capital, last month ended in the deaths of four members of the security forces.

"To us, you take, take, take and never give back. We don't see any benefits coming back to our island . . . that's why we are out there calling for Freeport to be closed," a Papuan student leader, who asked not to be identified, said yesterday. Adding to those problems, police in February clashed with illegal miners panning for gold in Freeport's tailings and a recent landslide crushed a staff mess hall adjacent to the Grasberg pit, killing three workers.

Meanwhile, Freeport's top two executives have reaped the financial benefits of a global commodities boom.

Between October last year and February this year, James "Jim Bob" Moffett, Freeport's chairman, and Richard Adkerson, president and chief executive, netted almost US$59m after taxes by cashing in stock options. This followed the award of 2005 compensation packages to the pair worth a total of US$77.3m, according to company SEC filings. It also comes as Freeport faces renewed questions from activists, academics, politicians, and even government officials over the distribution of its revenues. And over whether - in what is a perpetual question for multi-national mining groups operating in the developing world - the indigenous people around its mine are getting their fair share.

Freeport says last year it spent US$64m on community development projects around the mine with US$42m of that going to a "1 per cent [of revenues] fund" established to appease angry local communities following riots in 1996.

But the contrast between that figure and the windfalls enjoyed by its top two executives rankles some.

"When you compare the sorts of salaries and benefits their top two executives have received with the sorts of benefits the community receives, the contrast couldn't be starker," says Chris Ballard, an Australian National University expert on Freeport. Mr Adkerson, Freeport chief executive, says this is "an apples and oranges comparison" that ignores the US$1.2bn in taxes and royalties the company paid Jakarta last year.

The 2005 compensation packages were the appropriate result of a banner year for the company while the pair's disposal of shares was "just a matter of personal financial prudence". "From the terms of performing for our shareholders, which is what our compensation is tied to, I think we've performed," Mr Adkerson says.

"And then if you look at the support we've provided for the Papuan community, it's far beyond what would be expected of a miningcompany in any situation."

He says the company paid the government more in royalties and taxes than would be expected anywhere else in the world: "If it was in Canada, Australia, Chile, Peru, the US, the taxes and royalties would be less than what we pay the government of Indonesia."

Mr Moffett, a colourful 67-year-old mining engineer who served as chief executive until 2003, has faced questions over his pay packet before.

But his 2005 compensation, which included a record US$19.4m cash bonus, and his recent moves to dispose of shares, have prompted fresh questions about whether he plans to stay at Freeport.

This has rekindled speculation about a possible sale of the Grasberg mine, a joint venture with Rio Tinto, the Anglo-Australian mining group. One analyst says Mr Moffett has wanted to sell the mine for years but there have not been any buyers: "No one is prepared to take on the political risk of Indonesia."

Mr Adkerson will say only that "we have not had any announced intention to sell the company, [Freeport], or to sell the Grasberg mine".

Mr Moffett remains a major shareholder. The combined worth of his existing holding and the shares underlying his stock options is at least US$155m atcurrent share prices of about US$60.

Freeport says Mr Moffett remains "actively involved daily in the management of the company" and is under contract until 2008.

People close to the company also say, however, that in recent years his involvement in Freeport has waned. His primary residence is now in Austin, Texas, rather than New Orleans, where Freeport is based.

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