MAC: Mines and Communities

Mining Cos In Indonesia View Newmont As Test Case

Published by MAC on 2002-10-15

Mining Cos In Indonesia View Newmont As Test Case

Wednesday October 12


SYDNEY - Despite a string of terrorist attacks against western interests in Indonesia, foreign mining operators and prospective investors in the country are more concerned about legal uncertainties than security risks, industry participants said Wednesday.

According to multinational mining companies and analysts, a criminal trial involving Newmont Mining Corp. (NEM), the world's biggest gold producer, is of greater significance to Indonesia's appeal as a mining destination than terrorism.

In the trial, which reconvenes Friday, Denver-based Newmont is charged with dumping mercury and arsenic from its Minahasa Raya mine into Buyat Bay, on the northern tip of Sulawesi, making local villagers sick.

Newmont's Indonesia country manager, Richard Ness, faces up to 10 years in jail if found guilty.

"The Newmont case will be a benchmark for current and potential future investors in the resources sector to gauge what kind of risk they're facing," said Standard & Poor's principal sovereign analyst for Indonesia, Agost Benard.

Meanwhile, Muslim fundamentalist terrorism against westerners in the country is unlikely to find its way to remote mine sites staffed mainly by locals, said analysts and miners.

"If we assume it's the same terrorists with the same aims, then I don't think mining interests will be likely targets," said Benard.

"Although conceivably, mining interests could become targets for other reasons, such as local interests who for one reason or another are against projects or try to extract some kind of rent from the operators."

Security Still A Big Risk For Mining Companies

Australia's largest independent gold producer, Newcrest Mining Ltd. (NCM.AU), has firsthand experience of Indonesian social unrest, with bloody clashes between Christians and Muslims during the construction of its mine on Halmahera Island, 3,000 kilometers east of Jakarta.

Tensions have eased since then, but according to Tony Palmer, managing director of Melbourne-based Newcrest, "security remains the greatest challenge in Indonesia. I get concerned for our people there...Who knows what could happen?"

The recent terrorist attacks and the Newmont case, however, don't necessarily make Newcrest any less likely to get involved in new projects in Indonesia, he said.

"One of the things we've done to mitigate risk is just to stay as low-profile as possible. If you go to Jakarta, you won't find a Newcrest office there, and if I go there, I go practically unannounced," Palmer said.

But S&P's Benard said the Newmont case, if perceived to be flawed, would have an impact on the country's investment risk.

Newmont's Australian managing director, Paul Dowd, blames anti-mining NGOs for funding a campaign that sparked the case. He said scientific evidence shows that tumors, skin rashes and dizziness among locals are likely the result of poor nutrition and hygiene rather than any poisoning.

No matter the outcome, Newmont is highly unlikely to vote with its feet on the issue, given its $2 billion commitment in the Batu Hijau mine on Indonesia's Sumbawa Island, analysts said.

However, the world's biggest gold miner may be less inclined to get involved in new projects in the country, especially if Ness is found guilty.

"What sort of mining company wants to put their employees at risk when the evidence is clear that there has been no breach of environmental laws?" said Haydn Dare, a partner in Freehills, a legal firm representing Newmont.

Others aren't so convinced Indonesian authorities are acting capriciously in the case.

"It's unfortunate, but I think there is more to that story than we're all hearing from Newmont," said Milan Jerkovic, chief executive of Australia's Straits Resources Ltd. (SRL.AU), which operates the Sebuku coal mine in Indonesia.

Jerkovic said terrorism and the Newmont case would have little impact on Straits' ability to raise funds for its Indonesian operations but said the company will look to build its asset base in less risky Australia before pursuing anything else in Indonesia.

Case Puts Focus On Indonesian Legislation

The legal uncertainties spurred by the Newmont case also put the spotlight on Indonesia's legislative uncertainties for foreign investors.

Jerkovic and others are looking forward to a long-awaited mining code, still under review, that would replace the current work contract system with lease status, thereby offering some tenure certainty.

The current system means some work contracts require foreigners to reduce their ownership in projects to below 50% after a certain time. Investors also complain of 'nuisance' taxes created by provincial or local authorities.

The new law, while apparently still at an early stage of the legislative process, is expected to boost the appeal of mining projects to prospective financial backers and unlock more of the country's geological wealth.

S&P's Benard said the overall operating environment in Indonesia still compares unfavorably with that of its neighbors but is slowly improving.

"Legal issues, tax uncertainties, security risks - these things don't change overnight," Benard said.

"Even if you have an administration that is serious about improving investment conditions - and the current government is - you can't expect fast change."

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