Ong Hock Chuan, Jakarta – Monday's announcement that Freeport McMoRan Copper and Gold won the rush to mine what may be the world's largest gold reserves has sparked widespread concern about the implications of the deal for foreign investment in Indonesia.
Canada-based Bre-X Minerals said on Monday that the United States mining giant would join it and its Indonesian partners - Karya Askatindo Mineral and Amsya Lyna - in a joint venture to develop the Busang gold mine.
"The joint venture will be 45 percent owned by Bre-X, 30 percent by two Indonesian companies and their partners, 10 percent by the Republic of Indonesia and 15 percent by Freeport McMoRan Copper and Gold," the company said.
The announcement brings to an end months of speculation, intrigue and power plays as multinationals and their Indonesian political affiliates zeroed in on Bre-X's find in remote East Kalimantan province in Borneo, a gold deposit touted as potentially the largest in the world.
But analysts warned that even though the deal had worked out to be relatively fair for Bre-X, a small and fairly unknown company, the handling of the issue over the past few months would leave a negative impression of the country.
"Whoever succeeds in business in Indonesia does so not through rule of law but rule of power," said one observer.
Scholar Arbi Sanit said that while the Busang controversy appeared solved in the short term, it did little to improve the long-term image of the country overseas.
Freeport, through its subsidiary Freeport Indonesia, runs one of the world's biggest copper and gold mines in Indonesia's Irian Jaya province.
"With Freeport in the deal, the joint venture would have more credibility because Bre-X was a relative unknown. Freeport, on the other hand, is well-known and has extensive experience mining in Indonesia," said political columnist Christianto Wibisono.
Developments over the past few months raised eyebrows when another Canadian mining company, Barrick, appeared to be muscling in on Bre-X's find by co-opting the help of President Suharto's eldest daughter, Siti Hardiyanti Rukmana.
Bre-X tried to counter the move by enlisting the help of Suharto's oldest son, Sigit Harjojudanto, but was asked by the Indonesian government to give Barrick a large share of the mining concession.
While Bre-X and Barrick were locked in a stalemate timber tycoon Mohamad "Bob" Hassan emerged as a player after acquiring stakes in an Indonesian partner of Bre-X and in Freeport Indonesia. One of the acquisitions was done through Nusamba, an investment company 80 percent owned by three foundations headed by Suharto. Hassan, a close golfing mate of Suharto, is regarded by some to be the front man for Suharto in many matters.
"In analyzing this deal it is important to take note that Hassan often acts as a surrogate for Suharto," said Christianto.
Despite the controversy surrounding the deal, some analysts did not foresee a lag in interest from foreign investors.
"It's no secret that you have to deal with a large measure of corruption and naked power plays if you want to do business in Indonesia," said one analyst. "But so long as the potential for profits are there foreign investors will not be able to stay away."
Freeport will provide about US$400 million, or 25 percent, of the estimated cost of constructing the mining complex, which encompasses the Busang II and Busang III gold fields, according to the Bre-X statement.
"Freeport will also provide up to US$1.2 billion in additional funding for the venture through a commitment from a major financial institution," the statement said. New York's Chase Manhattan is widely believed in Indonesia to be that institution.
"The financial strength will allow for the joint venture to proceed without any further dilution to shareholders," it said, adding that Freeport Indonesia would be the sole operator of the Busang mine.
Bre-X also announced separately that the company had increased its estimate of the gold reserves at Busang by 13.6 million ounces to 70.95 million ounces, currently worth more than US$24 billion. It also said the average overall grade had increased.
"This is a great day for both Bre-X shareholders and for the people of Indonesia," Bre-X chief executive officer David Walsh said in the statement announcing the deal.
Walsh congratulated Hassan "for his diligence and guidance during these lengthy negotiations". "There is no doubt he was instrumental in bringing this project to fruition," the Bre-X chief said.
Hassan was quoted in the statement as saying: "The Busang project is critically important to Indonesia's economic future and the social advancement of its people. I believe that the [Busang project] is the best solution for my country, its people and Bre-X, the company responsible for finding this incredible deposit."