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The battle to mine Busang

February 13, 1997

It has all the hallmarks of a great saga: members of Indonesia's most powerful political family vying for control of a spectacular treasure, with most of the international intrigue going on behind the scenes. LOUISE WILLIAMS reports on the battle to mine Busang, the world's richest gold deposit.

Beneath the red, moist earth of the remote reaches of Borneo lies a prize so tantalising that a spectacular corporate battle is being waged behind the scenes for its control.

The main protagonists are three members of Indonesia's most powerful family. And circling around them like sharks vying for their share in the spoils are the international mining companies, and B-team players of the Indonesian politics and business.

The prize they are vying for is control of the biggest pot of gold the world has ever seen.

Business deals are never transparent in Indonesia, where political influence plays a key role in the carving up of natural resources. But what is clear is that the battle has already pulled in three of President Soeharto's children, the son of Indonesia's Mining Minister, the son of a promient general, the former US President George Bush, the former Canadian President, Brian Mulroney, four Canadian mining companies, one US and one Australian mining company, several Indonesian state-run companies and the Indonesian timber baron and presidential confidante, Bob Hasan.

"This is like claim jumping in the old Canadian gold rush, there is a real wild west feel to the corporate conflict," says one Western analyst.

Late last year details leaked out of a extraordinary deal which promised US $700 million in "consultancy fees" and profit share to be paid to Sigit Hardjojudanto, President Soeharto's eldest son, for his assistance in stitching up the final contract for the gold deposit known as Busang, in East Kalimantan, the Indonesian controlled territory on the island of Borneo.

At the time international mining industry analysts assumed that the Canadian company, Bre-X Minerals, which had originally discovered the gold and had now forged such an advantageous alliance, must have won.

Understandably, the stakes were high in the international bidding war over the Busang site, which geologists say may yield as much as 100 million ounces of gold and net at least US$30 billion in returns. Just as high was the price of influence: fees of US$1 million a month for 40 months to be paid to a company controlled by Sigit Hardjojudanto, plus a split of the profits.

It was astounding enough that the deal was publicly exposed. The wide-reaching economic empire of the Soeharto children is a public secret in Indonesia, but the discussion of the link between political power and business is actively discouraged.

Even more extraordinary is that it has since emerged that the deal was only the tip of the iceberg and that the US $700 offer may have already been left way behind.

Within weeks of the Bre-X revelation another Canadian company, Barrick Gold Corporation, emerged with President Soeharto's influential eldest daughter, Siti "Tutut" Hardiyanti Rukmana, by their side.

Tutut is one of the chairmen of the ruling Golkar political party as well as head of a business empire which controls the nation's toll roads and other big infrastructure projects. She is often seen publicly with her father and is thought to have his ear.

Tutut's influence was demonstrated in the announcement that Barrick had won approval for more than a 60 per cent share in the site, leaving Bre-X in the humiliating position of minority partner.

The deal was also seen as a victory for Tutut over Sigit, and the public nature of the family clash interpreted as a measure of the determination behind the struggle for control of Busang. Then that deal appeared to falter and a new, and increasingly complex, stampede ensued which has linked some of Indonesia's most powerful entrepreneurs and politicians to a multi-billion dollar web of international players.

"This could become the biggest gold mine anywhere in the world, it is certainly the richest gold mine in the world. This is the most spectacular battle ever for control, the situation is extraordinarily tense," says one Western mining source.

And the stakes might just go higher still. If the dispute over who actually has the rights to the gold is not resolved by the Government-set deadline of February 17, President Soeharto is expected to take control of the potential mine himself.

Already, the Busang battle has exposed the Indonesian mining sector to international criticism, raising questions about the reliability and transparency of the decision-making process in the letting of mining concessions.

"It has certainly sent worrying signals that major decisions are still fuedally based and that the Soeharto kids are being further locked into political and ecomomic power. Never think that the kids are not going to be considered for a deal, especially when there is an opening as lucrative as this one," one Jakarta-based mining executive told the Herald.

As behind-the-scenes attempts are made to resolve the situation, heads are rolling within the Indonesian political elite, which is linked directly to the business elite. At the same time critics of the mining industry have jumped in, seeing their chance to attack everything from Indonesia's percentage cut in a range of foreign-run mines to the rights of the indigenous people and potential damage to the environment the Busang mine will cause.

"It is because they are gold mines. The word "gold' has always been thought of as a treasure... (and) because it concerns a very big amount of gold, people become greedy and are not afraid to use their political influence to gain something from it," says local analyst Mohammad Sadli.

And from US Senator Alphonse D'Amato comes charges that Busang was in danger of becoming "history's largest insider circus, rampant with favouritism practices illegal by democratic standards and unacceptable to our securities laws".

THE story of Busang began in 1988 when the Perth-based Westralian Resource Projects began exploration in a joint venture with Indonesian mining entrepreneur, Jusuf Merukh.

Working deep within Borneo's dense tropical jungles proved both difficult and only marginally successful. Little gold was found and the cash-strapped Australian miner was bought out by the small Canadian company, Bre-X Minerals.

In its first year Bre-X uncovered about two million ounces of proven reserves and by mid-1996 the find had increased dramatically to 50 million ounces, making it one of the biggest known deposits in the world and fuelling the spectacular 100 fold increase in the price of Bre-X stock. The value of the company soared to US$5 billion.

The find has since been talked up further still and some mining entrepreneurs say the deposit may eventually yield 100 million ounces of gold, although the official estimate is now at 57 million ounces.

It was not, however, to be assumed that Bre-X would get the gold. Since 1994, Bre-X has failed to secure final approval for a "contract of work" for the site and holds only an exploration permit. The site has extended way beyond the boundaries of the original "contract of work" bought from the Australians, apparently leaving the richest deposit exposed to outside claims.

Then, there was the matter of Jusuf Merukh, now suing Bre-X for almost two billion dollars with the financial backing of Perth-based Golden Valley Mines (see box). By mid-1996 the Barrick Gold Corporation, an influential Canadian mining company, was making its move. On its Board sat the likes of George Bush and Brian Mulroney. Barrick pursued a blatantly political approach and was wooing Tutut and had no claim on the deposit beyond influence at the highest level.

Bre-X then found the Soeharto Government delaying on final approval for exploitation of the site. Indonesia's first family had not previously shown much interest in the mining sector but rumours soon began to circulate that this was "the deal". The mine has the potential to become one of Indonesia's biggest businesses.

In October Bre-X realised it would have to play a tougher game and moved to cut in the president's eldest son in with the US$700 million offer. By November the Soeharto Government had directed Bre-X to form a partnership with Barrick and a deal appeared to have been done: the Indonesians got 10 per cent, Barrick got 67.5 per cent and Bre-X was left with only 22.5 per cent.

Bre-X management was furious, its shareholders were furious, particularly over the overtly political way Barrick muscled in on the deal.

NOW, however, influential Indonesian economists have publicly questioned the meagre 10 per cent share the Indonesian Government would take and a wave of criticism of foreign mining companies has been unleased. Environmentalists and representatives of the indigenous people of Kalimantan have made public allegations of environmental vandalism, forced evictions and failure to pay compensation against other gold and coal mining companies working in Kalimantan, all of them Australian.

Critics are already drawing parallels between the potential size of Busang and the massive Freeport copper mine in Irian Jaya. The US mining giant Freeport has been caught in a sporadic war between Indonesian troops and the indigenous tribes whose former lands are within the mine site.

Gold mining is potentially the most environmentally damaging mining process as cyanide is used in processing frequently leaches into local water systems. Attention is already focusing on the recent bloody battles in West Kalimantan, where indigenous tribes have been displaced by mines and plantations and have been rioting against migrant labourers.

Enter another Canadian company, Placer Dome, offering the Indonesian Government a 40 per cent cut of the spoils and a US$6 billion merger deal with Bre-X. It left Tutut and Sigit looking less than nationalistic.

Placer's president, John Wilson, was quoted as saying he did not expect to be doing business with Soeharto's children.

However, timber baron and close friend of Soeharto, Mohamad "Bob" Hasan, is widely believed to have linked up with Placer Dome. Hasan is also said to have bought a controlling interest in the remaining 10 per cent share from the original contract of work as well as acquiring the rights to explore the entire area.

At the same time Newmont of the US, Teck of Canada, an Indonesian nickel mining company and a tin mining company have announced they are seeking a share. The tin mining company was reported in the Jakarta press to be seeking to team up with another Soeharto daughter, Siti Hediati Prabowo, who is married to the influential head of Special Forces, General Prabowo Subianto.

Hasan has reportedly made his move on the original 10 per cent through a company known as Nusamba, bringing the president directly into the increasingly complex tussle. Nusamba is 80 per cent owned by three foundations chaired by Soeharto, 10 per cent owned by Hasan and the remaining 10 per cent is controlled by the President's eldest son, Sigit.

"Some people would say that this latest move means the president wants a cut, but others would say that a real ruckus has broken out in the elite, and among his kids, so he is putting Bob Hasan up as a fixer," says the Western analyst.

"The question is whether this is entirely a money making venture for Hasan or is he being used to sort out a real mess when things are going badly wrong in a business sense."

There are few observers willing to pick which way the final deal will go, but it appears likely Bre-X will be forced to share its fortune and that the Soeharto family must be part of the final equation.

The Australian connection

PERTH businessman Warren Beckwith believes he should soon be a very rich man. Almost 10 years ago, his company, Westralian Resources Projects (WRP), was foraging for gold in the jungles of Borneo with limited success.

Strapped for cash in the recessionary environment of the early 1990s, WRP was bought out by maverick Canadian miners, Bre-X Minerals, who took over the Australian's 80per cent share in the "contract of work" for the area known as Busan.

Within a year, Bre-X had confirmed a phenomenal discovery now put at 57million ounces of gold, the richest known gold deposit in the world. And now Beckwith is back, financing a multi-billion dollar law suit against Bre-X as well as lobbying in Jakarta for a share of the spoils.

WRP is gone, swallowed up by Bre-X. But, the original joint venture included two 10per cent shares held by Indonesian investors, one of whom also retained an option to raise his stake to 30per cent.

Now as chairman and major shareholder of Golden Valley Mines, Beckwith, brother of the late Peter Beckwith, an associate of Alan Bond, has obtained a 95per cent "economic interest" in a company called Krueng Gasui, run by Indonesian mining entrepreneur Jusuf Merukh.

Merukh held the original 10per cent share with a further 20per cent option and has recently filed a claim for $3.5billion dollars against Bre-X in the Canadian courts. Merukh's argument is that the minority partners in the Bre-X joint venture assumed that exploration conducted by Bre-X beyond the original boundaries of the "contract of work" was being carried out on behalf of all the partners. The major gold deposit was found outside the original area, but Merukh is also arguing that Bre-X used knowledge from the initial exploratory efforts of WRP. Alternatively, Beckwith and his team have been lobbying in Jakarta for a share in the final contract through Krueng Gasui on much the same basis. The massive Busan gold deposit, they say, is not a separate find discovered outside the original exploration site but a continuation of the one deposit for which Krueng Gasui still holds a claim.

"I don't think it is a political matter; it is a mining administration matter. I have a lot of confidence in the Indonesian contract of work system," Beckwith says, dismissing the view that political influence will be the deciding factor in the Busan carve-up.

But, it politics is the deciding factor, Beckwith may be on the wrong team as far as the Soeharto Government is concerned. Merukh is one of a small handful of Indonesian businessmen linked to the opposition Partai Demokrasi Indonesia (PDI), led by Megawati Sukarnoputri, which was banned from political participation after anti-Government riots in Jakarta last year.