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Bre-X chief defends deal for Indonesian gold find

Source
Wall Street Journal - February 27, 1997

Richard Borsuk, Jakarta, Indonesia – The chairman of Bre-X Minerals Ltd., facing shareholder ire over last week's pact fixing ownership of the Canadian firm's giant gold find in Borneo, said he had to settle for an arrangement that reflected Indonesia's "political, economic and social environment."

David G. Walsh, who also is president and chief executive officer of the Calgary exploration firm, issued the statement Wednesday to "clarify inaccuracies" reported about the deal to develop Busang, which may become the biggest gold find ever.

Mr. Walsh's statement marks the second time within a week that Bre-X management has sought to defend the deal on Busang, which it found in the Indonesian province of East Kalimantan. On Feb. 19, Bre-X talked up the settlement in a conference call with securities analysts.

Under the arrangement it announced on Feb. 17, Bre-X will hold a 45% equity stake in Busang II and III, the two richest of Busang's three delineated zones. Earlier, the company had a 90% interest in both zones. Some Canadian shareholders were angry because Bre-X agreed to accept half its original interest and isn't getting compensated for the 45% it has relinquished.

Splitting the Find

The remainder of Busang II and III is split as follows: The Indonesian government holds 10%; private Indonesian interests controlled by Mohamad "Bob" Hasan, a confidant of President Suharto, get 30%; and the other 15% goes to Freeport McMoRan Copper & Gold Inc. of the U.S., which will develop the mine. Freeport, which already controls a huge Irian Jaya mine, was brought into the Bre-X deal at a late stage by Mr. Hasan, who brokered the Busang arrangement.

Months before Mr. Hasan devised a Busang settlement, the Indonesian government had sought to make Bre-X enter a joint venture with Toronto's Barrick Gold Corp., one of the world's largest gold miners. The scheme that authorities pushed, without success, would have left Bre-X with only a 22.5% stake in Busang.

The Busang settlement, endorsed by the Indonesian government on Feb. 18, put an end – at least for now – to brawling over who would develop the mother lode. Participants included several of the world's biggest miners, two children of Mr. Suharto (one helping Barrick, one helping Bre-X) and sons of two Indonesian cabinet ministers pushing for Barrick's entry.

The battle for Busang was watched with concern by investors in Indonesia, who feared that established mining rules could be changed or ignored to suit well-connected Jakarta businesspeople.

Clearance for a Price

In Indonesia, many businessmen view Bre-X's drop to a 45% stake in Busang as a price it had to pay to get the powerful Mr. Hasan to clear the way for mining to go ahead. In Canada, however, there is substantial criticism of the arrangement under which Bre-X wasn't compensated and of the 30% stake given to Mr. Hasan. In January, Mr. Hasan bought half of the original 10% stake in Busang II and III held by Bre-X's Indonesian partners.

A bulletin board about Bre-X on the Internet has carried many messages criticizing Mr. Walsh and Bre-X management. Bre-X's stock had been falling since the deal was announced. In early afternoon trading Wednesday on the Toronto Stock Exchange, the shares were at 20.55 Canadian dollars (US$15.11), up 75 Canadian cents.

The main contention of Mr. Walsh's latest statement is that the announced deal is the best Bre-X could get after recognition of Busang's size started the brawl over who would develop it. He said Busang drew the attention of "modern-day claim jumpers" and spawned demands in Indonesia that longtime mining-industry rules be pushed aside to let Indonesian interests get a large stake.

Bre-X calculates Busang contains 70.95 million ounces of gold at present. Mr. Walsh's statement says that at a current price of about $350 an ounce, Busang has a "gross economic value" of $24.8 billion. In last week's conference, a Bre-X executive said he foresaw the possibility that eventually 200 million ounces will be found.

'Victimized by Our Own Success'

In the months before a settlement was reached, Mr. Walsh said, the steadily increasing value of Busang – as larger reserves were announced – "exacerbated the difficulties in negotiating with the Republic of Indonesia.... We were ultimately victimized by our own success."

The chairman said "various third parties," who he didn't identify, had negotiations with Indonesian authorities from which Bre-X was excluded. Those talks, Mr. Walsh maintained, "introduced a percentage ownership mind-set that significantly reduced our ultimate negotiating leverage." Bre-X's find was of "such extraordinary richness that the final deal had to include a 40% share for Indonesians to be competitive" with other offers and to "satisfy [Indonesian] domestic political requirements," he said.

In the end, Mr. Walsh asserted, the arrangement Bre-X reached with its partners and the Indonesian government "was the best reflection of the political, economic and social environment in that country."

The Bre-X chairman said that while Bre-X is free to sell its 45% stake without giving its partners the right of first refusal, there is no plan for such a sale. "We remain committed to our joint-venture partners and the project," he said.

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