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Gold Rush In New Guinea (Int'l Edition)


International -- Intl' Business: INDONESIA

GOLD RUSH IN NEW GUINEA (int'l edition)

Captain Kaletus Janempa, a 42-year-old guerrilla of the Free Papua Movement, looks out from a thatched hut over a well-guarded mountainside in Irian Jaya, Indonesia. He and fellow guerrillas want to drive out New Orleans-based Freeport-McMoRan Copper & Gold Inc., which has invested $2.8 billion there to mine the world's largest gold deposit. "We're using spears, bows, arrows, and knives," says the bearded Amungme tribesman, wearing an olive-drab cap and wielding his palm-wood bow and bird-hunting arrows. "When the military is asleep, we'll take their guns."

Conflict with the Amungme, who are just emerging from the Stone Age, could spell big trouble for Freeport. Since the murder of a Freeport employee by guerrillas with assault rifles a year ago, the company has said the concession area is under control. "We have an excellent relationship with the chiefs of the tribes in the area," says New Orleans-based Senior Vice-President Thomas J. Egan. Any reports of civil unrest are "certainly not the case," he says.

But in the eyes of the Amungme, Freeport and the Indonesian government, which owns a share in Freeport's local subsidiary, are getting rich off their ancestral land in exchange for mere consolation prizes such as jobs and free medical care. As they become more worldly, many Amungme are increasingly resentful. Environmental problems also are looming larger. One of the company's political-risk insurance policies has just been canceled by the U.S. Overseas Private Investment Corp. because Freeport's operations are causing environmental damage, OPIC says.

For the Indonesian government, handling the tense situation surrounding its largest single foreign investor will be a crucial test of its drive to attract new investment. For Freeport-McMoRan Copper & Gold, which was spun off last May from Freeport-McMoRan Inc., the stakes are enormous. All of its eggs are in this Indonesian basket, according to San Francisco-based investment bank Robertson Stephens & Co. The 4,000-meter-high Grasberg gold-and-copper mine and supporting infrastructure are the company's only big assets. As both environmentalists and human-rights activists crank up the pressure, Freeport will have to try new methods to win over the Amungme, who number just 8,000.

PRECIOUS PILE. The prize, if Freeport can overcome these problems, is a fabulous treasure of minerals. Irian Jaya, the western half of the island of New Guinea, is the closest thing known to El Dorado. The mineral belt that stretches 800 km across the island is studded with reserves of gold and copper. This year alone, Grasberg will yield 1.3 million ounces of gold and 975 million pounds of copper with a total market value of $1.76 billion, according to Freeport.

The company has been in Indonesia since the 1960s. President Suharto signed the nation's first foreign joint venture with a predecessor company. Initially, Freeport mined the Ertzberg, a mountain of copper and gold, until it was depleted in the 1980s. But profits were scant because of sky-high startup costs in the remote location and rough terrain. Then, it found Grasberg, with enough proven reserves to last until 2015 at current levels of production.

To tap this bonanza, Freeport is expanding furiously. It boosted output by nearly 90% last April, raising the projected 1995 income of Freeport-McMoRan Copper & Gold, which is listed on the New York Stock Exchange, to $332 million from $130 million in 1994, according to Smith Barney Inc. In partnership with British mining giant RTZ, which bought 11.8% of the company in July, Freeport may boost production an additional 40%. Now, Freeport is looking to Japanese banks to finance two-thirds of yet another joint venture, a $700 million copper smelter that it plans to build on the island of Java next year with Fluor Daniel Inc. of Irvine, Calif., and Mitsubishi Materials Corp.

The key question is whether complications such as the guerrilla activity and the OPIC cancellation will seriously hamper Freeport's operations, from raising funds to dealing with partners, including the Indonesian government. Hoping to head off further unrest, Freeport is spending $14 million a year on community development for the Amungme. The money is going into clapboard houses, schools, clinics to prevent babies from dying of diarrhea, antimalaria measures, scholarships to U.S. colleges, and aid to tribespeople in setting up small businesses.

But the Amungme are waking up to the riches around them and how the wealth is being shared. They are starting to ask why Freeport has built clapboard shacks for them but furnished luxury apartments and an American-style shopping mall for its staff in the mining town of Tembagapura at the other end of Waa Valley. "Freeport promised me a good house. This is not a good house," says Tuarek Natkime, chief of Waa Valley, gesturing at the grimy walls of his living room. "In Tembagapura, those are good houses."

Sympathy for the guerrillas is pervasive. Once out of earshot of Freeport employees, young Amungme men wearing feathers and penis guards made of orange gourd shells proudly announce: "I am OPM"--an Indonesian abbreviation for the Free Papua Movement, a scattered band of secessionist guerrillas that has been blamed for last November's attack. The captain on the hillside claims that while the OPM has only five rifles, it has 3,000 members.

"EXCESSIVE FORCE." Generating further sympathy for the OPM, Freeport requested army assistance after the November attack, and 30 troops were sent in. The crackdown left at least 16 tribesmen dead and 4 missing. Troops requisitioned a Freeport bus and its driver to carry "suspects" and killed one who attempted to escape. Louis A. Clinton, vice-chairman of local subsidiary P.T. Freeport Indonesia, acknowledges that "a tragedy" occurred because of "excessive force" but says he does not regret having called in the troops. "It was necessary," he says. "They were lawfully trying to protect an area."

The blame for the incident may not fall on Freeport. Indonesia's government-appointed National Commission on Human Rights concluded after an investigation that Freeport was not responsible for human-rights abuses committed by the army. The army admitted that it committed "a procedural error and a violation of regulations." Four soldiers, including a second lieutenant, are under arrest and awaiting court martial on murder charges.

But the bloodshed has helped spur fresh attacks from environmentalists and aid agencies. Freeport's ore mills dump more than 100,000 metric tons of gray, dusty tailings into local rivers every day. The Indonesian Forum for Environment, a nongovernment agency partly funded by the U.S. Agency for International Development, says the tailings are toxic and are killing fish and razing vast tracts of rain forest. A recent report by the private Australian Council For Overseas Aid agreed.

Freeport has repeatedly denied the charges. "There is no toxicity," says Egan, who insists the mine tailings are "inert sand, the same material that washes down a mountain without a mine."

But environmental alarms continue. OPIC went ahead with its decision to cut off Freeport's $100 million political-risk insurance policy effective Oct. 31, even though Suharto brought up the issue in an Oct. 27 meeting with President Clinton and several Cabinet members. Freeport breached its insurance contract, OPIC says, by sharply increasing the amount of ore processed, now averaging 118,000 tons per day, compared with the maximum of 52,000 tons stated in the contract. The agency says the large tailings discharges are harming the Ajkwa River and lowland rain forests, causing an "environmental, health, or safety hazard in Irian Jaya."

GRAVE MISTAKE. Freeport has requested arbitration of OPIC's action. In any case, the OPIC insurance is "not financially significant," Egan says. Freeport also has a $50 million political-risk policy with a World Bank affiliate and other policies with private insurers for undisclosed amounts.

Still, many contentious issues, such as land rights, remain. The Amungme have no concept of land ownership that can translate into compensated exchange under Indonesian law. So in the early 1970s, Freeport got village chiefs to let it occupy their ancestral land in return for community development. "We Amungme feel that the land is our mother," says Tom Beanal, a community leader in the village of Kwamki. "We are nothing in the eyes of Jakarta and Freeport."

Now, without knowing where to start, Beanal and fellow tribesman Tuarek Natkime say they want to renegotiate. Stan Batey, a Freeport community-development supervisor, admits the company made a grave mistake by not clearly marking land boundaries in the early '70s. Now, Freeport is considering making amends by setting up a trust fund in the name of an Amungme council of elders that would hold shares of P.T. Freeport Indonesia and thus gradually give the community more of a say.

Environmental issues also will prove a tough nut to crack. U.S. consultant Dames & Moore Inc. started an environmental-impact audit in mid-October that Freeport hopes will prove that the damage it is doing to rivers and rain forest isn't permanent. The key problem: tailings overflowing from the rivers, smothering tree roots and destroying forests.

Earlier this year, Freeport built levies to contain the flow of tailings in a narrow channel to the sea instead of allowing them to spread through lowland forests, and it started replanting exotic tropical trees and grass on mounds of dry tailings. The results thus far look good, though Freeport's environmental manager, Howard Lewis, admits that the replanted forest has yet to withstand the test of heavy rains.

Considering the politics of the situation, Suharto is keeping a low profile in the debate over this vital national asset. The Indonesian government sees Irian Jaya as a benchmark of its ability to keep the lid on racial, religious, and political tension in a nation of some 300 diverse ethnic groups. It also wants to keep economic development on course. Freeport employs 14,000 Indonesians, predominantly from the main island of Java. Indirectly, Freeport creates 40,000 more jobs through domestic procurement. With last April's production hike, the government can expect to earn $250 million a year in royalties, corporate taxes, and dividends from Freeport.

NEW SUBURB. If stability can be maintained, the company will get a crack at developing an entire province on behalf of the Indonesian government. Freeport has already built U.S.-standard roads, cable cars, golf courses, an international airport, a four-star Sheraton Inn, hospitals, telephone systems, power stations, and the mining town of Tembagapura. In an area inhabited by fewer than 200 people 30 years ago, a multi-ethnic population of 70,000 has gathered around the former lowland village of Timika. By mid-1996, Freeport will have finished building a $300 million suburb for its managers called New Town.

As the local economy grows, some natives are getting in on the act. Yohanes Cenawatme, a 26-year-old barely literate Amungme carpenter, is being trained in Freeport's Business Incubator Program in cost analysis and other business skills. Cenawatme recently won a contract to supply dozens of ironwood park benches to New Town at a competitive $127 per bench. "No one else would sell these benches so cheap. Next time, I'll ask for more," says Cenawatme, his arms folded confidently.

But satisfied entrepreneurs are few and far between. Much more common are young, articulate Amungme who want Freeport and the Indonesian government to get out of Irian Jaya. Many are Freeport employees, such as Silas Natkime, the 30-year-old son of the Waa Valley chief. Natkime earns $380 a month as a Freeport welder, but he gives away his paycheck in a single day to friends and family. "I don't need money. I can eat in any Amungme village for free. I want the river's color back," says Natkime, who expects to be chief someday.

As long as the Amungme remain on a war footing, Freeport will have to do more to come to terms with them. But how much of its wealth can the company share with locals without causing even more of a social upheaval? "The jury's still out," says community developer Batey. Others would say it's waiting on the mountainside.

Trouble In El Dorado

1962

Indonesia annexes former Dutch-held western New Guinea, with its big Ertzberg gold-copper deposit. Renames territory Irian Jaya.

1967

President Suharto signs his government's first foreign joint venture with Freeport to develop Ertzberg.

1974

Accord with Amungme tribe allows Freeport to mine on its lands in return for community-development program.

1988

Freeport discovers Grasberg, world's biggest gold deposit. Subsidiary Freeport-McMoRan Copper & Gold goes public.

1994

Free Papua Movement rebels gun down Freeport employee. Freeport calls in Indonesian army. Troops kill at least 16 tribespeople.

1995-July

Freeport brings in British mining giant RTZ as a strategic partner.

U.S. Overseas Private Investment Corp. cancels Freeport's $100 million political insurance because of environmental problems at Grasberg.

DATA: BUSINESS WEEKBy Michael Shari in Irian Jaya, with Gary McWilliams in Houston and Stan Crock in Washington


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