International Business: INDONESIA
GOLD RUSH IN NEW GUINEA
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 a year ago, the company has said the concession area is under control. "We have an excellent relationship with the chiefs of the tribes," says Senior Vice-President Thomas J. Egan, who is based in New Orleans. Any reports of civil unrest are "certainly not the case," he says.
CHUMP CHANGE. 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 parent 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 13,000-foot-high Grasberg gold and copper mine and supporting infrastructure are the company's only big assets.
The prize, if Freeport can overcome these problems, is a fabulous treasure of mineral resources in Irian Jaya, the western half of the island of New Guinea. 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 officials.
Freeport has been in Indonesia since the 1960s, when President Suharto signed the country's first foreign joint venture with a predecessor company. In the 1980s, Freeport found Grasberg, with enough proven reserves to last until 2015 at current levels of production.
To tap this bounty, Freeport is expanding furiously. It boosted output by nearly 90% last April, raising the projected 1995 income of Freeport-McMoRan Copper & Gold to $332 million from $130 million in 1994, according to Smith Barney Inc. The company is traded on the New York Stock Exchange.
Hoping to head off further unrest, Freeport is spending $14 million a year on community development for the Amungme, from housing to schools and clinics. But the Amungme, who number just 8,000, are waking up to the riches around them. They are starting to ask why Freeport has built clapboard shacks for them but luxury apartments and a U.S.-style shopping mall for its staff in the 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.
Sympathy for the guerrillas is pervasive. Out of earshot of Freeport employees, young Amungme men wearing feathers and penis guards made of orange gourd shells proudly announce: "I am OPM"--the Indonesian initials for the Free Papua Movement, a scattered band of secessionist guerrillas that has been blamed for last November's attack.
After the attack, Freeport asked for the army, and 30 troops were sent in. The crackdown left at least 16 tribesmen dead and 4 missing. Indonesia's government-appointed National Commission on Human Rights concluded after an investigation that Freeport was not responsible for abuses committed by the army.
But the bloodshed has helped spur fresh criticism from environmentalists and aid agencies. Freeport's ore mills dump more than 100,000 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.
The company has repeatedly denied such charges. "There is no toxicity," says Egan. The mine tailings, he insists, are "inert sand, the same material that washes down a mountain without a mine." But OPIC says Freeport breached its $100 million contract for political-risk insurance by sharply increasing the amount of ore processed. The massive tailings discharges harm the Ajkwa River and lowland rain forests, the agency says, causing an "environmental, health, or safety hazard in Irian Jaya."
Egan says the OPIC insurance is "not financially significant" to the company. Freeport also has a $50 million political- risk policy with a World Bank affiliate and policies with private insurers for undisclosed amounts.
To help control the flow of tailings, Freeport built levies earlier this year to contain the discharges 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.
However, many contentious issues, such as land rights, remain. The Amungme have no concept of land ownership that can be translated into compensated exchange under Indonesian law. So in the early 1970s, Freeport got village chiefs to let the company occupy their ancestral land in return for community development.
Now, without knowing where to start, tribal leaders 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 1970s. Freeport officials say they are 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 give the community more say.
VOLATILE CALM. 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. And indirectly, Freeport creates 40,000 more jobs through domestic procurement. With last April's production increase, the government can expect to earn $250 million a year in royalties, corporate taxes, and dividends from Freeport.
If stability can be maintained, the company will get a crack at developing an entire province on behalf of the Indonesian government. But young, articulate Amungme say they 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, who earns $380 a month as a Freeport welder. "I don't need money," says Natkime, who gives his paycheck to friends and family. "I want the river's color back."
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 Pact with Amungme tribe lets Freeport 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.
1995-OCT. 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