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Snatching The Mother Of All Mines

International Business: INDONESIA


How Canada's Barrick grabbed a $20 billion gold deposit

For both Peter Munk and David G. Walsh, the stakes could not have been higher as they entered the office of I.B. Sudjana, Indonesia's Mining & Energy Minister, for a Nov. 14 meeting. At issue: which of their companies would control what may be the world's biggest gold deposit. It was Walsh's company, tiny Bre-X Minerals Ltd. in Calgary, Alta., that had discovered gold in the jungles of Borneo worth at least $20 billion. Walsh planned on realizing this monumental windfall by selling Bre-X to the highest bidder.

Sudjana's decision was a shocker: Telling Walsh that the government was "very concerned about the development" of these Busang deposits, he instructed Bre-X to form a joint venture, in which 75% of its interest would belong to Munk's Barrick Gold Corp., leaving just 25% for itself. That meant Walsh would lose majority control of a mine he regarded as rightfully his--and might also be forced to accept far less than he would gain in an open auction for Bre-X's Busang rights. Although several issues were unresolved as BUSINESS WEEK went to press on Dec. 4, including financial terms and how the government would be compensated, there seemed little doubt Munk will prevail. Walsh would not comment. But a Barrick spokesman says it landed the deal because "there was no doubt about our interest, and we clearly are qualified to get the mine in production."

How Walsh lost his bid is an astonishing tale that reveals much about how business gets done and undone in rough-and-tumble Indonesia. The story also underscores Munk's insatiable drive to become king of the gold industry. In just a dozen years, Barrick has gone from an upstart hounded by its creditors to the world's No.3 gold producer, with a market value of more than $10 billion and mines in the U.S., Canada, and Chile. If it gets a majority stake in Busang, Barrick will nearly double its 1995 reserves of 43 million ounces. Says Pierre Lassonde, president of Euro-Nevada Mining Corp.: "Barrick will gain the growth it needs to become No.1."

Snaring Busang from Bre-X also displays Munk's mastery of power politics. With an "advisory board" that boasts former Canadian Prime Minister Brian Mulroney and former President George Bush, Munk has the clout to open doors. In Jakarta, he enlisted one of President Suharto's daughters as a partner.

The saga begins in late 1993, when Munk was approached by Walsh with a request for financing. Bre-X, which started out by searching for diamonds in Canada's Northwest Territories, had shifted its focus to Indonesia. There, it teamed up with geologist John B. Felderhof, who was convinced of the Busang area's potential. Yet after showing initial interest, Munk pulled out when negotiations bogged down.

But within months, new drilling evidence suggested Busang might contain "more gold than has ever been found in one spot in recorded history," according to Brian Fagan, editor of Asian World Stock Report, monitoring Asian mining. "This was James Bond material."

Recognizing his mistake and determined to get a piece of the action, Munk began working Jakarta's corridors of power. He dispatched to Jakarta a longtime associate, Neil T. MacLachlan, a Barrick executive vice-president who was previously assigned to China. Last summer, he helped establish an alliance with Citra Lamtoro Gund Group, controlled by Suharto's daughter Siti Hardiyanti Rukmana. Known as Tutut, she is the most influential of the President's six children.

In early October, Indonesian authorities began questioning the Bre-X title to Busang. Jusuf Merukh, one of Bre-X's local partners, suddenly claimed that he was entitled to a 40% interest. Although Merukh has never fully explained his claim, he opened a can of worms by raising the ownership issue. In late October, Bre-X fought back by forming an alliance with the Panutan group, controlled by Suharto's eldest son, Sigit Harjojudanto. Walsh offered to give Sigit 10% of the deposit outright, in addition to a "consulting" fee of $1 million a year for 40 years.

Barrick kept working. Shortly before the Nov. 14 meeting, Tutut spent more than an hour closeted with Sudjana, who had recently been awarded sole authority to grant the contracts of work (called COWs) needed to develop Busang and other deposits. Although Tutut and Sudjana have declined to comment, most observers believe Tutut was pressing Barrick's case--standard practice in a country where foreign companies must enlist Suharto's children as joint-venture partners.

JUNGLE INTRIGUE. Tutut may well end up with an equity stake in the mine. Meanwhile, supporters of Bre-X now complain the company has been done in by local intrigue. "I don't see how Bre-X could have been at fault," says a foreign mining executive based in Jakarta. "They followed procedure, except that they did not have political clout." But others are more critical. "They won the mother of all lotteries and then couldn't produce the winning ticket," says Frank Giustra, CEO of Yorkton Securities, which has advised many Canadian mining companies. He says that Bre-X violated the "cardinal rule" of exploration by not fully resolving the title questions sooner.

For its part, the Indonesian government argues that "Bre-X could not develop the mine by themselves" and that it was taking too long to find a capable partner, according to Jean Anes, vice-counsel for investment at the Indonesian consulate in Toronto: "The government wants this area to be developed as soon as possible." No one questions that Barrick has the operational expertise and can raise the $1 billion or more required to develop Busang.

Nevertheless, many shareholders of Bre-X are furious. Greg Chorny, who is helping to spearhead the shareholder protests over the deal, fears that Barrick's price for 75% of Bre-X will probably be far below the $26 to $30 per share that Bre-X might have realized in an open auction. On Dec. 4, Bre-X stock closed at $15, down from a recent high of $20. Barrick's rivals are also grousing. "We were very disappointed to see the auction process preempted," says Placer Dome Chief Executive John M. Willson, who wanted to bid for Bre-X.

Though the Indonesian ruling is technically legal, it is deeply troubling to some foreign investors. "Historically, people who found deposits did not have trouble getting COWs," says another Jakarta mining executive. "But now it looks like a find can be pulled right out from under your feet."

"BUTCH CASSIDY." Controversy is nothing new to Munk. Few gave him any chance in the gold industry, since he was an outsider with no mining experience. But Munk, who made his first fortune building hotels in the South Pacific, knew foreign investors were hungry for non-South African gold stocks. He figured he could succeed by snapping up underperforming mines in the U.S. and Canada.

At the end of 1986, Munk offered $62 million for the Goldstrike Mine near Elko, Nev., a shopworn operation with reserves of just 600,000 ounces. Experts hooted. Just three months later, Barrick found it had hit what has since become North America's largest gold mine, containing some 28 million ounces. With the mine now worth more than $10 billion, Interior Secretary Bruce Babbitt called it the "biggest gold heist since the days of Butch Cassidy." His reasoning: Barrick, "a foreign company," paid the government just $10,000 in fees at Goldstrike, thanks to an old mining law that has since been changed.

Granted, the Nevada coup was good. But by securing a second El Dorado, this time in Indonesia, Munk could become a legend himself.By William C. Symonds in Toronto, with Michael Shari in JakartaReturn to top

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