In today's Indonesia, foreign investors are starting to wonder if there is ever such a thing as a done deal. Just ask Canadian mining giant Barrick Gold Corp. In November, Jakarta issued the surprising news that it was granting Barrick majority control over what many believe to be the richest gold fields on earth, the Busang deposit. Until then, a 90% stake seemed to be firmly in the hands of another Canadian concern, Bre-X Minerals Ltd., which discovered the lode three years ago.
On Feb. 17, the tables turned once again. The government declared that Bre-X will be able to keep 45% of the mine--twice as much as it got under the Barrick deal. But the other 45% of Bre-X's original stake is being turned over to New Orleans-based Freeport-McMoRan Copper & Gold Inc. and two Indonesian companies controlled by Mohamad "Bob" Hasan, an Indonesian businessman who manages the fortune of President Suharto and his family. Surprisingly, the Indonesian companies won't pay Bre-X for their share in the deposit, which is worth an estimated $35 billion. Such a payment is "unrealistic" in Jakarta's current political climate, concedes Bre-X Chairman David G. Walsh. Still, Bre-X could have fared worse.
FAMILY FEUD. This time, the decision looks final. In large measure, the government's reversal is meant to clear up the bad publicity it earned for blatantly favoring Barrick over Bre-X in November. That move also brought negotiations on 68 other mining projects to a halt. Even more important, the new deal secures a greater stake in gold-mining for Suharto's family and diffuses a brawl among Suharto's children over how to divide the spoils.
Under the new arrangement, besides Bre-X's 45% stake in the mine, 15% of the riches go to Freeport, 10% to the Indonesian government, and the remaining 30% to the two companies headed by Hasan. One is an investment firm named Nusamba that is 80% owned by three "charitable trusts" controlled by the President. Suharto's son Sigit owns 10% of Nusamba and has a "consulting" contract with Bre-X worth $1 million per month. Sigit's rival, his sister Tutut, will likely land contracts for her companies to clear roads to the site. Although Freeport-McMoRan has controlled a big copper and gold mine in Irian Jaya since the 1960s, it had lost out on Busang until now. In Jakarta, few play the power game better than Hasan and Freeport CEO James R. Moffett, one of the few foreign execs who can meet with Suharto privately.
The genesis of the latest deal came in late December, when longtime Suharto crony Hasan called a secret meeting at the President's heavily guarded ranch outside Jakarta. Days before, Bre-X had capitulated to government pressure to sell most of its stake to Barrick, triggering an outcry from foreign investors. Accompanying Hasan was Moffett. The three devised a formula not only for getting Busang back on track but also for spreading the gold-mining wealth among the First Family.
"OUTSMARTED." The biggest loser is Barrick. Chairman Peter Munk says he decided to pull out because Hasan's terms "would not have been in the interest of our shareholders." While Barrick typically insists on controlling its mines, the company was told it would have to settle for a minority stake, even though it planned to pay $1.5 billion in development costs. Munk balked, but Freeport agreed to the terms. "Barrick got outsmarted," says a Western mining executive.
Nor was the decision a resounding vindication for Bre-X. Although its 45% stake is bigger than what was decided in November, shareholders are fuming that they would have done better had Bre-X been allowed to auction its original 90% interest to the highest bidder. That's why the stock had dropped 14% by Feb. 18. But Walsh says selling the entire stake was never "a practical reality" given Busang's "national importance." Bre-X had no choice but to give more to its local partners, he adds.
In the end, the Busang saga is hardly a triumph of capitalism as most Western companies understand it. Still, the deal worked out at Suharto's ranch may have achieved Indonesia's objective, says Brian Fagan, editor of Asian World Stock Report. The trio found "the maximum amount they could get" from the deposit "without killing off the golden goose" of North American investment. Another smart move for the Suhartos.