So Much Gold, So Much Risk

Unrest makes Freeport's dependence on one Indonesian mine especially precarious

James R. "Jim Bob" Moffett and Richard C. Adkerson are in the enviable business of sitting on a literal gold mine. They run Freeport-McMoRan Copper & Gold Inc. (FCX ), which owns the rights to excavate Grasberg, a remote, beautiful, controversial site high in the mountains of Papua, Indonesia, that is the world's second-largest copper source and biggest gold deposit. As those metals have soared in value, Grasberg has become a veritable mint. Since 2001, Freeport's profits have quadrupled, to $935 million on $4.2 billion in revenues, helping it land the No. 35 spot on the BusinessWeek 50 list of top corporate performers. In the same period, investors have enjoyed a fivefold rise in Freeport shares, along with a flood of special dividends and stock buybacks.

It is a straightforward business, but also an enormously risky one: Grasberg provides some 90% of New Orleans-based Freeport's revenues and virtually all of its profits. Freeport has no immediate plans to diversify its considerable political or financial risk. Despite ample cash and opportunity, the company has so far passed on taking any meaningful stake in other locations or products. Instead, Adkerson, who is president and CEO, appears willing to milk Grasberg for what he reckons will be 40 more years of strong production. Meanwhile, it falls to Moffett, Freeport's chairman and head of its Indonesian operating arm, to keep the relationship with whoever's in power amicable. He has managed to pull that off since the discovery of Grasberg in 1988, despite an association with the dictator Suharto, a revolution, simmering disquiet among Papuan locals, and scads of human-rights and environmental abuse allegations.

But in recent weeks, having all those golden eggs in one basket has looked particularly precarious. After a relatively serene couple of years, relations with the Papuans heated up in March. Locals were blocked from panning for gold in a river carrying Grasberg's residue, and protesters barricaded a key access road, halting operations for three days. Four security people were killed in related protests in Papua's capital city, Jayapura. Indonesian officials are concerned enough about resurgent Papuan separatists, who have been agitating against Jakarta for some 40 years, that more security and military personnel have been deployed to the province.

Earlier this month came a scathing report from the Indonesian Forum for the Environment, an influential watchdog coalition. Among many allegations: that the local operating company, PT Freeport Indonesia, has improperly disposed of more than 1 billion tons of residue in local river systems and dumped 1.3 billion tons of waste rock containing toxic materials, creating dangerous acid runoff and landslides.

In an interview with BusinessWeek, Adkerson says that Freeport's practices in Indonesia are highly responsible and comply with local environmental law. And he's almost blasé about the political risk. "We worked through the change of government in 1998 [when Suharto was ousted], the Asian financial crisis, the telecom bust, and through times of very low metals prices," says Adkerson, 59. He and Moffett, 67, have big personal stakes in the outcome: Not counting options, Adkerson owns 500,000 shares outright (worth about $30 million), and Moffett owns 1.2 million ($73 million).


Despite Adkerson's optimism, BusinessWeek has learned that Freeport officials have been so consumed with the recent unrest that they put on hold the next phase of a company-sponsored human-rights audit that was to start in April. Prakash Sethi, president of the International Center for Corporate Accountability Inc., says the audit and a second one meant to target the many companies that support and service Freeport's operations at Grasberg will be delayed for at least several months. "We won't send our people in until we're sure that stability is restored," he says.

But it's the Indonesian government that's potentially more unsettling to investors than Papuan rebels. Several politicians and grassroots organizations are pushing President Susilo Bambang Yudhoyono to emulate Venezuela's Hugo Chavez and seize a bigger chunk of the bounty from his country's natural resources. At this point, though, most local businesspeople think Freeport's long-term contract will be respected. They say that Yudhoyono is pro-growth, and to win over new investors, he needs to continue setting a good example with current ones. Adkerson is confident the government will stick by its contract with Freeport, which supports 18,000 jobs and pays more than $1 billion in taxes.

The Grasberg-or-bust strategy has come with real marketplace consequences. Freeport's junk-level bond rating of BB- from Standard & Poor's (MHP ) would surely be higher given the company's enormous cash flow, but it "reflects the political and legal risks of operating in Indonesia and the company's limited operating diversity," S&P says. And Freeport's stock, despite its huge run, sells at a steep discount (about 12 times earnings) to some industry peers whose bets are hedged with multiple mines in different locales. Casting its entire lot with Grasberg ensures Freeport won't be short of metal reserves, or controversy, for the foreseeable future.

By Mark Morrison, with Assif Shameen in Singapore

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