St. LOUIS () -- Between bad press, accusations, governmental threats and investigation requests, Freeport-McMoRan [NYSE:FCX] has been feeling the heat in Indonesia of late. This month alone, investors were bruised with a 20% drop in share prices amid continuing protests and disturbances at the company's flagship Grasberg mine and company offices. Is Indonesia becoming too hostile for foreign miners?
Richard Adkerson, President and CEO of Freeport McMoRan, explained the situation at the BMO Nesbitt Burns Global Resources Conference in Tampa, Florida today, hoping to put investors' concerns to rest.
"This is just part of the scenery of being in the mining industry today," he said.
Is it? Or is it just a part of the scenery of being in the mining industry in Indonesia?
Let us not forget, Newmont Mining [NYSE:NEM] just agreed to to settle a civil suit over pollution at Buyat Bay, ending one of two legal battles in the country. Newmont executive Richard Ness still faces criminal charges.
Furthermore, In a recent study entitled "," The Frontier Strategy Group gave Indonesia a CCC rating of above-ground risk. This means:
- Predictability of above-ground conditions: Low/None
- Probability of downside event: Medium/High
- Probable impact of downside event: Medium/High
According to the report, the election of a populist president in 2005, continued problems between the Indonesian government and Newmont and increasing interest by Chinese firms in investing in Indonesia create a poor above-ground environment.
Freeport's Adkerson himself began the company's presentation describing the Grasberg mine, which is believed to hold the world's third largest copper reserves and has one of the biggest gold deposits, as "both a blessing and a curse." So let's take a closer look at the goings-on in Indonesia of late.
After weathering an editorial storm in late December, Freeport endured accusations that it had made illegal payments to Indonesian military officers. The New York Times reported that Freeport paid military and police officials almost $20 million between 1988 and 2004. Then the environmental group that Freeport paid an Indonesian general almost $250,000 to protect its mine.
to the accusations in an interview with Bloomberg, saying that all payments were "fully disclosed," and Freeport spent about $6 million to $7 million annually to guard the mine.
However, this prompted Comptroller William C. Thompson Jr. to request both the U.S. Justice Department and the Securities and Exchange Commission to investigate whether Freeport's financial support for security forces on Papua "constitutes possible violations of the Foreign Corrupt Practices Act (and) the Securities Exchange Act."
Furthermore, earlier this month, Energy and Mineral Resources Minister Purnomo Yusgiantoro said the Indonesian government of PT Freeport Indonesia if it is found to have polluted the environment in Papua.
Environmental groups blame the multinational company of causing an ecological disaster by dumping tailings directly into once-pristine rivers that flow into the Arafura Sea.
Purnomo said an interdepartmental team would conduct a follow-up investigation on whether Freeport was responsible for serious pollution in and around its mining concession. Following the investigation, the team would make recommendations for further action.
Fast-forward to today, and it's no wonder the tension had been building at Grasberg leading up to the disruption last week. Adkerson even admitted to conference listeners "first quarter is going to be weak."
"We had a disruption in our operations last week, only the third time in our over 30-year history," he began.
Last Tuesday, Freeport was forced to suspend operations in Papua after 500 locals set up barricades on a road leading to the site. The desperately poor locals were demanding the right to illegally sift through and sell tiny amounts of gold and copper in the tailings river, according to Adkerson.
"The area they were doing this in is very dangerous; there have been mud slides and water events where people have drowned," said Adkerson.
Police came in to sweep them out and there were more locals than expected. The people reacted by throwing stones and ultimately created a rudimentary roadblock that blocked access from the town site to the mill, Adkerson said.
After a series of discussions were held during the week, the roadblock was removed on Saturday and "we're back to work," he said.
Following this, there have been some protests in Jayapura and Jakarta led by the anti-mining NGO groups, added Adkerson.
In Jayapura, the capital of Papua province, about 200 protesters staged a noisy but peaceful rally outside the local parliament, demanding the closure of Freeport's Grasberg mine.
In Jakarta, scuffles broke out when police blocked the protesters from approaching Freeport's offices. Police then sprayed the demonstrators with a water cannon, forcing them to fall back.
"It's not a significant financial effect for us, but just an part of the ongoing efforts we have to do to work with the social environment in which we operate," concluded Adkerson.
Share Price Activity
Freeport shares were trading at $64.50 on month ago today on NYSE, just 50 cents short of its 52-week high.
However, the company has lost almost 20% share price value since February 1, closing today at $52.02.
So it time to get in or out? As always, caution is the best policy.