Arbitration on Newmont

Wed, 03/05/2008 2:16 AM | Opinion

The Indonesian government's decision Monday to file for international arbitration in a dispute over Newmont Mining Corporation's mandatory divestment at its gold and copper unit in West Nusa Tenggara will not scare off foreign investors.

The impact would have been quite damaging if the government decided to act on its earlier threat to cancel Newmont's mining contract outright.

Such a move would not only have shocked other mining investors but also could have interrupted operations at the whole gold mine, which, according to the American company, now has a market value of US$4 billion.

Even though the arbitration process is much more complex and more time consuming, it is the least-costly alternative because the dispute will be resolved under the rules of the United Nations Commission on International Trade Law.

Yet more important is the gold and copper mine will continue to operate normally during the arbitration proceedings, which could take two to three years.

The government has been patient enough over Newmont's foot-dragging regarding the compulsory divestment of 10 percent of shares to Indonesian interests which, by the contractual stipulations, should have been completed at the end of last year.

The government issued a default notice to Newmont early last month and pushed back the deadline for the divestment three times since Feb. 22.

The government finally moved to file for arbitration only after Newmont failed to show a serious commitment to implementing its contractual obligation.

Newmont holds 45 percent, Japanese investors, including Sumitomo Mining Corporation, hold 35 percent and an Indonesian company holds the remaining 20 percent of PT Newmont Nusa Tenggara (NNT), which operates Batu Hijau, the nation's second-largest copper and gold mine.

According to a 1986 contract, Newmont and other overseas investors must cut their combined stake in Newmont Nusa Tenggara to 49 percent over time and should have divested 10 percent of their holdings by December 2007. Indonesian interests should control 51 percent of NNT by 2010.

Newmont did start offering 3 percent in NNT in 2006 valued at almost $110 million and another 7 percent valued at $325.36 million in April 2007, but the asking prices were considered too high.

There is nothing wrong with the central government directive that because it could not afford to take up the offered shares, Newmont should offer it to the West Sumbawa regional government, the West Nusa Tenggara provincial government and the Sumbawa Besar regional government.

These three regional administrations are the best choice of new shareholders in NNT, in large part because they can maintain a conducive political and social environment for the mining venture.

But the regional administrations did not have enough money to take up the shares, while Newmont reportedly "did not like" PT Bumi Resources, the private Indonesian company tapped by the local governments to be a partner in acquiring the shares.

It was Bumi Resources which acquired 51 percent of PT Kaltim Prima Coal from British Beyond Petroleum and Anglo-Australian Rio Tinto in mid-2003 while negotiations about the divestment to regional administrations in East Kalimantan were still underway.

Almost 40 percent of Bumi Resources is owned by the family of Aburizal Bakrie, the coordinating minister for public welfare.

There have been numerous rumors regarding the protracted negotiations for the divestment, especially as international gold prices have risen by more than 50 percent to historical levels over the past year alone.

NNT's Batu Hijau mine reportedly holds 493 million tons of proven and probable gold reserves and almost 2 million tons of copper.

Bringing the dispute to international arbitration would bring to light which parties are actually guilty of sabotaging the divestment; whether Newmont deliberately dragged its feet on the divestment in view of the sky-high gold prices, or whether it has really been serious about doing its part of the deal but was hindered political vested-interest groups.

Now the legal battle has been declared, we should let the arbitration run smoothly without any disturbances to production operations at the Batu Hijau gold mine. Since Newmont reportedly submitted its shares in NNT as collaterals for bank loans, we may rest assured there is unlikely to be any painful surprises along the lines of what BP and Rio Tinto did with their shares in Kaltim Prima Coal in 2003.

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