Arbitration not the answer for Newmont dispute

Hendarsyah Tarmizi , The Jakarta Post , Jakarta | Wed, 03/05/2008 2:14 AM | Headlines

Relations between the government and Newmont Corporation have turned for the worst after the parties failed to settle their dispute over the mandatory divestment of the American mining giant's unit in West Nusa Tenggara.

The Energy and Mineral Resources Ministry and Newmont will now pursue an out-of-court settlement to settle the dispute, which has been closely covered by the media during the past several weeks.

However, taking the case to arbitration is unlikely to solve the dispute if the core problems of the divestment program are not dealt with.

Under their contracts of work, foreign mining companies are required to divest up to 51 percent of their shares to local parties after five years of commercial production.

The divestment can be carried out gradually over five years, and the shares should be sold at the government's price tag. The shares must first be offered to the central government. If Jakarta passes, then the shares are to be offered to local governments. Indonesian companies can only buy the shares if local governments also decline the shares.

Because the main purpose of the divestment program is to give local people the opportunity to share the economic benefits of mining operations in their areas, and to allow them to be involved in the policy-making process of the mining companies, the central government, as the preferred buyer, has the moral obligation to name local administrations at the provincial and regency level as the buyers.

However, this has been difficult to achieve in practice because of the inability of local governments to acquire the shares being offered with their own money. In order to be able to finance the acquisition of shares, local governments have to team up with third parties, usually large business entities.

With the involvement of third parties, the pricing of the shares becomes a problem. Mining companies have a different perception than the government when it comes to the price of the shares. While the ministry insists on the need to use the official price, mining companies want the prices to be based on market prices.

Differences over share prices and the lack transparency of the companies behind the local governments in the deals are the main factors for delays in divestments in the mining sector.

Newmont Nusa Tenggara (NNT), which operates a copper and gold mine at Batu Hijau in West Nusa Tenggara, has had the same problems.

Under Article 24 of the contract of work that NNT signed with the government in 1986, a 3 percent interest should be divested in 2006, 7 percent in 2007 and another 7 percent in each of the next three years. The price tag determined by the government for the 3 percent stake is US$106 million and $282 million for the 7 percent.

The company's foreign shareholders are Newmont Indonesia Limited, with a 45 percent stake, and Sumitomo affiliate Nusa Tenggara Mining Corporation, with a 35 percent stake. They are required to divest at least 31 percent of their shares because their local partner, PT Pukuafu Indah, already holds a 20 percent stake.

The government has accused Newmont, as the majority shareholder of the company, of acting on bad faith in fulfilling its divestment obligation. It has threatened to terminate its contract due to the delay.

Newmont has strongly denied the allegation, saying it tried to meet the deadline but was unable due to financial difficulties on the part of the local governments.

Newmont has, in fact, offered a risk-free bridging loan to the local administrations for the shares purchase. The local administrations will then repay the loan out of the royalties they will receive. In addition, they will receive an annual cash of $333,333 for each percentage of their ownership in the mining operation.

The local administrations rejected the offer, saying that by accepting the loan, foreign shareholders would continue to control the ownership of their shares until the loan was repaid.

The local governments have, instead, joined forces with an Indonesian private sector company to buy the shares. According to media reports, the local governments will cooperate with PT Bumi Resources for the shares purchase.

The problems in the divestment process are complicated due to the fact that the local governments, as the preferred buyers, do not have the money to buy the shares. On the other hand, Newmont consistently refuses to sell the shares at government prices if there are third parties involved in the deal.

We hope the ministry, the local governments, Newmont and its foreign partners will reconsider their plan to take the case to arbitration, and instead return to the negotiating table.

Newmont's loan offer might be the best answer to solve the payment difficulties. This scheme could even be adopted by other foreign mining companies.

Third parties or business entities can still be allowed to cooperate with local governments in the deal, but only if they agree to offer better financial benefits, than what Newmont provides. Otherwise, the business entities will only use the local governments to take advantage of the low price of the shares being offered.

Using market prices in these deals is also unrealistic, given that the purpose of the divestment is to help locals receive some of the economic benefits of their natural resources.

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