Global Policy Forum

Risky Business: The Grasberg Gold Mine

Project Underground

PT Freeport Indonesia likes to portray the Grasberg mine as the greatest asset that a company could wish for and that it is safe as a bank. Unfortunately for investors and other stakeholders there is much evidence to the contrary. This report explains what the problems surrounding Grasberg are, and some of the steps that might be taken to improve the situation at this, the world's largest open-cut gold and copper mine in the easternmost province of Indonesia.

Grasberg is known to different audiences as different things. For some it is Indonesia's largest source of tax revenue, for others it is a symbol of that nation's corruption and cronyism. For the engineers it is a technological marvel; for activists it is the locus of human rights abuse and destruction of the important local ecosystem in Irian Jaya. For the traditional owners it was the sacred head of their mother; for shareholders it is simply a bad investment.

Wherever you stand, important facts about the mine are not disclosed by the company pertaining to future risks facing the operation. This report changes that by exposing some of the liabilities facing PT Freeport Indonesia (hereafter simply referred to as PT Freeport), and its parent companies Freeport McMoRan Copper & Gold and RioTinto. In particular:

  • a pattern of human rights violations around Grasberg that has resulted in ongoing litigation against the parent company, Freeport McMoRan (page 9)
  • the involvement of PT Freeport Indonesia staff in the death of local people, as recently as September 1997 (page 4)
  • the destruction of local water quality, and pollution of the environment, as assessed by an independent consultant (page 15)
  • the long-term environmental threats posed by the mining activity (page 17)
  • the potentially illegal exploration inside the neighboring National Park (page 19)
  • the poor track record that the partners in PT Freeport Indonesia bring to the operation (page 22)
  • Freeport McMoRan's corporate culture, established by the men at the top, which obstructs real solutions to these problems (page 20)

The tone for the corporate tragedy is set by PT Freeport's complicity in the murder of hundreds of the local indigenous peoples, and the destruction of hundreds of hectares of rainforest. It is our conclusion that the risks stem from two decades of arrogance towards the local community, a lack of due care in environmental management, and a closeness to the dictatorship of Indonesia which, while once a business advantage, can now only serve to weaken the company's standing.

Take the current political instability in the country. This massive nation is so close to political breakdown and economic collapse that the United States Embassy has contingency plans for a full withdrawal of its personnel and foreign citizens5. PT Freeport Indonesia - the Suharto family and regime's biggest pet piggy bank - is in the midst of this crisis.

An array of threats face it in the scenarios for a post-Suharto Indonesia not least the fact that a very influential figure on the opposition, Amien Rais, has said that the government should "stop Freeport mining" and received much support for this stance. This leader of Muhammadiyah, the largest Muslim organisation in the country, feels Grasberg breaches Article 33 of the Constitution which stipulates that the earth, water and other natural resources shall be used for the greatest welfare of the people of Indonesia. He says the contract with PT Freeport Indonesia only benefits foreign investors.

Yet PT Freeport Indonesia has no political risk insurance against risks such as nationalization. How could this be? Unfortunately for shareholders two good policies with the World Bank's Multilateral Investment Guarantee Agency (MIGA) and the US Government's Overseas Private Investment Corporation (OPIC) were canceled by the parent company in the last two years.

This was for one of two reasons. Freeport McMoRan Copper & Gold's version is that it no longer requires insurance "against political risks such as civil wars or nationalization"8 as the staff told MIGA. The unofficial version is that the insurance was canceled to avert the scrutiny and conditions that the Bank and US Government had required in return for their guarantee9. It is no secret that the company terminated its contract on the eve of an investigation into the mine by the Multilateral Investment Guarantee Agency.

In either case the cancellation of these guarantees appears to be a major problem now with Indonesia on the brink of chaos. And they both stem from regrettable and avoidable management decisions about this resource development project. Such has been the pattern.

Take another example concerning the better known threat of civil unrest around the mine.

At last year's Freeport McMoRan Copper & Gold share- holders' meeting a compensation fund was proffered by management as the way to resolve the social problems at Grasberg which Vice President Paul Murphy admits keep him up at night. The proposed solution was known as the 1% Trust Fund because it put a paltry one percent of future profits to local development. Just this March a review12 for the company of its silver bullet to the crisis, found it to be a failure:

"The large sums of money which were intended as an effort to resolve existing social problems have on the contrary become a new source of difficulties and conflict. The general aim of giving these funds has not been attained."13 This kind of exercise can only hurt the investor  - not simply in terms of money wasted but in the reputation the company has built locally and globally.

Despite the lack of careful management and positive community relations by PT Freeport, people around the mine remain committed to upholding their rights and working out solutions with the company. That this has resulted in them going to the courts in the United States to seek redress for historical abuses is as much a measure of the company's intransigence as it is a symbol of their resistance to being taken for granted and having their culture and homeland destroyed.

At base the parent companies controlling PT Freeport Indonesia need to work with the Amungme, represented by LEMASA (the Amungme Tribal Council), and other community groups to develop a plan for equitable benefit sharing from Grasberg. Prior, informed consultation and consent is a necessary condition for any future development at Grasberg, including the proposed expansion to triple production.

The way in which the company seeks community input is important in judging the validity of the process. As long as PT Freeport continues to attempt to buy community support with trinkets and beads, the Amungme and other communities are not being consulted—they are being bought. Only by establishing a process which recognizes that mine expansion is only an option, not a given, and that the local communities have the right to say NO to such development can there be true dialogue. Hiding behind the barrel of a gun held by soldiers won't help either.

These questions speak to a larger struggle of communities in resistance to abusive gold mining operations around the world. Grasberg is emblematic for at least two reasons: the epic battle of indigenous people against this, the largest open-cut mine is mostly over gold - a non-essential product which has a declining social value since 80% of it goes to jewelry. And this case involves two companies - Freeport McMoRan and RioTinto - whose names are synonymous with an abuse of social, labor, environmental and human rights wherever they operate.

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