article from FInancial Times,
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Indonesia on Tuesday threatened to terminate the multi-billion-dollar mining contract of a local subsidiary of Newmont Mining, claiming that the US company and its Japanese partner had reneged on a plan to hand over shares to local organisations.
Simon Sembiring, Indonesia’s director-general of mineral resources, said Newmont and Sumitomo Mining had until February 22 to divest 10 per cent of their shares in the Batu Hijau copper and gold mine on Sumbawa island in West Nusa Tenggara province.
Muhammad Lutfi, head of the investment co-ordinating agency, also suggested that the two foreign companies, along with Trakindo, the Indonesian agent for Caterpillar, the heavy industry equipment supplier, may have violated the US Foreign Corrupt Practices act with their approach to the divestment process. However, no details were put forward.
The move is the latest blow in a long-running dispute between Newmont and the Indonesian government over the ownership of the Batu Hijau mine, which is managed by Newmont Nusa Tenggara, a joint venture between the US company and Sumitomo Mining.
Under the contract of work signed in 1986, Newmont and Sumitomo were required to divest 51 per cent of Newmont Nusa Tenggara to local entities within 10 years of production, in agreed instalments. Production began in 2000.
The companies sold 20 per cent immediately to Pukuasu Indah, controlled by businessman Yusuf Meruk. And in 2006 the company offered 3 per cent, valued at $109m, followed by another 7 per cent, valued at $282m, to local investors last year.
These stakes were not taken up and an affiliate of Trakindo has since been in talks with Newmont over the 3 per cent stake. Newmont on Tuesday said it had sold 2 per cent of the shares to the Sumbawa district government for $72.67m, a figure agreed via an independent valuation in 2006, adding that this demonstrated its commitment to divestment.
The sale price valued the mine at $3.6bn in 2006. Newmont was unwilling to say how much the mine is worth now. However, the price of gold has risen some 45 per cent in price since the end of 2006. The mine’s proven and probable reserves were estimated at 493m tonnes of gold and 1.9m tonnes of copper at the end of 2007.
Mr Sembiring told the Financial Times that Newmont and Sumitomo had violated the contract of work by not divesting 3 per cent of their shares in 2006 and 7 per cent in 2007.
“They’ve been hesitating, wasting time and not acting in good faith,” he said. “So I’ve given them until February 22 to complete the divestment or else I will exercise Indonesia’s right to cancel the contract.”
Newmont, speaking on behalf of itself and Sumitomo, insisted neither had done anything wrong. Newmont said it would take whatever steps necessary to protect its shareholders’ interests, including going to international arbitration.
Mr Lutfi, who has to approve the divestment, accused Newmont of “pursuing its own agenda” to retain ownership of the shares even though that would violate the contract of work.
“There are indications that several foreign companies have undertaken activities that violate the good corporate governance guidelines issued by the American government,” he said. “May I remind and warn Newmont, Sumitomo and Caterpillar’s Indonesian agent, namely Trakindo, to obey the articles of [America’s] Foreign Corrupt Practices Act.”
Trakindo on Tuesday said neither Caterpillar nor Trakindo were involved in attempting to purchase a stake in the mine, adding that it was an affiliate of the Indonesian company that had been in discussions.
Russell Ball, Newmont’s chief financial officer, said the company was committed to the divestment programme, even though it had taken longer than expected. He said he was “disappointed” by the default letter because “the government knew [the Sumbawa district deal] was in the works and imminent to be released”.
“It seems to be counter to the good faith of the negotiations that have been ongoing,” he said.
He added that if Jakarta cancelled the contract, Newmont would almost certainly pursue international arbitration.
Mr Ball rejected the suggestion that Newmont had violated the foreign corrupt practices act.
Additional reporting by Taufan Hidayat
Copyright The Financial Times Limited 2008