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Tense Situation at World’s Largest Gold Mine

Already contending with the possible nationalization of the world’s largest gold mine, in Indonesia, American mining giant Freeport-McMoRan now faces a shareholder lawsuit.

PHOENIX (CN) — Facing possible nationalization of the world’s largest gold mine, in Indonesia, American mining giant Freeport-McMoRan has another problem now: a lawsuit from shareholders who say it breached its duty to inform them of the problems before it shut down operations, whacking $5.6 billion from the value of shares.

Jeffrey Harris sued Phoenix-based Freeport-McMoRan and 19 of its top executives in a shareholder derivative complaint on April 11 in Maricopa County Court.

Freeport-McMoRan in February began laying off many of the 33,000 workers at its giant mine in the Grasberg minerals district in the remote mountains of Papua, Indonesia. It has shut down the mine, for now, though the company has called it its “most significant operating asset,” Harris says in the lawsuit.

Freeport-McMoRan is Indonesia’s largest employer and largest taxpayer, This Week in Asia reported in a Feb. 27 article about the dispute. It produces 91 percent of the Gross Domestic Product of Mimika Regency, the West Papua province containing the Grasberg minerals district, the Voice of America News reported, also on Feb. 27.

Freeport-McMoRan, the world’s largest copper and molybdenum producer, operates throughout the United States, Indonesia, Spain, Chile and Peru. Ninety-three percent of Freeport-McMoRan’s gold and 16 percent of its copper came from the Grasberg district in 2014, Harris says. The copper is, in effect, a byproduct of the gold mining. Copper from the Grasberg mine is extraordinarily valuable, as extracting it costs Freeport-McMoRan just 10 cents a pound, compared with typical costs of 50 to 55 cents a pound, according to VOA News.

Freeport-McMoRan acquired rights to 250,000 acres in the Grasberg minerals district in 1967, from the U.S.-backed military dictator Suharto. That acquisition, under a totalitarian government, lay the seeds for the present dispute.

With Freeport-McMoRan and Indonesia both profiting immensely from the mine, relations had been cordial — until Feb. 12, when Freeport-McMoRan CEO Rich Adkerson had a fiery meeting with Indonesia’s Mines and Energy Minister Ignasius Jonan.

Jonan claims that under an Indonesian law enacted in 2009, Freeport-McMoRan needs a special operating permit to keep the mine open. The law also requires Freeport-McMoRan to build a $2.9 billion smelter, giving Indonesia access to a share of more profits from the refined metals. And it gives Freeport-McMoRan 10 years to divest 51 percent of its shares in the mine, to Indonesian buyers.

This was the deal-breaker for Adkerson, who claims that his company’s contracts with Indonesia do not expire until 2021.

After the confrontational Feb. 12 meeting, Freeport-McMoRan began layoffs at the mine. It also stopped some exports from it to the United States, citing low prices. Freeport-McMoRan also claims that Indonesia cannot even begin negotiating terms of a contract until 2019.

Harris claims that aside from loss of $5.6 billion in share value, Freeport-McMoRan has exposed itself, and its shareholders, to hundreds of millions of dollars more in damages, for violations of state and federal laws, in two countries.

He claims that Freeport-McMoRan have tried to “strong-arm” Indonesian officials into negotiations, “including attempting to bribe non-U.S. government officials,” in violation of the Foreign Corrupt Practices Act.

It is difficult, if not impossible, to find a giant international mining company that never has been accused of violations of labor, environmental and anti-corruption laws, Freeport-McMoRan included. For ethical reasons, Norway divested itself of Freeport-McMoRan stock in 2006 due to reports that tailings from the Grasberg mine polluted more than 11 square miles of rain forest with acid runoff, and that continuing acid runoff from more than 3 billion tons of waste rock over the life of the mine would pollute the area irreversibly.

The New Times reported in 2005 that Freeport-McMoRan had paid Indonesian military and police nearly $20 million for security in and around the mine from 1998 to 2004. Freeport-McMoRan denied the implication that is used police and military to maintain a docile labor force. It said the money went as well to other things, including infrastructure, housing, maintenance and repairs and administrative costs.

Labor strikes closed the mine temporarily in 2011, 2014 and 2015. A years-long independence movement in West Papua complicates the political situation.

Should Freeport-McMoRan agree to sell 51 percent of the shares in the mine to Indonesian buyers, it would not constitute nationalization, unless the buyer was the Indonesian government. But it would be a sort of soft nationalization, and would hand effective control to outsiders — not an attractive prospect for Freeport-McMoRan.

With so much at stake, the question of U.S. national interests also arises. Nationalization or attempted nationalization of land from U.S. corporations led the United States to conduct or encourage military coups and proxy wars in Nicaragua, Honduras, El Salvador, Chile and elsewhere. Fidel Castro’s nationalizations of Cuba’s nickel mines and oil refineries in the early 1960s were a bone in the throat to U.S. corporations and the government for more than 50 years.

As for shareholders’ money, Harris claims that Freeport-McMoRan “made a series of improper statements designed to mislead stockholders into believing that its negotiations with the Indonesian government were processing towards positive results such that an extension of the COW [contract of work] was forthcoming. Unfortunately, these statements were inaccurate.”

Harris claims that many of the “bargaining points” in the failed negotiations violated U.S. and Indonesian laws, and Freeport-McMoRan’s own policies.

“Indonesian news reported extensively on the sordid details of the attempted bribery, Freeport’s conduct became a major scandal in Indonesia,” Harris says in the complaint.

When news of the failed negotiations emerged, including Freeport-McMoRan’s ineffective internal controls and its violations of the Foreign Corrupt Practices Act, the company’s stock plunged more than 55 percent, or $4.90 per share, erasing $5.6 billion in market capitalization, according to the complaint.

Due to the extensive news coverage, Harris says, Indonesia now is less likely or willing to extend the work contract.

Individual defendants include Adkerson, Executive Vice President Kathleen Quirk and Vice President C. Donald Whitmire.

Freeport officials and Harris’ counsel did not respond to requests for comment Friday.

Harris seeks disgorgement, equitable and injunctive relief for breach of fiduciary duty, and costs of suit.

He is represented by Michael McKay with Schneider Wallace Cottrell Konecky Wotkyns of Scottsdale.

Freeport in 2011 ordered to pay $6.8 million to settle claims that it polluted natural resources near the Morenci Mine, Arizona’s largest copper mine.

U.S. Vice-President Mike Pence is scheduled to visit Indonesia this week, from Thursday to Saturday. Indonesian government sources have said he will be asked to discuss the dispute.

Pence is also slated to tour Japan, South Korea and Australia.

Categories / Employment, Securities

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