“We found too much gold” — Freeport-McMoRan to develop Busang, Bre-X retains 45% interest

The open bidding process had been going on all the time.

Freeport-McMoRan Copper & Gold (FCX-N) will be the developer of the Busang gold project in northeastern Kalimantan, Indonesia, following an agreement reached on Feb. 17 with Bre-X Minerals (BXM-T) and its Indonesian partners.

Bre-X retains a 45% stake in the elephantine gold property it discovered in northeastern Kalimantan, avoiding a deal with Barrick Gold (ABX-T) that would have left it with less than 25%. And Mohammad (“Bob”) Hasan, an Indonesian industrialist and personal friend of Indonesian President Suharto, has emerged as kingpin: a financial group he manages will hold a 20% direct interest and is half-owner of Bre-X’s two Indonesian partners.

The agreement was announced only hours after the deadline passed for Barrick and Bre-X to complete an agreement to develop Busang. Bre-X and a number of potential bidders for the project — Placer Dome (PDG-T), Teck (TEK-T) and Newmont Gold (NGC-N) — had called for an open bidding process for Bre-X’s interest in Busang after the Indonesian government directed Bre-X to strike a deal with Barrick.

Freeport, which owns and operates the Grasberg-Ertsberg copper and gold project in Irian Jaya, gains a 15% interest in the Busang II and III properties, and in return puts up US$400 million of Busang’s US$1.6-billion development budget. Freeport will also arrange financing for the remaining US$1.2 billion, probably through a syndicate led by New York-based Chase Manhattan Bank.

The Indonesian government will hold a direct 10% interest, and Bre-X’s two Indonesian partners retain their holdings — 10% of the main Busang II (Southeast) property for Askatindo Karya Mineral and 10% of the Busang III (Northwest) property for Amsya Lyna. Minorca Resources (MAR-T) still has an option to earn an indirect interest in Busang II from Askatindo.

The Nusantara Ampera Bhakti financial group (Nusamba), which is managed by Hasan and owns 50% of both Askatindo and Amsya Lyna, will have direct ownership of an additional 20% in both properties. Hasan owns 10% of Nusamba, as does Sigit Harjojudanto, Suharto’s son. The remaining 80% is split between three charitable foundations: Supersemar, Dakrab and Dharmais, all of which are headed by Suharto.

It is not clear whether Freeport’s principal shareholder, RTZ-CRA, will have any more than an indirect holding in Busang. According to a Freeport release from October 1996, a joint-venture agreement gives RTZ the option to participate as a 40% partner in Freeport’s “future development projects in Indonesia.” Freeport declined to comment on the possibility that RTZ might buy into the Busang project, and Adriana Vellar of RTZ said the agreement “is solely in Irian Jaya, and solely connected to the Grasberg leases.” The Indonesian government approved the agreement less than a day after it was signed, with Mines and Energy Minister Ida Bagus Sudjana declaring that “the government accepts the proposal put forward by Bre-X and its Indonesian partners,” and that it would shortly grant the application for contracts of work (CoWs) at Busang. Bre-X Vice-president John Felderhof expects the contracts will be signed around the end of March.

Backtracking

The haste to grant the CoWs stands in some contrast to the government’s earlier attitude toward Bre-X. Sixth-generation CoWs had been approved by the Ministry in April 1996 and were subsequently ratified by the country’s legislative assembly, but during negotiations between Bre-X and Barrick in December of that year, Minister Sudjana and Secretary-General Umar Said had suggested that Bre-X might lose its title to the Busang properties unless it reached an agreement with Barrick. The officials later backtracked on their statements, but doubts about the security of Bre-X’s title were never put to rest.

Though the government had clearly backed out of the assurances it gave the company in early 1996, Bre-X executives were philosophical, noting that there is a strong public sentiment in Indonesia that the country, not the discoverer, should reap the benefit of a mineral discovery. “The political reality is that the Busang deposit is of national importance,” said David Walsh, president of Bre-X.

Felderhof agrees: “I think what happened here is that we found too much gold, so therefore it becomes a situation of national interest. If we had found a lot less, this would have never happened.”

The agreement does not cover the Busang I (Central) property, in which Bre-X holds an 80% interest and in which two Indonesian companies, Kreung Gasui and Sungai Atan Perdona, hold 20%. “As it stands now, it is a separate entity,” says Walsh. Both he and Felderhof see the possibility that, in time, the properties may be consolidated.

Meanwhile, Kreung Gasui and its principal shareholder, Jusuf Murukh, have filed suit in Alberta asking the courts to award the company an interest in the other Busang properties. Bre-X’s motion to have the suit dismissed is currently before the court. In response to a question from one analyst during a conferece call on Feb. 19, Walsh said that Bre-X had not indemnified Freeport against possible judgments in Kreung’s action. Freeport officials were not able to comment at presstime.

At the same time as it announced the development deal, Bre-X also released a new resource estimate for the Busang deposit. The proven and probable resource now stands at 432 million tonnes grading 2.5 grams gold per tonne, with an inferred resource estimated at 457 million tonnes grading 2.4 grams.

The contained gold resource in all categories has risen to 71 million oz.

from the 57-million-oz. figure released in early December 1996.

Felderhof said internal company estimates run to 100 million oz., and he sees potential for the figure to double.

Bre-X expects to see the Busang deposit developed as an open-pit mine with initial production of around 100,000 tonnes per day. That rate would be bumped up to 150,000 or 200,000 tonnes, and ultimately Busang would produce 4 million oz. gold each year. The most recent feasibility work by Kilborn SNC Lavalin indicates a cash cost well below earlier estimates of US$96 per oz., and a capital cost near US$1.5 billion.

Current pit designs show a stripping ratio of around 1-to-1, and metallurgical designs envision recovery of 50% of the gold by gravity and the remainder in a carbon-in-leach plant. Total gold recovery is expected to exceed 95%.

Takeover target

Freeport is expected to take over management of the project in about six weeks. Bre-X sees construction starting in 1998 and production in early 2000.

Operations will be directed by a 5-person board, with two representatives nominated by Bre-X, two by the Indonesian interests, and one by Freeport.

Bre-X management is not troubling itself to deny that the company remains a potential takeover target. “The for-sale sign is not on the lawn,” says Walsh, but the president also points out that the company’s share in the Busang project is not subject to any encumbering clauses in the agreement.

Bre-X might seek informal approval for a merger or acquisition: “Out of courtesy and respect to the government . . . we would present [a takeover proposal] to the government ahead of time.”

Placer Dome, which had made a merger offer for Bre-X on Jan. 14, said in a release that it would re-evaluate its offer but did not rule out proceeding with the merger. Other possible suitors include Teck (TEK-T) and Newmont Gold (NGC-N), who had approached Bre-X with earlier development proposals.

Barrick Gold released an announcement that it had informed the Indonesian government that it could not reach an agreement with Bre-X. Calling its offer “fair and equitable to Bre-X and its partners,” the release said that “to go beyond [Barrick’s final offer] in the circumstances would not have been in the best interests of our shareholders.”

At presstime, Bre-X shares were trading at $21.50 on the Toronto Stock Exchange. Barrick shares were at $35.60 and Placer Dome was trading at $29.10. On the New York Stock Exchange, Freeport shares were changing hands at US$33.38.