October 21, 2002

BLOOD AND GOLD IN INDONESIA

Freeport McMoran CEO James Moffett has a lot to worry about. Someone ambushed a busload of his employees. His stock is down. And the Indonesian government is giving him a hard time

JAMES "Jim Bob" Moffett, CEO of Freeport-McMoran Copper and Gold, has one helluva to-do list:

1. Find out whether soldiers or separatists murdered my staff

2. Keep pesky rebels and meddling local officials away from my gold mine.

3. Convince Wall Street that Freeport isn't Indonesian

4. Convince Indonesia's President Megawati Sukarnoputri that it is.

It's been a bad month for the free-wheeling, Louisiana-born CEO, one of the worst in his 18 years at Freeport's helm. On August 31 gunmen ambushed a busload of employees near the company's Grasberg mine - the world's biggest copper and gold mine - in Indonesia's increasingly restive Papua province on the western half of the island of New Guinea.

Three died, including two American teachers at the U.S-style suburb it built to house mineworkers. The killings sent the company's shares, already shaky with gold prices at decade lows, tumbling nearly 20%.

But after a lightning visit to Grasberg in September, Moffett told analysts that Freeport will exceed third-quarter production and sales targets. As for the violence, he said the company was co-operating with investigators, adding that morale at the mine remained high. "The 16,000 staff are going on with their lives despite the shooting." he said.

The Indonesian military blamed the Free Papua Movement, which has been fighting for independence since the 1960's. But many human rights activists say unruly army units may have planned the killings in order to justify a tougher crackdown on the rebels and to push Freeport to finance enhanced security. Beyond the immediate outrage it provoked, the attack put Freeport's vulnerability in sharp focus.

The company, which has mined in Papua since 1969, opened Grasberg in 1988. The 2.2 square mile gash in the Indonesian jungle is not only the world's most bountiful mine but also one of the most efficient and profitable.

Freeport was the first major foreign investor in Indonesia after General Suharto took power in 1966. But Suharto fell in 1998. Now Moffett's former cordial relations with the dictator are a black mark with the new government. "Jim Bob made the mistake of being far too friendly to Suharto for Megawati's liking," says Denise Leith, an Australian academic who has written about Freeport. That means no more immunity from human rights activists, who claim the company winks at military abuses in Papua, or from environmentalists, who criticize pollution at Grasberg. When activists won a lawsuit against Freeport last year after a dam at Grasberg collapsed, killing four, the government applauded the ruling.

To win hearts and minds in Indonesia, Freeport has emphasized the $9.1 billion in royalties and other contributions it says it has pumped into the country in the past decade. It named Gabrielle McDonald, a U.S human rights jurist, to its board in 1995 and last year appointed Tom Beanal, a vocal critic and Papuan independence activist to the Indonesian subsidiary's board.

But to recover Wall Street's affections, Louisiana-headquartered Freeport has tried to distance itself from Indonesia, arguing that because it produces and sells U.S-dollar-denominated commodities, it is unaffected by Indonesia's economic woes.

Still, with 90% of revenues coming from Indonesia, there's no way Freeport can get away from that country's instability. Some observers worry that Papua could descend into the same type of army-sponsored violence that ravaged East Timor before that territory's break from Indonesia.

Speculation that Moffett will have to merge Freeport with a bigger concern helped push its shares above $20 earlier this year. But Moffett has spent two decades building Freeport into one of the world's mining giants and he's not about to bow out just yet.