September 5, 2005

INDONESIA V. NEWMONT

The gold-mining company is accused of poisoning villagers.
Will this be a test case for the country's judicial reform?

By Eric Ellis

RICK NESS HAS A PLATINUM FREQUENT-flier card from Indonesia's national airline, Garuda. That's something many Indonesians would covet. But for Ness, it's a rueful reminder that he may be facing ten years in an Indonesian prison.

Ness, a 55-year-old Minnesota native, is president of the local unit of the world's biggest gold miner, Newmont. Indonesia alleges that he failed to stop massive arsenic and mercury pollution from the tailings of Newmont's now defunct gold mine at Buyat Bay off Sulawesi island. Newmont denies the charges, but Ness and five colleagues spent a month in jail while investigators built their case. Since released, Ness now collects air miles in weekly four- hour shuttles between his Jakarta office and the trial in remote Manado, the closest city to the mine. "I would've much preferred to have got this visiting Bali," says a worried Ness.

The case against Ness and his Denver-based employer was sparked in July last year, when Indonesia's environmental lobby, called WAHLI, claimed that villagers near the mine were being poisoned by contaminated fish caught in Buyat Bay, where Newmont dumped 5.5 million tons of waste containing mercury and arsenic over the mine's eight-year life.

Newmont, which also faces a $125 million civil case over the alleged pollution, admits releasing pollutants into Buyat Bay during the mine's life but says they were monitored, well within contractual terms, and also in line with Indonesian and international mining standards. WAHLI claims 33 tons of poisons were dumped; Newmont claims the total amount of pollutants was no more than what would fit in a soft-drink bottle. As Wall Street and potential foreign investors in Indonesia anxiously look on, Newmont has assembled an expensive team of crisis managers and attorneys to fight the case and the company's "Newmonster" reputation. Respected agencies like the World Health Organization also support what Newmont's chief counsel, Blake Rhodes, says is a "very strong case that we did not harm anyone or pollute those waters."

But Newmont is confronting powerful forces in Indonesia. Environment Minister Rachmat Witoelar is a former secretary-general of Golkar, the party that dominates Indonesia's Parliament. President Susilo Bambang Yudhoyono needs Golkar's support to push through his ambitious reform agenda. Also influential is Witoelar's wife, Erna, an environmental activist and one-time WAHLI chairperson. She insists that she's not anti-mining, as Newmont claims, but tells FORTUNE, "I am against anyone who practices one set of environmental standards in their home country and a very different one in mine."

The case is unfolding against a tricky background: President Yudhoyono's campaign to reform the judicial system. He told FORTUNE a week after taking office last October that he wants Indonesia to be a "normal" country where the rule of law is sacrosanct. That means an end to political interference in Indonesia's notoriously corrupt legal system. Aug. 17 was the country's 60th anniversary as an independent nation, and the President, known to Indonesians as SBY, used his National Day speech to express the "hope that all advocates will be serious about combating corruption, bribery, and other disgraceful practices that damage the prestige of the law and our legal institutions."

The Indonesian lawyers prosecuting Newmont embrace the same rhetoric and say they are determined to set a legal template for foreign investors. Indonesia's deputy attorney general, Prasetyo, says the case "will improve our [legal] image in the eyes of the world." Bambang Widjojanto, the lawyer who prepared the civil case, says, "If companies want to do business in our country, we welcome that, but they cannot use our seas like a toilet."

Newmont also insists it is upholding the rule of law and claims the charges against Ness are false. It moved on Aug. 19 to throw out the criminal case against Ness on legal technicalities, but the five Manado trial judges--there is no jury--won't decide until September, after which the substantive scientific arguments begin. As Ness sat silently in the dock, seething villagers outside the makeshift court protested in sea monster costumes as Sulawesi militiamen and local police kept the uneasy peace.

The evidence in the case is anything but clear-cut. Indonesia's police initially claimed that pollution in Buyat Bay had led to deaths and deformities among the fishing families living near the mine. But the formal indictment claims villagers suffer only "itchiness." The local doctor who first raised health concerns at Buyat Bay has since recanted, and even some of the government's scientific studies are contradictory. Newmont officials say prominent politicians have "sympathized" with them, apologizing that Newmont has been caught in the middle of Indonesia's painful evolution as a democracy after the long Suharto dictatorship.

In a bizarre twist, on Aug. 9, the same Environment Ministry fighting the pollution case against Newmont handed the company a "green award" for another of its mines, in Sumbawa. "We welcome the award, but it makes no sense," says Tom Enos, Newmont's international operations head. "One side of our business in this country is green, while another side in the same country makes Indonesians sick?"

Religion is complicating matters too. Northern Sulawesi is mostly Protestant, but the villagers complaining are Muslims from outside the region squatting on a beach adjacent to the mine. Newmont agrees that management was remiss in not addressing their concerns, as it did in the mostly Protestant settlements nearby, by building roads and hospitals. It is keen to present itself as an exemplary corporate citizen, claiming its 7,000-member Indonesian staff makes it the country's biggest foreign employer of Muslims. Ness himself has lived in Indonesia since 1979, married an Indonesian Muslim, and converted to Islam in the 1990s, twice performing haj, the annual pilgrimage to Mecca.

Government officials privately worry about the signals that Newmont's plight sends abroad. Indonesia desperately needs investment in resources--as a Java-wide electricity brownout the day after National Day suggested--but foreign capital is spooked for the time being. "It certainly gives us pause for thought," says Peter Fanning, chairman of Indonesia's International Business Chamber, the umbrella group for 15 foreign business lobbies. "These situations can destroy business confidence in this country." Investment levels suggest as much. In 1997, $2.6 billion of new foreign investment was made in Indonesian resources. Last year it was just $177 million. Fanning believes Newmont, which was closing the exhausted Buyat mine when the claims flared, was the victim of a last-minute squeeze attempt by powerful local officials. Wall Street is watching closely. Despite booming gold prices, Newmont's shares have dropped from $49.98 last November to $40.13 on Aug. 18.

SBY himself may well feel the heat when he visits New York and London in September on a mission to promote Indonesia Inc. abroad. "That should be an interesting visit," notes Tom Enos drily. Newmont is careful not to threaten to withdraw the $2 billion it has invested in Indonesia. But company officials say "all contingencies are being examined."

Newmont CEO Wayne Murdy says Newmont has "been a victim of a lack of political leadership." He welcomes scrutiny of Newmont's environmental record and says Newmont is determined to win this case. But Murdy's headache, and perhaps that of many foreign investors like him here, is that many influential Indonesians are just as determined to win.