Mon, 07 Apr 2008
From: Asia Times
By John Helmer
LONDON - According to the local tourist literature, the clear blue waters off the soft and sandy beaches of the Lembeh Strait in the Molucca Sea have some of the best muck diving (exploration of low-visibility waters) on the planet as home to the colorful Ambon Scorpionfish, the Orangutan Crab and the Hairy Octopus.

The area is also the corporate setting for Australian gold miner Archipelago Resources’ (AR) big investment plans to dig the area’s untapped gold deposits from a camp and mill site just five kilometers from the sea. While some inhabitants of Indonesia’s remote North Sulawesi province would definitely benefit from the multi-million dollar project’s job creation, many more fear the proposed mining operations will spoil the area’s pristine waters and tourism potential - claims which AR has strenuously denied.

A local and international protest movement opposed to the mine

has put off at least one big foreign bank, which has withdrawn its lending to the project. For over a decade, the contentious mining project at Toka Tindung has run into fierce local opposition. More recently the provincial governor, Ministry of Environment and nongovernmental organizations have joined the chorus against the project. AR represents the third international miner to try its luck at extracting the province’s supposedly rich store of untapped gold resources.

The project was first developed by Aurora Gold, an Australian Stock Exchange-listed company that acquired the original contract of work in 1995. By mid-1997, Aurora had completed a feasibility study and was preparing to raise funds for actual gold production when the 1997-98 Asian financial crisis hit and financing dried up.

Aurora sold its interest in Toka Tindung to the well-known Indonesian Tahija family, long the local partner of choice for big foreign miners including Newmont Mining Corp, Newcrest Mining and BHP Billiton. The influential family later joined forces with investors based in Perth, Australia, to form Archipelago Resources. For unclear reasons, Archipelago fails to identify the Indonesian stakeholders in its nominee list of principal shareholders detailed on its website.

Powerful opponent
Who is prominent is North Sulawesi provincial governor Sinyo Harry Sarundajang, the leading opponent of the project, who has done everything in his political power to foil AR’s designs on environmental protection grounds. He has vetoed an environmental permit, known locally as an AMDAL, which AR must obtain before it may receive a formal mining permit. In a February 2007 letter sent to the central government in Jakarta, Sarundajang warned that the project’s pit, tailings and processing were all potentially damaging to the local environment.

Toka Tindung isn't the only foreign-financed mining project in Indonesia to run into opposition on environmental grounds. US-based Newmont Mining Corp, the world's second-largest gold miner, won in court last year against criminal charges that its mining activities in Indonesia had polluted the environment and violated regulatory requirements. Pressure from a wide range of Indonesian political forces, including so-called "resource nationalists", who believe extraction should be reserved for national rather than foreign developers, played a key role in that crippling 21-month criminal trial.

It’s not clear yet that such nationalist forces have aligned themselves against AR’s plans, but the company nonetheless finds itself in a regulatory Catch-22 before digging has even been allowed to commence. Without an official mining permit, it cannot access bank financing for the project. If the mine’s promoters are unable to overcome local resistance and lift the governor’s AMDAL veto, there is a risk that AR may lose altogether its Sulawesi-based assets. AR’s total market capitalization stands at around US$108 million.

Meanwhile AR’s bank syndicate, comprised of South Africa’s Investec, Germany’s WestLB, France’s Societe Generale and Australia’s ANZ, requires that certain conditions be met before loans may be drawn. A syndicate insider told Asia Times Online that no new loans would be forthcoming until the Indonesian government issues the full permits.

Political pressures are mounting against the project from outside of Indonesia at a time Western banks are increasingly sensitive to the reputation risks of lending to environmentally controversial projects. WestLB decided last December not to renew its agreement with AR after German environmental protection organization Urgewald led a high-profile campaign against the project. Certain Indonesia-based nongovernmental organizations have in their opposition identified some of the big banks supporting the project.

Without bank financing, the only way the West Australia-based company can move ahead with its investment plans is through equity-financing. To keep share prices high enough to keep the funds flowing, AR is trying to pump up investor sentiment by reporting that the project is moving ahead - despite local resistance, bureaucratic opposition and legal hurdles.

AR chief executive officer Colin Loosemore recently tried to sell shareholders in London on the need for the company to launch a new share issue. An emergency shareholder meeting to discuss that plan is expected in the coming weeks. Loosemore has claimed that if the company is able to raise enough capital through new shares to construct the mine’s plant, then the Indonesian government had indicated to him it would authorize the permits needed to commence mining activities.

Well-spun shareholders
Investment bankers and fund managers in London have also been led to believe that for the past 12 months management has successfully played the central Indonesian government off against governor Sarundajang and pressed the latter into lifting his AMDAL veto. On March 17, AR issued an announcement to the stock market claiming a breakthrough in the impasse.

The company said that "the Director General of Mineral, Coal and Geothermal [Purnomo Yusgiantoro] on behalf of the Minister of Energy & Mineral Resources, in his capacity as representative of the Government of Indonesia, issued decrees approving development of the Toka Tindung Gold Project". The decrees, the statement claimed, "accept the operating companies revised Environmental Management Plans [AMDALs] and entitlement to re-commence construction activities under the construction phase of the project".

Opponents say that’s an overly optimistic - if not wholly inaccurate - reading of what the government actually agreed to, which stops at the construction of the plant and fails to grant approval for actual mining activities. Loosemore was more explicit in remarks in London, where he said that the construction go-ahead and the environmental and mining AMDAL permits are "inextricably linked". He said the AMDAL will be approved as soon as construction reaches 75% of plan and that receiving it is now "automatic".

If so, it represents a sharp turn from previous government positions. In June 2007, Environmental Minister Witoelar told reporters that his ministry would not issue a license to the project due to opposition from the local government, parliament and people near the intended mining site. He was at the time backed by statements from the central ministries of fisheries, and of social affairs. In July 2007 Governor Sarundajang publicly declared that he wanted sustainable and eco-friendly development for the island and that AR’s plans would mean waste dumps on land and contamination of inland and sea water.

Sources at Indonesia’s environment ministry in Jakarta who requested anonymity say that its minister, Rachmat Witoelar, was infuriated by a decision by a mid-level official at the energy and mineral resources ministry to issue the construction go-ahead and by the subsequent upbeat spin Loosemore put on the development during recent presentations in London.

Indonesian sources say it is legally impossible for the Ministry of Energy and Mineral Resources to influence - let alone force - the environment ministry to issue an AMDAL and that the latter won’t consider doing so until and unless North Sulawesi’s governor lifts his veto on the project. Witoelar and his advisor, Arif Yuwono, did not respond to Asia Times Online questions sent by telephone and e-mail.

Other ministry officials who spoke on condition of anonymity contend that AR's announcements have put the cart before the horse in that construction will not be permitted at Toka Tindung until the AMDAL is issued - and not vice versa. Witoelar has also made public his refusal to countenance any support for AR's permits unless the North Sulawesi governor agrees first.

Investors appear to be taking a doubtful view of AR's claims of a breakthrough. AR's London-listed and highly volatile shares have tumbled about 18% from their 52-week high of 35.25 pounds, touched on March 18, the day after AR issued its stock market announcement. The shares are still up 45% from the December 6 low of 20 pounds and at 29 pounds on Wednesday are now trading in the same range as this time last year.

Environmental enemies
Environmental groups, meanwhile, are becoming more vocal in their opposition to the project. Local environmental group Friends of Lembeh has published reports accusing the Australian company of threatening environmental damage and misleading local public opinion. Open pit mines are known to eat away at forests, emit heavy exhaust fumes from excavators and generate noise pollution through dynamite blasts. There is also the risk that tailings and cyanide-leeching dams will flow into the water-table and sea.

As designed, the Toka Tindung project will be 200 meters above sea level, and slopes down to the seashore where locals aim to develop a national resort zone for tourism. Several developers have started building resorts and grooming beaches hoping to attract tourists away from nearby Bali. Other critics contend that Loosemore’s attempt to go around the provincial governor and environment ministry, by dealing instead with the energy and mineral resources ministry, might trigger legal sanctions.

Indonesia’s 1998 Environment Law allows for fines, loss of business licenses and possible imprisonment for violations of AMDAL requirements. If the new plant construction causes or is perceived to cause environmental damage, the governor would have the power, and may have grounds, to file criminal and civil charges against AR, its executives, as well as its Indonesian partner companies, they note.

On March 6, AR issued a statement denying that its proposed activities at Toka Tindung pose any environmental risks, claiming the project "meets World Bank standards [and] does not believe there is a negative perception of the project within the local community". AR also claims to have modified its original mine plan to eliminate a proposed dumping of tailings at sea - although this modification has not been acknowledged by sources contacted at the environment ministry in Jakarta.

What AR’s alternately upbeat and defensive statements clearly fail to acknowledge is that AR’s original bank syndicate has refused to disburse any new loans until the AMDAL conflict is resolved. Loosemore has reportedly told associates that reports of WestLB's withdrawal from the syndicate are "false" and that the project financing is being handled by WestLB's Australian mining arm.

At its Dusseldorf, Germany, headquarters, WestLB denied those alleged claims and reaffirmed its December 21 statement that it had withdrawn from the project by not renewing its financing agreement with AR. Now the only viable way for AR to fund its construction scheme will be through a new share issue - which, with a declining share price, would appear to be poorly timed.

If all had gone well, AR would have started production in 2007 and begun to reap the gains of spiking global gold prices. Instead, the once-promising project appears headed for the same legal and environmental troubles that have recently bogged down other foreign-invested mining ventures in Indonesia. Because Archipelago has been unable to start production in the time period required by its two contracts of work, which implement the licenses, cancellation of contracts and mining rights, its contract is now under administrative review. AR does not readily acknowledge the revocation risk in its presentations and reports.

The company’s last annual report, from 2006 and issued in June 2007, acknowledged the AMDAL obstacles but noted that "there is no basis in fact for concerns raised." Still AR has apparently hedged the possibility that Toka Tindung may be lost through a proposal to shareholders to spin off its non-precious metal assets into a separately listed vehicle, Archipelago Metals.

Another hint that AR’s management may try to make a virtue of necessity and prepare to refocus company assets elsewhere came in the same annual report in the suggestion that AR is already gearing up in Vietnam and the Philippines for alternative gold projects.

Local newspapers from Sulawesi have been splashed with photographs and reports of demonstrations against Toka Tindung - and more demonstrations are apparently expected. If governor Sarundajang intervenes to limit the protests by halting the project’s construction, Loosemore's divide-and-rule bluff will be called. And if that happens, AR’s troubles could turn out to be as unstoppable as the tides rolling in from the Molucca Sea.

John Helmer, currently a Moscow-based reporter, was at one time a member of the Priorities Review Staff in Canberra which advised the Australian Prime Minister on economic and political strategy relating to Indonesia.

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