What are big capital gains in Busang mining?

What are big capital gains in Busang mining?

Controversy over the Busang gold mine in Kalimantan has been
going on for some time. Economist Hartoyo Wignjowijoto examines
the issue.

JAKARTA (JP): In a prerecorded CNN interview on Busang Gold
Discovery to be broadcast this evening, I said the high exposure
of the Busang case was fundamentally driven by big money,
obtained from the international capital market. The rest is a
political smokescreen because of the high political exposure of
the gold mine in both Indonesia and Canada.

From an international perspective, when Bre-X announced its
discovery of 57 million ounces of gold in East Kalimantan it
expected a huge capital gain in a short time at a minimum cost.

But gold discovery is only a discovery, not necessarily a
materialized physical gold, salable at a prevailing market price.
This is rather misleading, but unfortunately it is common
practice in any capital market.

International investors have been perplexed and concerned
about the Indonesian government's indirect answer to the Busang
case. They were worried about the declining opportunity to plow
back the capital gain by investing in an emerging gold mining
country.

The worldwide current trend indicates that senior gold mining
companies are now busy acquiring junior gold mining firms like
Bre-X and even merging with the junior company. But they are not
busy digging for gold or in regional economic development.

At the same time, advanced financial technology, such as
hedging, options, derivatives, forward and futures, means the
multinational gold company is able to call the shots to deliver
hard equity cash, provided the political risk is transparent.

In the Busang case, once government intervention is
acknowledged by the market participants, the financial leverage
of the multinational gold company declines and the chance to
obtain capital gain is gone. The core revenue of multinational
gold companies comes not from digging gold, but from capital gain
obtained from the hedging and leveraging exercises by using gold
in the ground.

It is no wonder then that when the Busang case smells of
government intervention, political exposure is targeted as a
black sheep. A black sheep is to blame for the declining interest
of direct foreign investment flows to Indonesia. In fact, what
they are concerned about is the loss of expected capital gain.

The core business of a genuine gold mining company is mining,
not "selling" a gold discovery. Gold mining is a long-term
investment. For example, if the gold mining site is located in a
remote and inaccessible area, it requires heavy infrastructure
investment. Therefore for the benefit of Indonesian regional
economic development, long-term investment in gold mining is
needed by the Indonesian economy.

Unfortunately, government officials who think in the short-
term are currently suffering from a moral hazard. They prefer a
short-term cash benefit, rather than long-term regional economic
development. It is here the domestic political debate over the
last few weeks began. It was suggested that the ownership of
mineral resources and the outcome of gold mining development
should be for the optimum benefit of the people.

It is also unfortunate that such a moral hazard affected
short-term direct foreign investment in gold mining. A junior
mining company like Bre-X, for example, which only discovers
gold, is able to sell its shares at a much higher value called
capital gain. But if Bre-X's partner only has a short-term
mission, Indonesia will hardly be able to become a world-class
gold producer.

I support a long-term multinational gold mining company which
has a clearly defined long-term mission to assist in regional
economic development in Indonesia and environmental management. I
would not support a gold mining multinational company which calls
itself a gold mining company, yet gains its earnings mainly from
"selling" a gold discovery and hedging.

Therefore the Busang case is a political liability for
Indonesia at the moment, because the direct foreign investment
currently involved is short-term.

The government of Indonesia is aware of the present Busang
situation and its domestic political repercussion. A cabinet
meeting last week specifically addressed the issue of mining
development.

Judging from the nature of the Busang problems, for example
huge capital gains for a short-term oriented company and the
morals of a selected few government officials, I make the
following suggestion for all parties, especially the government
of Indonesia.

First, leave Bre-X alone in handling internal matters both
with local partners and prospective partners. Government
official's intervention should be avoided to evade any
international blame in failing to realize huge capital gain.

Second, the "musketeers" from the government should refrain
from intervention in the mining company to avoid Indonesia being
labeled one of the most corrupt countries in the world.

Third, having successfully calmed the domestic political scene
the government should address international direct foreign
investment in gold mining. Indonesia is geologically the most
prospective emerging gold mining country. Indonesia now belongs
to the top ten gold producers and the top ten gold consumers.
But Indonesia should only welcome long-term oriented, genuine
gold mining companies who care about regional economic
development and environmental management.

The writer is senior economist and president of PT Aspecindo
Kreasi consulting company in Jakarta.