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.