Business in Indonesia can be fraught, and sovereign risk is rampant.
WHAT goes around comes around.
In a scene redolent of the Vietnam War classic Apocalypse Now, a chopper roared into a jungle clearing near the coast of East Java and set down at the Tujuh Bukit goldmine.
Some men in dark sunnies alighted and ordered the 460 workers to stop work. Intrepid Mines’ expatriate staff were told to find their own way home.
That was Thursday, two weeks ago. When they came off their trading halt, shares in Intrepid Mines, the project’s operator, were promptly cut in half.
Tujuh Bukit is a ”jumbo” project. We are talking 25 million ounces of gold, 80 million ounces of silver and 7 million tonnes of copper. It is shaping up to rival Newmont’s monster Bata Hijau copper/gold mine, and may be a third the size of Freeport-McMoRan’s Grasberg, the biggest gold mine in the world.
The tinderbox issue of sovereign risk flared up on news of the Java evacuation. Investors took the long-handle to any stock exposed to Indonesia.
Intrepid’s partners in Jakarta, a couple called Maya Ambarsari and Reza Nazaruddin, had brought in new investors on the project and were cutting the Australian explorer out of the picture. Having spent $95 million proving up Tujuh Bukit, Intrepid was fuming.
Its chief executive, Brad Gordon, after trying to put out the frantic fires on the shareholder front, flew to Jakarta this week and stitched up a deal with an Indonesian businessman, Suryah Paloh. And what a deal it was. Paloh was issued 5 per cent of the company’s stock, with options over another 10 per cent, because he had ”vast experience in navigating the waters of Indonesian business”.
Effectively, Intrepid announced to the ASX that it had allotted 13 per cent of its shares at a discount to a hitherto unknown Indonesian businessman who might be able to buy influence; even to get them back to the negotiating table with its own partners Maya and Reza.
Incidentally, Paloh owns a TV station and the president of this TV station is Adrianto Machribie, a non-executive director appointed to the Intrepid board last year.
It is desperate stuff and prompts the question: did Intrepid ever have a legal entitlement to the project in the first place?
This was not the first evacuation at Tujuh Bukit, nor the first time Maya and Reza had traded in one set of investors for another. It was a couple of Aussie lads, Paul Willis and Sam Garrett, who first discovered the resource, with some clues from old Placer Dome geological data.
Garrett was the geologist and Willis the entrepreneur. They had a bit of cash. Willis, a funds manager and mate of Andrew Forrest, had plunged fortuitously into Fortescue shares in the early 1990s when they were fetching 5.5¢. Needing a local partner, Garrett and Willis struck a deal with Maya and Reza. Under Indonesian law, foreigners could not legally own shares in Indonesian companies so their private company, IndoAust, had an arrangement with Maya and Reza’s company IMN. IMN held the mining licence, known then as a KP.
As the stunning drill results came through and the project started to hum, Willis and Garrett, went in search of a joint venture partner to fund the thing. In August, 2007, they found Emperor Mines, which was soon to be renamed Intrepid.
By January, 2008, the drilling program had gone so well that Gordon told the stock exchange that Tujuh Bukit was a ”company-maker”. But by March 31, the alliance agreement between IndoAust and the then Emperor Mines had fallen apart, even though it was not disclosed to the ASX at the time.
A dispute between the parties ensued. Intrepid chairman Colin Jackson said this week he was bound by a confidentiality agreement not to talk about the events of 2008, but, whatever transpired, Willis, Garrett and IndoAust were squeezed out of Tujuh Bukit.
In fact, IndoAust and its workers were forced to evacuate the site in April 2008 in the same dramatic fashion as Intrepid two weeks ago.
Sovereign risk is rampant in Indonesia, it would appear. It would also appear that Intrepid has left itself susceptible to severe shareholder angst and even legal action. Its desperate deal this week to buy influence through an Indonesian businessman, to get its hands back on what it has always purported to be its own resource, is a signal that all was not well from the beginning.
The intricacies of Indonesian laws are too much to delve into here. Suffice to say that Intrepid’s predecessors were advised by Jakarta law firms, including a Baker & McKenzie affiliate, that they never had a legal entitlement to the resource.
There is no reason to think that the subsequent 2010 reforms to Indonesia’s investment laws had improved their legal position either. Was the fact that there was no enforceable title to Tujuh Bukit properly disclosed by Intrepid to its shareholders?
There is mention of the legal risks in the prospectus for instance to the company’s $112 million Canadian share issue 18 months ago, an issue followed by director share sales at far higher prices than now.
Whether this disclosure is enough is a moot point, especially for a company that sold its main asset, the Paulsens mine in Western Australia, and relied on this one ”company-maker” to which it never enjoyed formal title.