Case Study: Newmont Mining in Indonesia

Paul Lahti, the director of the Minahas Raya mine for Newmont Mining Corp. in Indonesia, was
both disappointed and relieved about Newmont’s latest decision. Faced with a changing political
and legal landscape, illegal miners, environmental protests, and decreasing gold reserves,
Newmont decided to close the Minahasa Raya mine in 2008.

Newmont Mining, headquartered in Denver, Colorado, is the second biggest gold producer
worldwide. Beginning Indonesian operations in 1996, it now had two mining operations – Batu
Hijau on the island of Sumbawa and Minahasa Raya on the island of Sulawesi. Newmont’s
involvement in Indonesia has been one of frustrations and struggles yet also great success. To
understand its situation in Indonesia, it is necessary to first understand the political history of the
country.

Political History Of Indonesia

Indonesia is the fourth largest country in the world in population, with 210 million people, and
87%of the population is Muslim, making it the largest Muslim country in the world. Indonesia is
an archipelago stretching more than 3,000 miles and comprising 17,000 islands, 6,000 of which
are inhabited. Sixty percent of the population resides on the island of Java, where the capital city
of Jakarta is located. Indonesians fight extreme poverty, with per capita income at $570 and a 15-
20 per cent unemployment rate. For many years prior to World War 2, Indonesia, known as the
Dutch East Indies, was governed under autocratic rule by the Netherlands. During World War 2,
the Japanese invaded the country and took control for the next three years. During this time and
prior to the Japanese invasion, an independence movement by many Indonesian nationalists
began forming. Although surpressed by the ruling government, the main party – the Indonesian
Nationalist Party – was run by Ahmed Sukarno. The Japanese withdrew from the country upon
their surrender to the Allies, and Indonesia claimed independence on August 17, 1945.

Ahmed Sukarno emerged as the country’s first president and quickly established his
authoritarian regime, labelled “Guided Democracy”. In the mid-1960’s, a failed coup begun by
the Indonesian Communist Party (PKI), which Sukarno empathised with, was stamped out by the
national military that was led by the army chief of staff, General Suharto. In an effort to rid the
country of a communist presence, Suharto’s forces killed hundreds of thousands of suspected
communists.

Never able to regain support, Sukarno passed political and military powers to Suharto. Suharto
established his political “New Order” by massing power in the central government and military.
The economy improved dramatically under Suharto’s rule, although corruption filtered through
the military, government and legal system. He was known for using an iron fist to impose his
will on the country’s vast array of religious and ethnic groups.

When the Asian financial crisis of 1997 hit, Indonesia’s flawed economic structure and
corruption sent the country spiralling down-ward. Inflation hit 80% at one point, and the
economy contracted by 14%. Demonstrators turned against ethnic Chinese, and conflicts arose
between Christians and Muslims. Companies owned by ethnic Chinese or foreign companies
using ethnic Chinese in management positions were the targets of demonstrators and incurred
serious property damage. Protesters and rioters demanded Suharto’s resignation and he
eventually gave in after 32 years inpower.

On October 20th, 1999, Abdurrahman Wahid was elected by the Indonesian legislature to be
president, and Megawati Sukarnoputri, the daughter of Sukarno, became vice president. Both
leaders were faced with the daunting tasks of restoring the economy, ridding the country of its
corruption, and trying to establish policies to govern the vast array of religions and ethnicities.
Although known for his political acumen, Wahid was not able to restore the country and avoid
corruption. He was impeached for alleged corruption in April 2001, and Megawati became
Indonesia’s president.

Another political issue facing Indonesia was the independence movement by East Timor, an
island situated between Indonesia and Australia. Since 1975, when Portuguese rule left the
territory, East Timor engaged in a civil war between advocates of integration with Indonesia and
those who wanted an independent nation. After UN intervention, the Indonesian military
withdrew from the territory, and East Timor became an independent nation on May 20th, 2002.

Major Challenges Facing Newport Mining Newmount Mining is faced with

many problems in Indonesia, including a changing political and legal landscape, illegal mining,
environmental protests and declining gold prices and reserves.

Although Suharto caused many problems in Indonesia, his policies helped stabilize the mining
industry. Newmont worked directly with the central government rather than deal with the
different local governments. All this changed once Suharto resigned.

Indonesia’s current leaders have been struggling to grant power and decision-making
responsibilities to the provinces and regions. Wahid was unwilling to use Suharto’s same tough
tactics on local governments, and as a result the central government has lost much of its power to
the regions. This has caused confusion among the business and industry sectors. They don’t
know whether to follow the central or regional government’s laws and policies.

It is not enough that the political spectrum is going through dramatic change; Indonesia’s legal
system is in turmoil too. The corruption of the Suharto era filtered into the courts, making it even
riskier for foreign firms like Newmont to operate. There is a deterioration of the court system,
stemming from the political conflicts between local regulations, parliamentary decrees,
ministerial decisions and presidential orders. Local authorities engage in political and legal
battles with many western multi-national companies like Newmont, because they feel the
contracts drafted in the Suharto era are corrupt and benefit only the multi-national companies.
The abject poverty in most of these regions only fans the flames.

Newmont was hit head-on from the defective court system and local aggression in September
1999, when the local Minahasa district demanded $8.2 million in back pay of taxes for waste
material. Newmont’s contract established with the central government of Suharto, exempted
Newmont from paying any tax on mining waste materials, including topsoil and rock. However,
Minahasa’s local parliament passed a law requiring payment for waste products from local
companies.

After forcing the mine to shut down a number of times, Minahasa’s local courts, under
pressure from Indonesia’s Supreme Court, agreed to settle with Newmont for $500,000, and it
paid another $2.5 million to be added into employee programs and community development
projects. This will help reduce the resentment of the community, which faces extreme poverty
and unemployment.

President Wahid passed new autonomy laws in hopes of solving some of the political and
legal conflict. Some people fear that these laws, which took effect at the beginning of 2001, will
just escalate the problems. The laws are intended to hand more of the central government’s
power to the regions, but neither Wahid nor Megawati have passed any regulations to implement
them.

With the government’s move toward democracy and decentralisation, local groups have found
it the perfect time to demand more from companies operating in their regions. Labour activists,
environmental protesters, and local social groups are demanding that corporations improve their
social responsibility programs if they are to receive popular local acceptance. Under Suharto’s
regime, corporations could turn to the central government to brush aside any uprisings from local
groups. These companies are now finding it necessary to implement social programs, engage in
better labour relations, and meet local environmental regulations.

Local problems have caused Newmont to close down its Minahasa Raya mine several times
for short periods since its opening. In the last quarter of 2000, former landowners blockaded the
entrance to the mine at least three times, demanding more money for the land Newmont now
mines on. Newmont argues that it compensated the landowners fairly when it initially purchased
the land.

Another major difficulty for Newmont is the fact that illegal miners are stealing gold from the
mine. The number of illegal miners has tripled since 1997 because of the large number of
unemployed which the recession has created. In the Minahasa mine alone, there are 3,000 illegal
miners. Mr. Lahti took a creative approach to ridding the mine of illegal miners. He developed
and signed a memorandum of understanding with the local government that Newmont would
give a portion of its mine to the illegal miners if the government cleared them out of the rest of
the mine.

The deal fell through because the government failed to implement its side of the bargain.
Although he lobbied and pleaded with local and national authorities, Mr. Lahti was unable to rid
the mine of the looters.

Ever since the opening of the Minahas mine, Newmont has been under environmental
scrutiny, with mounting evidence of pollution problems. Environment groups claim that the
tailings, or waste material, that Newmont disposes into the ocean contain toxic levels of mercury
and arsenic. Studies have found that the number of fish has drastically decreased in the area and
the health of local people has been affected.
 Because of these studies, the environment minister required Newmont to conduct an
environmental risk assessment and to detoxify its tailings before dumping them in the ocean.
Despite these efforts, environmentalists continue to protest.

Some, however, believe the environmental problems are mainly the result of illegal miners,
who use antiquated mining practices to extract the gold. They also use mercury to separate the
gold from the ore and then dump the waste into rivers. Local officials don’t want to upset the
local miners though. Sam Kindangen, who heads the environmental control office in the North
Sulawesi government, worries about the dangers of illegal mining. But he says, “Under the
reform era, we have to consider the people. We don’t want the people to demonstrate against us.”

On top of all these problems, the price of gold and gold reserves in the mine has been
declining. From February 2000 to March 2001, the price of gold declined 13% and has devalued
a third since 1997. There are only about one-fifth of the reserves of gold left down in the mine.
Once they are gone, the mine will be forced to shut down.

Managers of foreign firms in Indonesia like Mr. Lahti wonder if all the risk involved with
operating in the country is worth it. They have been working with local and national authorities
to change some of the laws and policies governing business in the country, yet there is still much
that needs to be done to reduce the political and legal uncertainty. Mr. Lahti wonders what he
could have done differently to continue operations in the Minahasa Raya. He wonders if
Newmont’s other mines will suffer the same fate Minahasa Raya has, or if things will change for
businesses in Indonesia.

Questions

1. What were the key political problems facing Mr. Lahti and Newmont Mining in
Indonesia?

2. How has the legal situation in Indonesia contributed to Newmont Mining’s

dilemma?
3. What are the environmental dimensions to gold mining in Indonesia, and whose
responsibility is it to protect the environment?
4. Evaluate Mr. Lahti’s approach to solving Newmont’s problems. Could he have done
anything differently?
Summary

NewMont Mining Corp. is the one of the world’ leading gold company, headquartered in
Denver, Colorado. NewMont Mining Corp. began to operate two mines in Indonesia in 1996,
one in Batu Hijau on the island of Sumbawa and Minahasa Raya on the island of Sulawesi.
NewMont Mining faced several environmental challenges in operating mines in Indonesia which
were political-legal instability, illegal mining, environmental complaint, decreasing gold price
and reserve.

Political-Legal Changes in Indonesia

Political-legal environment in Indonesia has been challenging in decades. With Indonesia’s
independence on August 17, 1945, Armed Sukarno became the first president and established
“Guided Democracy.” In the mid-1960’s general Suharto’s Communist Party (PKI) led “New
Order” administration and constructed a strong centralized and military-dominated government.
At this period, Indonesia experienced significant economic growth and industrialization,
dramatically improving health, education and living standards. After the Asian financial crisis of
1997, Abdurrahman Wahid, the founder of the National Awakening Party (PKB), elected
president of Indonesia with the fall of Suharto’s regime. At his presidency, political-legal
environment decentralized and government was not able to restore the Indonesia’s economic
recession and avoided corruption. It caused political uncertainty among the business and industry
sectors. Because of political-legal confusion, foreign firms faced conflicts in operation with local
government’s law and policy and deterioration court system. The local Minahasa district
demanded $8.2 million in back pay of taxes for waste material which under the central
government of Suharto exempted before.

Some national laws on local business activity influence foreign companies, especially in the
areas of health and safety standards. The director of the Minhasa Raya, Mr. Lahti was aware of
the legal systems and had been working with local and national authorities to change some of the
laws and policies governing business in the country and to reduce the political and legal
uncertainty.