Indonesia's gold standard
By Gary LaMoshi

DENPASAR, Bali - Stock-market justice came swiftly for Freeport-McMoRan after an ambush last Saturday on a convoy from its complex in Indonesia's Papua province that left three dead and 10 wounded. Two of the dead and eight of the wounded were expatriate contractors for the giant PT Freeport Indonesia (PTFI) Grasberg mine. Indonesian justice works less quickly and surely.

Within hours of the attack, Freeport issued a statement to "deplore this senseless act of violence". When US investors returned from their long Labor Day weekend on Tuesday, Freeport greeted them with a conference call to update analysts on the incident, and emphasize, as it had in two previous statements, that Grasberg operations were unaffected by the violence.

"Morale is high," Freeport chairman and chief executive James R Moffett told analysts. "The hundreds of thousands of people who are committed to this project all over Indonesia are not going to let a handful of people impact our project." The mining giant came to the call armed with updated production figures showing it was on track to meet third-quarter targets of 155 million kilograms of copper and 635,000 ounces of gold, including output from the days following the attack, illustrating what Moffett termed the "tenacity" of the PTFI operation.

Moffett, whom just about everybody calls Jim-Bob, characterized the attacker as trying to make a "statement". PTFI has been criticized for its human-rights and environmental practices in Papua (formerly known as Irian Jaya), and the mine generates tens of millions of dollars a year for the Indonesian government, a 10 percent partner in PTFI. (In the aftermath of the ambush, the Jakarta Post wrote: "The Freeport gold mine has become a symbol of Indonesia's economic exploitation of Papua, not to mention environmental degradation of the remote province.")

But under questioning from Goldman Sachs analyst Daniel McConvey, Moffett refused to speculate on who might have made the statement, or answer another question about what the intended statement might be.

When McConvey hung up from the call, he issued a downgrade on Freeport shares, citing heightened political risk, while acknowledging the lack of any fundamental impact on mining operations, assuming the attack was an isolated incident. (His downgrade was based mainly on potential buyers becoming skittish because of the attack, a trend that could also be attributed to a Goldman Sachs analyst's downgrade; we'll discuss that chicken-and-egg in a future article.) In trading on Tuesday, while most gold stocks found favor amid Wall Street's biggest dive since the September 11 tragedy, Freeport shares dropped more than 10 percent, and took another 3 percent hit in a mixed market on Wednesday, before a small bounce in Thursday's trading.

McConvey's report added that, if there were further attacks or, reading between Moffett's lines, "if the event turned out to have military involvement, we would likely become more cautious on the stock".

While Papua, the western half of the island of New Guinea, does have violent (and non-violent) independence movements that sporadically launch guerrilla operations, the last civilian casualties came during a series of 1996 kidnappings that left four Indonesians dead. The movements had never killed foreigners. After last weekend's attack, the military immediately went after an obscure faction of the Organisasi Papua Merdeka (Free Papua Organization, or OPM) led by Kelly Kwalik that was responsible for the 1996 kidnappings. Far from making a statement, Kwalik's faction denied involvement in the attack. Investigators from the National Police, whose members sometimes stage gun battles with the military over rent-seeking opportunities or whose turn it is at the gasoline pump, waited until Wednesday to agree with the military that a splinter OPM faction was to blame. Last year's unsolved murder of independence leader Theys Hiyo Eluway has also been linked to OPM splinter factions. You'll be forgiven for thinking you've learned the Bahasa Indonesia term for "round up the usual suspects".

One of the problems for investors, and everybody else, in post-Suharto Indonesia is figuring out who are the good guys and who are the bad guys. When violence breaks out in Indonesia - the 1998 anti-Chinese riots, the militia bloodbath in East Timor, the 2000 bombing of the Jakarta Stock Exchange hours before ex-president Suharto was due in court (he called in sick), Christmas Eve 2000 church bombings across the archipelago, four years of religious warfare in Ambon and the newer version in central Sulawesi - suspicion falls on security forces.

While soldiers sometimes deflect the blame to others, they're also not above smirking and daring civilians to do something about it. An East Timor human-rights tribunal that found the former governor guilty of failing to stop pro-integrasi militia violence, but last month acquitted the military defendants, who had top brass in the gallery for moral support. As politicians squabble, the economy limps along without meaningful recovery from the regional crisis five years past, and the splintered forces of reformasi offer no champion and no program, the military remains Indonesia's only powerful national institution. Its vast business holdings, which finance a majority of the military budget and make officers rich, also make it independent of civilian control. While an attack on Freeport personnel makes no sense from a big-picture perspective, a small personnel incident or a demonstration of the need for increasing security could be reasons for an attack. That's wild speculation, but when it comes to violence in Indonesia, that becomes fair game in the absence of official credibility.

The police announcement of OPM as the suspected perpetrator came the same day as a court handed down its verdict against House of Representatives Speaker and (Suharto's) Golkar Party chairman, Akbar Tanjung (see Akbar verdict: A glimmer of light, September 5). The judges agreed with prosecutors that Akbar conspired to steal Rp40 billion rupiah (US$4.5 million) earmarked to buy food for the poor and sentenced him to three years in prison. As with the Tommy Suharto murder conviction, the verdict left reformers outraged rather than pleased (see Tommy's embrace of Islam, August 7).

In the Akbar case prosecutors had asked for four years, for a crime with a maximum sentence of 20 years. Akbar immediately pledged to appeal the verdict and keep his job, following the trail shamelessly blazed by Indonesia's central bank governor Sjahril Sabirin. Sabirin refused to resign after a corruption conviction. An appeals panel declared him innocent of all charges, and he governs still. Legal observers cite prosecutors' failure to trace the money trail in the Akbar trail (after the indictment was handed down, a co-defendant returned the Rp40 million to the government) as a key weakness in the case and possible grounds to challenge the verdict. Few expect Akbar to spend time behind bars.

The Freeport ambush is a reminder for foreign investors - including thousands of Freeport stock owners who can't spell "Papua" - that risks abound in Indonesia. The Grasberg mine is an apt metaphor for how the game is played is Indonesia: the powerful get the gold, and everyone else gets the shaft.

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