Bre-X Minerals Ltd. and Political Constraints in Busang

Table of Contents

Introduction
Rules that Govern Foreign Investors in Indonesias Mining Sector
The Process of Making Rules
Gaining Leverage over Indonesian Relationships
David Walshs Response
Conclusion
Work Cited

Introduction

The case study provided establishes various political constraints encountered by David Walsh, the president of Canadas Bre-X Minerals Ltd, a company that was given the opportunity to engage in gold mining in Busang, Indonesia. Bre-X encountered political pressure from Indonesian officials who wanted the government to restrict the foreign company from accessing the Busang site. The relentless political pressure forced Bre-X Minerals Ltd to give both Barrick Gold and the Indonesia government a controlling stake, which resulted in operational constraints and reduced profit margins. In addition to presenting rules that may be vital for foreign investors who wish to venture into the Indonesian mining sector, this paper also discusses the possible mechanisms that Bre-X can adopt to gain leverage over its deals in Indonesia. It also provided the probable response that David Walsh can give regarding Minister Sudjanas declaration.

Rules that Govern Foreign Investors in Indonesias Mining Sector

Under the rule of President Suharto, Indonesia was anxious to venture into foreign mining driven by the need to boost its economy. However, the country imposed intricate and confounded regulations on foreign mining companies to ensure that Indonesia returned significant wealth extracted through mining. Firstly, each foreign firm was required to partner with a local Indonesian firm that would later seek authorization from the Ministry of Mines and Energy (MME) (Bell et al. 4). Particularly, the Kuasa Pertambangan (KP) consent only allowed the partnership to perform the initial sampling and drilling under a defined area (Bell et al. 4).

Secondly, the foreign firm would then apply for a Contract of Work (CoW), which outlined the recommended exploration and mine construction standards, including the targets for the mining production levels. Thirdly, the company would then seek a preliminary exploration permit, which allowed minimal work such as trenching and auguring. It is also prudent to state that a typical mining project took more than three years to move from the exploration phase to the actual mining. In addition, foreign investors may need to know that acquiring the CoW permit is frustrating and complex due to the rigorous political channels.

The Process of Making Rules

The set rules governing foreign mining are formed through the Indonesian regulatory system. The CoW permit is distributed among diverse institutions in Indonesia. The authorization undergoes a hierarchical chain, which includes negotiations between the local and foreign partners with the Director-General of Mines (Bell et al. 4). Further, details are then passed through the MME, who approves the terms before forwarding the CoW to parliament for status voting. Negotiations with MME are lengthy and time-consuming. They also have financial implications for the foreign mining firm. The lengthy process gives the foreign firm time to perform thorough explorations to determine whether the gold residue is sufficient for mining, including whether it can cover all obligatory costs. After the parliament voting according to the contract laws, the final vote on whether to approve the project originates from the president.

Gaining Leverage over Indonesian Relationships

Bre-X Minerals Ltd can implement various strategies to leverage the relationship it shares with the Indonesian government. The MME department should be enthusiastic about collaborating with Bre-X. This administrative unit also needs to ensure that the gold mine project is successful with the aim of enriching its country in return. Further, Bre-Xs financial capability is a driving factor since the ratio of its ordinary shares and that of its debt favor the company. The people in power are significantly geared towards expanding the international market. Consequently, they are open to companies such as Bre-X, among others that venture into their global market with an investment of over one billion US dollars in Busang goldfields (Bell et al. 4). In addition, David Walsh is well versed in international relations. Here, he is advantaged since most politicians in the Indonesia government concentrate on the short-term goal of outdoing competing nations as far as economic growth is concerned.

David Walshs Response

Minister Sudjana summoned David Walsh and issued a harsh announcement that Bre-X was to relinquish 67.5% of Busang stake to Barrick, thereby reducing its shares to 22.5% while the government controlled the remaining 10% (Bell et al. 12). The best response to this announcement would entail engaging in negotiations with both the government and Barrick concerning the appropriate compensation and contractual terms. Agreeing to the set rules implies that Bre-X will have a dismal fraction of its gold discovery. Upon considering the capital spent on the exploration work, pulling out of the Indonesian global market will only cripple the company. Another favorable response may involve increasing the share percentage of the local government. This way, David Walsh will stand a better chance to convince Minister Sudjana that his company is not aimed at dominating the Indonesian gold market, but rather seeks to partner with local people to bring economic growth to the country. Consequently, Bre-X may regain its control of the Busang site.

Conclusion

Differences in the political environment greatly influence global market operations. The Busang case study confirms this claim. It reveals political disparities within the Indonesian government whose impact made it difficult for Bre-X to explore its Busang gold fields. Therefore, it is advisable for any company engaging in global markets to consider whether the government is stable, whether the country operates under dictatorship or democracy, or whether power is bestowed on some few leaders. Companies such as Bre-X should be aware of the prevailing rules while at the time being ready to respond to any criticism from the government.