Can someone please help me answer the question for the Freeport case below?
The Harvard case is below.
Describe a comprehensive stakeholder management strategy for Freeport as it moves forward with implementation of its ambitious new underground mine plan talk about the tradeoffs inherent to key components of your preferred strategy.
Freeport Indonesia
James Robert (Jim Bob) Moffett looked down through the windows of his 757 as it made its final approach to the airfield at Timika. Off to one side he could see the clouds that obscured the Grasberg (Dutch for "Grass Mountain"), and behind that Mt. Jaya, the highest point between the Andes and the Himalayas. In the plane's immediate path below lay deep, green rain forest, except for an ugly swath of gray defoliation along the Ajkwa River.
Jim Bob thought about his company's monumental efforts to develop one of the world's largest copper and gold mines here in the heart of Irian Jaya, New Guinea. In 1995, PT Freeport Indonesia, the mining subsidiary of Freeport McMoRan Copper and Gold, processed a record 110,000 tons of ore per day at its world-class, open-pit mine at the Grasberg. The ore, with an average grade of 1.17% copper, plus 1.18 grams of gold and 3.77 grams of silver per metric ton, yielded more than 985 million pounds of copper, 1.35 million ounces of gold, and more than 1.9 million ounces of silver This, in turn, generated $1.8 billion in revenues and a net income of just over $199 million.
But Jim Bob also thought about all the criticism Freeport-McMoRan had received in the press for the environmental and socio-cultural issues this project raised. There were problems with acidic overburden, problems with tailings deposition, and problems with the impact on the Komoros and Amungme people who lived in the vicinity of his mine. In late 1994, a group of Irian Jayan separatists, demonstrating at Freeport's mine, were arrested by the military; four were, in fact, killed. The U.S. government-owned Overseas Private Investment Corporation (OPIC) had recently revoked Freeport's $100 million insurance policy due to alleged "substantial adverse environmental impacts."1 The Walhi—Indonesia's Forum for the Environment—was continuing its attack on Freeport, with support from the International Rivers Network and other American nongovernmental organizations (NGOs).
As his plane touched down, Jim Bob wondered whether Freeport could ever look forward to acceptance by reasonable environmentalists of its efforts to mitigate its environmental impact and eventually "encourage sustainable development."2 And he wasn't sure how environmental groups would react if Freeport announced plans to expand the mine to as much as 250,000 tons of ore per day.
Irian Jaya
Irian Jaya is the western half of the island of New Guinea—several hundred miles north of Australia and 2,100 miles east of Jakarta, the capital of Indonesia. Its highest point, a glaciated peak of 5,029 meters, was discovered in 1623 by the Dutch navigator, Jan Carstensz. The territory was turned over to Indonesia in 1963, and renamed (formerly Irian Barat) by President Soeharto in 1973.
Irian Jaya was first populated by Melanesians at least 40,000 years ago. In 1996 some 250 tribes, each with a different dialect, lived in small villages much as they always had. They fished, gathered sago, raised pigs and sweet potatoes, and engaged in production of traditional goods. The two major ethnic groups in the vicinity of Freeport's mine were the Komoros, a coastal people, and the Amungme, an uplands tribe. Most of the population of Irian Jaya—about 1.6 million—lived in coastal villages and towns, the largest of which was Jayapura, the provincial capital.
The topography of Irian Jaya consisted of coastal lowlands, the alluvial plateau, and a rugged mountain system extending across New Guinea from northwest to southeast. Fourteen million years ago, the Pacific and Indo-Australian crustal plates collided to uplift these very steep mountains. In a distance of less than 125 kilometers the mountains rise from sea level to 5,000 meters. Temperatures vary from night-time freezing in the mountains to daytime heat of 90 degrees in the coastal swamps. The steep slopes and heavy rainfall (300 inches annually), together with landslides and earthquakes, resulted in a fast flowing and unstable river system. The rivers flowing down from the mountains to the sea—the Mawati, Otomona, Kopi, and Ajkwa—were heavily silted, fast flowing, and frequently flooding watercourses.
The flora of Irian Jaya were exceedingly diverse—ranging from the coastal swamps to sparse grasses of the Alpine region near the mine. Mangrove swamps occupied a zone of 5 to 15 kilometers along the coast of Irian Jaya (see
Figure A
and
Exhibit 1). Trees exceeding 35 meters provided an open understory in brackish water. The next 20 or so kilometers, to an elevation of about 200 meters, formed a zone of freshwater swamp characterized by deciduous hardwoods. A huge number of trees and other herbaceous species were dominated by the sago palm, the pulpy center of which was the principal food of the Komoros and other coastal people. On the northern edge of this zone stood the town of Timika (population about 25,000), together with the airport and Freeport's new town (Kuala Kencana).
Lowland evergreen rainforest occupied another 20 kilometer strip with as many as 1,200 species of trees forming a 45-meter canopy. Vines, ferns, herbs, orchids, and mosses proliferated in this low- light, high-humidity environment. Lower montane rainforest, rising from 500 to 3,000 meters altitude, formed the widest strip of perhaps 30 kilometers. This region of steep mountainous slopes and valleys was also diverse rainforest, with scattered palms and a high canopy. The upper montane rainforest formed a narrow strip at an elevation of 2,600 to 3,800 meters. Smaller trees gave way to bushes, rhododendron, mosses, orchids, and ferns forming a thick undergrowth along high ridges and steep valleys. A thin zone of subalpine rainforest prevailed in the next 400-500 meters of elevation, giving way to the alpine zone which supported mosses, sedges, low herbs and shrubs, and a wide mixture of meadow plants and flowers, up to 4,600 meters.
The fauna of Irian Jaya were nearly as diverse as the flora. There were 174 species of terrestrial mammals, primarily marsupials, rodents, and bats. Among the most unusual were several species of echidnas, bandicoots, kangaroos, and wallabies. Of New Guinea's immense bird population, 643 species had been recorded in Irian Jaya, including greater and lesser birds of paradise, the crowned pigeon, many types of parrots, and the huge, flightless cassowary. Some 238 species of reptiles included two species of crocodiles, the world's largest monitor lizard, and such snakes as the notorious death adder. Amphibians, fish, and some 100,000 species of insects also populated the jungles and waterways of Irian Jaya. Ecologists believed that Irian Jaya was among the most richly speciated regions on earth.
Mine Development
On December 5, 1936, after 57 days of fighting jungle, swamps, and malaria, a Dutch explorer named Jean-Jacques Dozy, in the employ of the Shell Oil Company, finally reached the high point of the Carstensz Massif. Twenty-three years later, relaxing in his apartment in the Hague, Dozy retold his adventure to a man named Forbes Wilson, who was a geologist with Freeport. Wilson had recently read an obscure report by Dozy that mentioned his discovery of the Ertsberg—a 600-foot- high outcropping of copper-rich ore in the valley adjacent to Mt. Jaya.
Wilson convinced Freeport to mount an exploratory expedition. Several months later Wilson arrived at Omowka, a village on the south coast of Irian Jaya. From there he set off with five other foreigners and 44 local paddlers in a 14-canoe fleet up the Mawati River. Seventeen days later, after unbelievable paddling, trekking, and climbing in nearly continuous soaking downpours, Wilson and what was left of his party—those who had not returned to Omowka tired or sick—reached the Ertsberg, in sight of Mt. Jaya. The following day Wilson began his survey. The Ertsberg ore deposit turned out to extend 1,181 feet below the surface. Its 30 million tons contained 40% iron, 3% copper, and significant amounts of gold and silver.3
Financing problems and revolution in Indonesia prevented any mine development for several years. Finally, though, in 1966, General Soeharto's new government in Indonesia signed a draft contract of work with Freeport and passed a new Foreign Investment Law. P.T. Freeport Indonesia (PTFl) received a 30-year contract to develop a 10-kilometer area around Ertsberg (ore mountain). The next five years were spent building access roads and tunnels through dense jungle over precipitous terrain, and conveyors, aerial trams, an extraction mill, a port, and the towns necessary to support mining personnel. At 2,062 meters, PTFI built a townsite named Tembagapura (Coppertown), where miners and managers would live. Near Timika, a village located at 34 miles inland, Freeport built an airport large enough for commercial jets, and later, a luxury hotel operated by Sheraton. A smaller port village at Amamapare was developed to load ore and off-load all incoming materials. A barge unloading facility was developed at mile 11, and equipment and maintenance sites were established elsewhere, as needed (see
Exhibit 2). President Soeharto dedicated the project in March 1973, and in July it became operational.
Between 1968 and 1988, six discoveries of ore were added to the Ertsberg reserves (see
Exhibits 3
and
4), and mining was commenced at two of these, Ertsberg East and the Deep Ore Zone (DOZ), which were underground mines. By the end of 1988 the company was producing nearly 25,000 tons of ore per day, yielding 300 million pounds of copper, 139,000 ounces of gold, and 1.9 million ounces of silver. This ore generated annual revenue of more than $300 million.4
By 1988, as the Ertsberg deposit was nearly played out, PTFI's exploration program had yet to deliver any large new discoveries. About two kilometers away, however, stood the Grasberg (grass mountain)—an intrusion about 2.5 kilometers in diameter and surrounded by jagged limestone peaks. Twice during the 1970s, Freeport geologists had reconnoitered it, but found little evidence of copper. Sampling in 1987 had revealed some gold and copper in minerals exposed on the lower eastern edge. In 1988, after geologist Dave Potter delivered "cores that King Midas would be proud of," Jim Bob Moffett, himself a geologist, ordered a thorough drilling of the Grasberg.5 Copper ore, rich in gold and silver, was proven and eventually tested down 2,900 meters [see
Figure B]. This reserve, as of January 1996, was estimated at 1.9 billion tons.
In 1989, a feasibility study for producing 52,000 tons of ore per day (tpd) was completed, and project financing was secured. Further expansions to 90,000 tpd in 1992, and then 115,000 tpd in 1993, would require a capital commitment of about $1.5 billion. The government of Indonesia expanded PTFI's exploration permit to six million acres, and renegotiated the Contract of Work for 30 years (with two 10-year extensions).
The initial work entailed removing overburden by blasting, and then developing 20-foot-high "starter benches." While smaller bulldozers and loaders were used early on, by 1990 large equipment began to arrive at the job site. Despite the fact that it could lift a truck trailer load, the aerial tramway was simply too small for the job. A Heavy Equipment Access Trail (HEAT) road was constructed at a 40 degree angle from the extraction mill (at 2,800 meters) up 800 meters to the ridge camp 600 meters below the base of the mine. Equipment was loaded in pieces on huge sleds, and then dragged up the HEAT road by two huge Caterpillar bulldozers—one pushing and one pulling. By 1995, the Grasberg mining fleet included 12 huge shovels (with scoops as large as 42 cubic meters), dozens of bulldozers, graders, and 80 huge trucks, some as large as 218 tons.6
Freeport's ore flow system had a capacity of 10,000 tons/hour. At the mine, two gyratory crushers pulverized the ore to under several inches in diameter, where it moved on conveyers, and fell 505 meters through an underground ore pass, to a stockpile at the extraction mill. From there, it was conveyed to the crushing mill—a huge, ball mill/crusher built by Siemens. The ore, ground almost to powder, was fed to parallel banks of 12 flotation cells. Chemicals were added to generate a froth. After stirring, a bubbly concentrate of about 33% copper was removed. This concentrate was thickened (to about 60% solid) and sent by pipeline to portsite. About 4,000 tons per day of concentrate were dried and loaded onto ships for transport to smelters, including the RTM smelter at Huelva, Spain, that Freeport had recently purchased.
Freeport's Environmental Issues
Even before its most recent increase in production volume, Freeport's mine at Irian Jaya posed several environmental issues that attracted considerable attention. Most significant among these were (1) effects on the glaciers; (2) overburden storage; (3) tailings; water quality and deposition; and (4) the effects on the culture of local peoples.
Mount Jaya Glaciers
Mt. Jaya had five small glaciers, which in 1972 amounted to 6.9 square kilometers of ice. The two principal bodies were the Meren Glacier and the Carstensz Glacier—each about 80 meters thick. Warm humid air rising from the lowlands brought daily rains to the mountains (five meters per year), providing the snow and ice that made up the glaciers.8 During the last ice age, Mt. Jaya' s glaciers extended 17 kilometers further than present. Since then, they have several times disappeared altogether, and re-formed. Photographs taken in 1936, 1972, and 1990 showed them clearly in retreat again.
Over the past decade environmental interests suggested that PTFI's mining activities—heat, blasting, and dirt—were causing the shrinkage of these glaciers. Moreover, commonly observed black spots on the glacial snouts were attributed to diesel smoke and dust created by PTFI's operations. Originally, the glaciers were inside PTFI's contract for work, and people thought PTFl planned to mine beneath them. Computer models using historical data, photographs, and morainal debris all suggested that the recent recession began 120 to 150 years ago, and was similar to recession of glaciers through New Guinea and the tropics generally. After studying the glacial environment, however, Dr. Alex Wilson of the University of Arizona concluded that "the recession of the Mt. Jaya glaciers is being caused by global warming and is completely unrelated to the operations of PTFI."9 He added that the related appearance of dirt and soot was actually algae communities, which developed in part because the ice was so clean.10 The glaciers are now part of the Lorentz Nature Reserve.
Overburden Storage
The Grasberg mining operation was so large that an immense amount of rock from above the ore—some 2.8 billion tons of overburden—had to be dug and safely stored. When the mine was expanded, Freeport hired Dames & Moore, an environmental engineering firm, to investigate overburden storage issues and prepare preliminary designs for storage sites. Dames & Moore developed a plan to store 2.4 billion tons over 30 years, with a stated margin of safety, barring earthquakes or sliding due to weak compressible soils. Four valley locations were planned for storage—Carstenszweide, North Grasberg, West Grasberg, and Wanagon (see
Exhibit 5).
According to this plan, overburden would be deposited in layers 100 meters thick, separated by berms 100 meters wide. Although such storage changed local topography and destroyed vegetation, it maximized stability and provided adequate drainage.11
In the view of John Macken, the mine's general manager, overburden storage was the biggest environmental problem—in the short term.12 The difficulty was acid drainage from sulfides in the overburden. PTFI had taken 143 samples of overburden to determine its likelihood for acidification. Some of the samples did indeed show acid rock drainage.13 Wanagon Lake, next to one of the storage sites, registered a pH as low as 4—acidity strong enough to kill any plants were it to be released from the lake.
To deal with this, the company had developed short-term, medium-term, and long-term plans. Freeport was currently putting lime into the east stream of West Grasberg to neutralize the low pH coming out of the overburden. That should raise the pH of Lake Wanagon to 7.0 by March 1996, and keep it there, to prevent any acid mine drainage. Next, the company was also driving a tunnel (3.5 kilometers) under Lake Wanagon and would bore up under the east stream to collect the runoff water. It would be brought to the mill for treatment to recover dissolved copper and used as feedstock for mill production. In the long term (after 2002), limestone would become available in huge quantities as part of the overburden to neutralize any acidity.14
On slope stability, there was a chance that an overburden stockpile could slide, due to weak foundation soils, saturated foundation conditions or, more likely, an earthquake. The company's mining engineers felt that "all available technologies [should] be utilized, if economically feasible and effective, to maximize the long-term stability of the OBS (overburden storage) system.15 Although the stockpile was designed to withstand severe earthquakes, even under high rainfall conditions, there was a risk which the company (and consultants) felt was "acceptable."16Tailings Deposition
Deposition of tailings, the waste ore after extraction, was a serious and certainly the most visible environmental problem facing Freeport. About 115,000 tons of finely ground rock were discharged from the extraction mill every day. These tailings, together with effluent water from the extraction mill, flowed into the Aghawagon and the Otomona Rivers, which merged with the Ajkwa River further down the mountain. From there, the river carried tailings to the lowlands, and then lost speed as the topography flattened out. In the freshwater swamp area below Timika, the Ajkwa overflowed its low banks in a sheetflow and deposited the tailings as it meandered back and forth, shifting its flow as the tailings filled in vast stretches of riverbed.
The very process of mining inevitably created a tailings problem; there was simply no way to avoid it. The environmental problem had two components: water quality and the effects of tailings deposits on flora and fauna.
The physical extraction process used by Freeport did not, according to company managers, change the rock chemically. The solvents that were added to help flotation evaporated before the river flowed very far, and were undetectable in the lowlands. Although the river carried an immense amount of tailings (115,000 tons per day), they were chemically similar to natural sedimentation, albeit ground somewhat finer. And as a fast-flowing mountain river, the Ajkwa carried a huge volume of natural sedimentation, even in the absence of mining.
To deal with water quality, PTFl had undertaken a Long-Term Environmental Monitoring Program (LTEMP) to measure the mine's effects on water. The LTEMP monitored 30 physical and chemical aspects of water quality at 25 locations through the work area on the Aghawagon, Otomona, Kopi, Ajkwa, and Minajerwi Rivers. Sampling stations were located from the high mountains to near-shore marine environments. Water samples were collected monthly, and then tested in Freeport's new environmental laboratory adjacent to the airport. These samples were compared to samples collected from waters unaffected by Freeport operations on the Mawati and Kamora Rivers.
Exhibit 6
shows Freeport's monitoring results for metals, as they compared to Indonesia's water quality and drinking-water standards. The tailings, Bruce Marsh wrote categorically, "are not toxic under any technical, scientific or legal definition."17 The metals contained in the tailings were tightly bound in the rock matrix and were not readily bioavailable. Tests show the tailings not to be toxic to fish and shrimp species. Likewise, tissue from plants that were grown on tailings soils and fish taken directly from the Ajkwa River meet Indonesian and international health standards.
Dissolved arsenic, lead, mercury and other potentially dangerous metals showed concentrations near detection limits with modern equipment. Freeport had only recently gotten its laboratory on line, and acknowledged the need to do more work on accumulation of minerals, particularly in the liver and kidneys of animals.18 Dissolved heavy metals—copper and manganese—were somewhat higher in tailings drainage than naturally, but still below threshold values for drinking water. Likewise, analysis of groundwater samples near Timika did not detect any toxic compounds.19
In addition to measuring water quality, PTFI developed a system of meteorological and hydrological monitoring along the river systems in its operating area. These computerized stations continuously recorded data on temperature, humidity, and flow rates. Samples of aquatic biota were collected quarterly at 10 strategic locations on the Ajkwa, Minajerwi and Kamora rivers. These collections represented 8 orders, 33 families, 47 genera, and 62 species of fish. PTFI's official conclusions were as follows: Data from this and past studies indicate that the presence of mill tailings in the estuarine systems have no significant adverse effects on the aquatic biological community structure. Differences for species richness and diversity among sample locations that receive mill tailings and those sites that do not receive mill tailings are under study to identify trends and develop a more detailed data base.20
In its environmental-impact study, Dames & Moore had confirmed the relative safety of the mine's tailings, but environmentalists complained that Dames & Moore had a conflict of interest (because of their earlier overburden study). Why, they asked, couldn't independent environmentalist take samplings of the Ajikwa River?
The effect of tailings deposition on freshwater swamp forest was a more serious problem for Freeport. It had been a problem ever since the mine opened, but was exacerbated severely by the recent expansion of output. Freeport engaged Golder Associates, an international engineering- consulting firm headquartered in Atlanta, Georgia, to study its tailings problem, review all the possible options, and recommend a solution. Golder worked with Crescent Technology and several other firms to accomplish its work.
As the Golder report explained,
The planned mine expansion scheduled for mid-1995 will increase mill tailings production to 115,000 tonnes per day. . . . This rate may be further expanded to 176,000 tonnes per day for an ore reserve increase to 1.5 billion tonnes and a 23.5-year mine life. . . .
The Ajkwa River transported the tailings to the sea until mid-1990 when, as a result of a severe storm with high winds, many trees were washed down to the lower Ajkwa River, forming a massive logjam. As a result, the river became blocked and overflowed its natural banks, and levees had to be constructed and subsequently raised to divert the river and flood waters. With this diversion, the Ajkwa River has developed a sheetflow course to the east. . . .
Eight options were selected for comparative evaluation . . . based on environmental impact, engineering and construction feasibility, operational feasibility, and order-of-magnitude relative cost (see
Exhibit 7). The major criteria for prefeasibility design were:
- a) PTFI has government approval to deposit and manage tailings in a broad expanse east of Timika. The approval, however, states that there will be no impact to the Mawati River and hence to the Lorentz Nature Reserve;
- b) Minimizing the potential impacts to the Minajerwi and Ajkwa estuaries;
- c) The desire to perform concurrent reclamation of areas affected by previous, current and future deposition;
- d) The desire to limit the use of additional forested land;
- e) Provide a flexible system to handle potential future increases in orebody size and production throughput;
- f) Provide a system which could be implemented with technology and techniques proven to withstand the working and construction environment of Irian Jaya;
- g) Provide a system which is capital and operations cost effective.21
After studying eight options, Golder Associates selected Option 3 as its recommended plan: a levee containment system on both sides of the Ajkwa River, confining deposition to west of the Minajerwi and Kopi Rivers. PTFI's Board of Directors approved the first installment of $23.4 million in capital costs (towards an eventual cost of $85 million), and an annual expenditure of $12.6 million per year for operations and maintenance.
The primary improvement was to be the construction of a second levee system along the western banks of the Kopi and Minajerwi Rivers. This levee system would prevent tailings and natural sediment carried by the Ajkwa from entering these rivers. This system was intended to contain the Ajkwa River flow within the present sheetflow and adjacent area. The approach would prevent all sand and half the fine particles from getting to the Kopi/Minajerwi River systems. The Ajkwa would be rerouted along the path of its old natural flood plain, all the way to the estuary. The deposition area would be 3.5 kilometers wide and cover an area of 13,000 hectares (see
Exhibit 8).22
There remained the matter of revegetation. Tailings deposition meant that all the vegetative matter in the affected areas would die. And 133 square kilometers was a huge eyesore, highly visible to any visitor landing at the Timika airport for the next 20 or 30 years.
Bruce Marsh, Freeport's environmental manager, believed that the tailings deposition area could eventually be thoroughly revegetated. Since arriving in Irian Jaya in 1991, Marsh had conducted numerous experiments with reclamation and revegetation. Some tailings areas he simply allowed to grow naturally—first with grasses, and eventually with bushes and fruit trees grown from the seeds in the droppings of fruit bats. Other areas were more carefully replanted—with mangroves, sagos, and other natural vegetation. One such plot of 66 hectares was virtually unrecognizable as a tailings deposition area. To the casewriter it looked like native forest, only 15 years younger. On a couple of recent experimental plots, Marsh and his staff had tilled tailings every week or two for six months— building up soil nitrogen from vegetative matter that grew rapidly. Young fruit trees and a variety of other plants were growing successfully on these plots.
There was no apparent reason why the tailings-deposition area could not be completely reclaimed and revegetated. "There is no problem with tailings," explained Marsh. "It's a question of trust. People don't trust Freeport. Tailings don't matter . . . the size of the area affected doesn't matter." There was, moreover, no evidence that species were being reduced, although everyone agreed that not enough research was being done, either in Freeport's work area or the rest of Irian Jaya. Although new species of a tree kangaroo, rats, fish, and many plants had been discovered by expeditions sponsored by Freeport, more work was needed in the future.23 To reclaim the tailings deposition area might cost $35 million to $45 million (in 1995 dollars) some 25 years hence, but it could be done. Freeport, however, had no program as yet to set aside the necessary funds.
Social and Cultural Effects
Notwithstanding these real and substantial environmental issues, Paul Murphy, Freeport's vice president for government affairs, was certain that Freeport's relations with local people was by far the largest environmental problem his company faced. And it was, as he explained, an environmental problem. Mining activities affected every aspect of the local people's lives—their housing, hunting, farming and foraging ways, their health, child care, and education. They had become Freeport' s biggest environmental concern.24
When Freeport first came to Irian Jaya in the 1960s, its mine development activities affected some 300 Amungme people in the highland region and another 300 Komoros along the coastal region. Prior to Freeport's arrival the Amungme, a subgroup of the Damal that numbered about 4,000, were relatively isolated—both from the Komoros and from outsiders. The Amungme lived in small villages, at higher elevations, each about two days' travel apart. Material culture was simple—no pottery, textiles, sculpture or painting. They were skilled in basketry, string making, and netting. Generosity was an important cultural value among the Amungme; greater material wealth allowed more generosity. The desire for material wealth was a search for self respect.25
Lowland peoples were nomadic fishermen and gatherers of sago palm who lived in small villages along the rivers in the tidal estuaries. Although few Komoros lived in the immediate vicinity of the Freeport operations in 1966, many more had moved there, attracted by economic activity. Beginning in 1986, the Indonesian government began promoting migration to Freeport's area by developing four transmigration settlements—for Irian Jayans from the north coast as well as for Indonesians from other islands.
Of PTFI's 18,000 employees, about 1,500 were Irian Jayans; this included about 400 local people. About the same number was also employed through contractors—as trainers and teachers, environmental reclamation supervisors, personnel staff, equipment operators, tradesmen, landscapers and laborers. PTFl also bought as much as possible of its foodstuffs locally, and simple equipment such as blocks, bricks, pallets, etc.
Still, the impact of Freeport on Irian Jaya's indigenous people had been dramatic. Until 30 years ago, these people followed traditional patterns of life which, in many respects, were similar to those of their ancestors. Freeport had brought everything Western into their lives: education, health care, sanitation, better food, clothing, building materials, electrification, improved bridges and roads, as well as degraded water, television, alcohol, and obvious disparity of income.
Freeport's social and cultural staff of about 400 people oversaw an extraordinary range of programs. They built and ran eight clinics and three medical services, with regular nurses and occasional doctors. They operated malaria control projects, drilled wells, built and operated sewage treatment plants, and removed refuse. They built elementary schools in rural villages, operated teachers' dorms and vocational training centers, and managed women's club's projects. They established and funded "business incubator" projects in Kwamki Lama (a village next to Timika), such as brickmaking, peanut products, vegetable gardens and fruit trees, fishing, coffee, and wood carving. They constructed hundreds of houses in Kwamki Lama, South Timika, and several smaller villages.26
Besides the mine itself, Freeport's biggest venture was the construction of a new town named Kuala Kencana (Golden Estuary). This planned community, several miles north of Timika, would eventually have as many as 2,000 homes, with electricity, air conditioning, fresh water, refrigeration and plumbing. Already, it had an imposing new mosque, a church, a shopping center with a grocery store and restaurants, a bowling alley and a golf course. Some expatriates, but mostly Indonesians, would occupy the town in mid-1996. The company had spent more than $350 million on this community.
It was difficult to assess Freeport's impact on Irian Jayans—whether they were better or worse off after the mine's development, and whether they would be better or worse off with another developer. As Paul Murphy acknowledged, someone would have developed the mine at Grasberg, if his company hadn't. Freeport's management would gladly compare their efforts on behalf of local people to those of any other mine in the world.27
But contemporary critics didn't criticize by comparison. For example, in a critical report entitled "Trouble at Freeport," The Australian Council for Overseas Aid attributed "a history of bad relations between Freeport Indonesia and the local Amungme people" to the appropriation of traditional lands by Freeport, the pollution of the Ajkwa, the low percentage of Amungmes (13%) employed by Freeport, and the social and cultural fragmentation that had occurred.28 The Catholic Church of Jayapura confirmed the widespread violations of human rights by the Indonesia military in the area of Timika.29 Similarly, Walhi, the leading Indonesian NGO, blamed Freeport for the "violation of the rights and the culture of the Amungme and Komoro people."30
Freeport-McMoRan Copper & Gold
In 1994, Freeport-McMoRan proceeded with a restructuring plan that separated its two principal businesses—copper/gold and agricultural minerals (sulfur, phosphoric acid, and ammonia) —into independent entities. The principal firm—Freeport McMoRan Copper & Gold—still owned 51% of Freeport-McMoRan Resource Partners, the sulfur and phosphate producer. Another subsidiary, McMoRan Oil & Gas, was spun off as an independent company.
Freeport Sulfur, the predecessor, was a 60-year-old company that had produced sulfur in Louisiana. The copper mine in Irian Jaya was a strategic departure, and a risky one at that. By 1989, however, Freeport had become a hardrock mining company, with agricultural chemicals contributing a relatively smaller share of revenues.
Freeport McMoRan maintained a small corporate staff in New Orleans, Louisiana. In addition to Jim Bob Moffett, the chairman, it included George Mealey, president, and a handful of senior officers responsible for administration, finance, government affairs, law, the environment, exploration, and marketing. The executive staff in Jakarta consisted of an Indonesian president of PT Freeport Indonesia, 10 expatriates, including American executives of government affairs and finance, and 150 Indonesians.
As its income statement suggests (see
Exhibit 10), Freeport's revenue had doubled between 1992 and 1995, from $714 million to more than $1.7 billion. This was due to the vast increase in production volume, as well as an improvement in copper and gold prices [see
Exhibits 11
and
12]. Freeport's management had implemented a "price protection program" to hedge against declining copper prices. This had minimized the short-term damage of copper prices that had fallen by more than $.20 per pound by Spring of 1996.
In the first 11 months of 1995, Freeport paid $42.8 million in dividends and royalties and $90.8 million in corporate taxes to the Indonesian government. A variety of other tax contributions and charges added $22 million. PTFI estimated that indirect benefits from wages paid and goods and services purchased in Indonesia added another $850 million (see
Exhibit 13).
In 1993, Freeport had also acquired 65% of a smelter in Spain from Rio Tinto Minera; by 1995, it owned 100%. By investing $50 million, Freeport financed the expansion of its capacity from 150,000 to 180,000 tons of ore. Although this capacity could absorb about 45% of Freeport's production for 1993, it was not nearly enough for the expanded yield achieved in 1995 and after. Thus, Freeport also entered a joint venture (with a 20% stake) to build a 200,000 ton/year smelter in Gresik, Indonesia. This venture, with Mitsubishi and FluorDaniels, would locate the new smelter on the east coast of Java, next to a government-owned fertilizer plant (thus solving Freeport's sulfur disposal problem as well). When this smelter became operational in 1998, Freeport could smelt about 70% of its own ore.31
Increasing volume to 125,000 tons per day while buying into multiple smelter projects had, of course, required considerable additional investment (reflected in the balance sheet (see
Exhibit 14). To finance this continuing growth, Freeport had sold 11.4% of its stock to RTZ, the world's largest minerals mining company (see
Exhibit 15). The mine at Irian Jaya had very quickly become one of the largest in the world, and with access to RTZ, Freeport gained real depth of experience in hardrock mining.
Under their arrangement, moreover, RTZ agreed to invest Freeport up to $750 million to expand its mining capacity beyond 120,000 tons per day. Although Freeport was already permitted to produce 160,000 tons per day, it was feasible to expand to 250,000 tons per day. Were this to happen, RTZ would be paid back and then have a 40% interest in profits (for production over 120,000 tons per day). Freeport would incur no costs for its (60%) incremental earnings. Such a project might generate pre-tax income of $1 million per day, yielding a project payback of two years.32
Freeport's Environmental Organization
Only in 1991, when Bruce Marsh arrived in Irian Jaya, did PTFI develop an environmental management organization. By 1995, however, about 90 employees, including 6 expatriates, 9 Indonesians, 2 executives back in New Orleans, and 73 Irian Jayans were devoted to environmental management.
Gaining staff and resources from management had required constant pressure and considerable patience. Marsh recalled that when he arrived in Irian Jaya, the mine's management either ignored him, or tried to "run him off"—typical for newcomers at the mine. He was given a staff of locals, but not much else in the way of resources; even his car was taken away. Marsh had to hitch rides to get back and forth between Timika, Tembagapura, and the mine. His original list of things to do included recycling auto parts, cleaning up dumps, handling visitors, and writing government reports. These responsibilities had little to do with the massive reclamation job that the tailings deposition would require.
One of Marsh's first accomplishments was developing a nursery behind the house of a native worker and paying workers out of his own pocket to grow plants, since he did not have land or a budget to do otherwise. When the general manager was forced to conduct a tour for a group of Wahli environmentalists, the only thing they saw that they liked was Marsh's nursery. After that, Marsh received some respect from the mine's management and, after a new management team took over, a larger budget. Over several years, he built up his organization, reclaiming dumps and building sewage treatment facilities, developing recycling systems, growing plants and experimenting with the reclamation of tailings. The recent opening of the environmental laboratory allowed sophisticated analysis of water and plants. And now the environmental and social audits by outside firms should help put in place longer-term plans for less baleful operations.33
In 1994, PTFI's environmental operating budget was $41.1 million and its capital budget $50 million. The operating costs included salaries for 90 staff, sewage treatment, health, garbage collection, water recycling, and various expenditures at the mine, portsite, the lowlands, and for consultants. The capital expenditures were unusually large, swollen by the $25 million committed to levee building for tailings management. The environmental budgets for 1995 and 1996—of $17 million and $27 million respectively—were more the norm for Freeport (see
Exhibit 9).34
Bruce Marsh was proud of the environmental goals for PTFI that he had suggested management integrate into the Social and Strategic Plan of November 1994. There were 14 in all:
- Sustainable Development
- Long-Term Commitment
- Compliance
- Exploration
- Environmental Monitoring
- Reclamation
- Waste Management & Recycling
8. Supplier Involvement
9. Integrated Management 10. Social Development
11. Safety
12. Emergency Preparedness 13. Employee Education
14. Public Communications
For the exclusive use of M. Pena, 2020.
Some of these require elaboration. Goal #1 entailed converting a depleting mineral resource into lasting, economic activity. Goals #2 and #6 committed Freeport to long-term management of overburden, tailings deposition and reclamation. Goal #5 tried to lock in the long-term environmental monitoring program and the sharing of scientific data with BAPEDAL (Indonesia's Environmental Agency). Goal #3 stated (and Bruce Marsh confirmed) that PTFI met all of Indonesia's environmental standards.35 If Marsh could get Freeport management to embrace these goals unequivocally, then he would consider his work a success.
The Environmental and Social Critique
As executive vice president for Government Affairs, Paul Murphy's biggest problem was the outside criticism of PTFI, primarily by environmental NGOs. Conflict between PTFI and third parties seemed minimal until 1994. Before then, environmental groups were critical of Freeport, but not outright hostile. In 1992, for example, a vice president of the World Wildlife Fund wrote that "most of [PTFI's] problems can be successfully managed or mitigated at least within a context which recognized that there will always be inevitable alteration and deterioration of the environment as a result of mining. FI is now addressing these issues with greater vigor."36
And the most important Indonesian group—the Indonesian Environmental Forum (Walhi)—had reasonable relations with Freeport, visiting the mine more than once between 1991 and 1994. In fact, in 1994, a governmental environmental commission did a study of Freeport's environmental management program and monitoring system.37 Walhi made constructive comments to which Freeport responded. About this time, however, a Walhi activist named Emmy Hafild returned to Indonesia after completing a masters degree in environmental science in America. Hafild, who was extremely critical of the environmental management plan, called a press conference to accuse Freeport of plundering the environment and to criticize the commission.
In February 1995, the former Indonesian Environmental Minister arranged a luncheon with Emmy Hafild and Paul Murphy to try to orchestrate a peace. But it proved to be a failure, and Walhi subsequently brought suit to prevent the Department of Mines from approving Freeport's new environmental plan. To make matters worse, Walhi, working with the International Rivers Network, put pressure on the Overseas Private Investment Corporation, which had insured Freeport's investment for $100 million, forcing the October cancellation of their policy. Because of Freeport' s expansion, wrote OPIC,
. . . especially its tailings management and disposal practices have severely degraded the rainforests surrounding the Ajkwa and Minajeri Rivers . . . [and] continues to pose unreasonable or major environmental, health or safety hazards with respect to the rivers that are being impacted by the tailings, the surrounding terrestrial ecosystem, and the local inhabitants.
MIGA, the World Bank's political risk insurance agency, was also under pressure to cancel its policy for $50 million. And in November 1995, a group of NGOs at the Biodiversity Convention Conference issued a critical statement accusing Freeport of damaging biodiversity and possibly releasing toxins into the rivers.39
As serious as they were, these environmental pressures were only part of Paul Murphy's problems. An even larger threat, at least in the short run, came from human rights violations by the Indonesian military, which provided security for Freeport. The problem went back to the late 1960s, when the OPM (Operasi Papua Merdeka) was organized. This small separatist movement was formed to "resist Indonesian government rule and abuses" in Irian Jaya. Several small guerrilla bands were active in the 1970s but had been suppressed in the late 1970s by the Indonesian military's use of overwhelming force.
Beginning again in 1989, the OPM began demonstrating and staging periodic protests— complaining of inadequate economic development from Freeport, and being ignored by the Indonesian government. These problems were exacerbated by the disappearance of four brothers of Kelly Kwalik, the leader of the OPM, in October 1994. On Christmas Day, OPM activists demonstrating in Tembagapura were arrested by the military; Some were detained in empty containers, owned by Freeport. Four were killed. Eleven more killings occurred in April 1995 in a village 90 kilometers from the mine.
The government immediately authorized a commission on human rights to investigate and report on this series of killings. The Commission released its findings on August 3. It concluded that the military had committed human rights abuses, but did not blame Freeport or accuse them of compliance.40 When Freeport cited this study in its own defense, Emmy Hafild and other NGOs wrote a disclaimer, trying to implicate Freeport on the basis of its cooperative relations with the military.41 And INFID (International NGO Forum on Indonesian Development), a group of nearly 100 NGOs, remained critical of Freeport's close relationship with the Indonesian military, its periodic "attacks " on Walhi, and Freeport's lack of openness in running the mine.
Freeport's March Meeting
By 1996, the huge amount of environmentalist and human rights criticism recently was beginning to take a toll. Gifts of $2 million and $.6 million from Jim Bob Moffett to the University of Texas and Loyola University, for example, were sharply criticized by activist students, who had even gone so far as to demonstrate at Jim Bob's house. In Washington, Freeport lobbyists were trying to keep MIGA from terminating its insurance and get OPIC to reinstate its policy. And in Jakarta, Paul Murphy had his hands full with the environmental audit, and the social audit, and newspaper reporters from Australia, Japan, National Geographic, and CNN.
Jim Bob, meanwhile, planned to have the Board of Directors meet in March 1996, when some important issues would be raised. Environmental and social budgets needed to be confirmed, with the possibility of setting aside a fund for mine closure and reclamation. But the chief question was capacity. RTZ was pushing hard for a significant expansion of PTFI's output—to 230,000 tons per day, or possibly 250,000. This could be done, they believed, by improving extraction facilities to handle ore less rich in copper. At other mines around the world, ore with as little as 0.3% or 0.5% copper was milled. Freeport, however, had taken ore with concentrations of only 0.8% or higher. If the overburden, and perhaps even some of the tailings, were processed, the mine at Irian Jaya could be made more efficient—and more profitable.