Question

Unfortunately it’s a familiar chain of events in the mining industry: junior mining partner makes a discovery in a faraway land. Junior mining company sinkssignificant amounts of capital into the ground to establish a world-class resource. The discovery attracts the interest of powerful local business concerns and/or governments. The deposit is seized under suspicious circumstances and the junior mining company’s shareholders are annihilated. This story has played out all over the world from Venezuela to Mongolia to the Democratic Republic of Congo. Such is the case for Intrepid Mines Ltd, an Australian-listed company, which owned substantial rights to the Tujuh Bukit mine, a gold and copper project in Indonesia. Intrepid’s misadventures in Indonesia began in 2007, when it signed an agreement with a local company called PT Indo Multi Niaga (IMN), which owned rights to the Tujuh Bukit copper-gold project. The deal allowed Intrepid to earn up to 70% of the project’s potential earnings by spending A$8 million on exploration and up to A$2 million on a feasibility study for what was then considered to be a relatively small deposit. Everything changed in July 2008 as Intrepid’s drilling revealed a substantial reserve of high-grade copper and gold. Further drilling established that the mine holds 19 billion pounds of copper and 28 million ounces of gold, making it one of the largest discoveries of its kind in decades. The problems started in 2011 when Intrepid was having trouble negotiating a new shareholder agreement with PT IMN, which was required following changes in Indonesian law. Intrepid’s joint venture partner began delaying the deal although Intrepid continued working on the site. The relationship deteriorated in the following months and Intrepid became suspicious. It then discovered that 80% of IMN’s shares and leases were transferred to two companies linked to a high profile Indonesian billionaire named Edwin Soeryadjaya. Then in July 2012, two truckloads of armed police showed up at the Tujuh Bukit mine and ordered all Intrepid’s expatriate employees to leave the site. The deception of Intrepid’s joint venture partner soon became clear. By that time Intrepid’s total investment in the project was around A$100 million with almost nothing to show for it. Upon the news, Intrepid’s shares plunged 55 per cent, destroying about A$160 million in market value. Intrepid launched several complaints with the Indonesian police, and the company engaged law firms to fight civil and criminal cases against IMN. Intrepid also launched a case against the local government of Banyuwangi for allowing the transfer of Tujuh Bukit leases to another company. While these cases were waiting to be resolved, a strange new twist emerged. In February 2013, a Hong Kong-based Hedge Fund called Quantum Pacific Capital began calling investors in Intrepid and trying to gather support for a proposal to overthrow Intrepid’s Board of Directors. Quantum Pacific claimed that it led the push to take over Intrepid’s Board in order to negotiate with Mr Soeryadjaya to win back a stake in Tujuh Bukit. However, Intrepid publicly claimed that Quantum Pacific was working hand-in-hand with Mr Soeryadjaya to wrest control of the mine and the company. In a vote of Intrepid’s shareholders held in June 2013, the majority of the shareholders rejected Quantum Pacific’s motion and supported the current Board and its battle to win back rights to the Tujuh Bukit mine. In the weeks leading up to the shareholders' poll, more than 20 percent of the company's shares were bought by people from Indonesia, Singapore and Hong Kong. "In our opinion, the Board's legal strategy reflects an inexperienced and highly naive view of conducting business in Indonesia and puts any chance of project recovery at significant and unnecessary risk," Quantum Pacific said in a statement. "All precedent cases have favoured the Indonesian party," it said after the vote. While Intrepid’s Board survived Quantum’s attempts to gain BUSI2025 International Business 2 control of the company, its interests in the Tujuh Bukit mine remained under a legal cloud. The Head of the Office of Industry, Trade and Mining in Banyuwangi stated that the regional administration is only familiar with IMN as the official gold mining exploration concessionaire in Tujuh Bukit: “The name Intrepid never existed in the licence application submitted by IMN”. The legal validity of Intrepid’s claim was under a further cloud when it became clear that the type of mining licence held for the deposit by its joint venture partner (IMN) was an IUP – a type of mining permit that could not legally be held by foreigners. Following an amendment to mining legislation in September 2012, foreign mining companies are now required to gradually divest their majority interests over 10 years to Indonesian shareholders. After protracted negotiations a settlement of sorts was reached in February 2014 when IMN agreed to pay Intrepid A$90 million in cash to resolve the legal dispute over the mine, estimated to be now worth more than A$5 billion. Following the announcement, Intrepid’s shares fell more than 20 per cent on the Australian Stock Exchange. Commenting on the settlement, Intrepid’s Chairman Ian McMaster said “while this is a disappointing conclusion to our efforts on the project, I am confident that our shareholders will see the benefit of eliminating the current risks we face in Indonesia and recovering the A$90 million for redeployment elsewhere”. Reflecting on Intrepid Mines’ experience in Indonesia, Tim Schroeders, fund manager of Pengana Capital, said it “underscores the difficulties in emerging markets and the propensity for people to lose money very quickly”. The Australian Securities and Investments Commission (ASIC) now requires Australian mining companies to “provide adequate verification about the ownership of their assets and clearly disclose legal and regulatory risks to investors”. These risks are all too apparent given Intrepid’s share price has fallen from A$19.32 in April 2011 to a price of A$0.80 yesterday.

a. Explain the types of risks that Intrepid Mines faced in its activities in Indonesia. b. Could Intrepid have avoided or better managed these risks? Explain your answer. c. What are some of the key lessons from this case for firms that enter emerging market countries?

Answer 1

Key points in the case: Intrepid mines ltd in collaboration with local Indonesian company Called IMN agreed to explore mines and Intrepid will get 70 % revenue. After huge Cooper and gold deposits were found out, Intrepit was forcibly moved out of Indonesia and without recovering its costs and hence its shares plunged in value. It was then involved in legal battle and in the end after spending almost A$100 million it was. getting negligible A$90 million by partner IMN as settlement.

a.Political, economic and legal risks were encountered by Intrepid mines ltd in Indonesia.

b.Yes, Intrepid could have managed risks better by considering all legal risks and covering them. For ex, later it was said by IMN that the mining licence itself was invalid. Hence these legal disagreement could have been avoided if local law firms were considered. It could also have avoided political risks if lobbied better.

c. Key lessons are:

a. Political, economical and legal risk analysis should be carefully done. The agreements made should be clearly filed with company regulators in both the countries. Govt. guarantees should be taken for any such agreements. If possible then a risk fund can be created in which both parties will keep some money which can be used for any such risks. There should be a international convention agreed and signed by both the parties to abide by the rules ion contract made.