Freeport's Lode of Trouble

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Do you know what an F.O.B. is in Washington? asked James Moffett, chief executive of Freeport McMoRan Copper and Gold, the giant mining company based in New Orleans, in a recent newspaper interview. It's friends of Bill. That's how you get contracts with the U.S. government. And before that, it was friends of Bush. And before that ...Welcome to the one-hand-washes-the-other world of Jim-Bob Moffett, a former University of Texas football star, geologist and amateur Elvis-impersonator who built Freeport into a mining behemoth with annual revenues of almost $2 billion. Moffett himself is an F.O.S., or friend of Suharto, the ousted leader of Indonesia. This week's parliamentary election could bring to power reformers long critical of Freeport.

Indonesia is the site of Freeport's most important asset, the Grasberg open-pit mine, developed under the auspices of the Suharto regime. A giant crater scooped out of a mountainside in the jungles of Irian Jaya, on the Indonesian half of the island of New Guinea, the $60 billion mother lode contains one of the world's largest single deposits of copper and gold.

Moffett's Dale Carnegie routine worked wonders when Suharto ran the show. There were afternoons of golf with the ruler and friendships with his family and business cronies. Indeed, Suharto interests own a multimillion-dollar stake in the Grasberg mine, which surely did not hurt Moffett's effort to maintain mining rights there on favorable terms. The deal was so sweet, in fact, that Freeport has long been the world's lowest-cost producer of copper, a key industrial metal.

But since Suharto's ouster a year ago, Freeport's future in Indonesia has been called into question. The company's status and the allocation of its royalty payments have become a campaign issue. The company has denied any illegal behavior and notes that Freeport is one of Indonesia's largest taxpayers. It would be unusual if [we] did not maintain a close business relationship with the government of Indonesia and its officials, including then President Suharto, it says. Fair enough, but in April, Standard & Poor's lowered its rating on $3.3 billion worth of Freeport debt and preferred stock, citing the firm's ties to Suharto and the possibility that it could face retribution [and] reprisals.

Freeport's woes extend beyond politics. Mining isn't a particularly popular industry, given the propensity to insult the planet in order to get at ores. And this is not a particularly good time to be in the mining business, what with the price of commodities bouncing off all-time lows. Freeport's profits have gone down the shaft, with earnings off 33% in its last quarter, to $129 million. Perhaps that's one reason Moffett and other senior executives skipped the company's annual meeting last month. Certainly he's used to confrontation, having had to deal with vociferous environmental and social activists who in years past have carried picket signs proclaiming JIM-BOB MOFFETT KILLS FOR PROFIT.

The strict capitalists among Freeport's shareholders might be happier were that the case. The company's stock last week was trading at about $15.70, down from $36 three years ago. Low copper and gold prices, which the company obviously can't control, clearly have hurt; but some shareholders also complain that despite a cost-cutting campaign dubbed Hunker Down and Go, Moffett's 1998 compensation of $4.5 million plus stock options is out of line with Freeport's sagging performance.

In a statement to TIME, Freeport argues that its stock is significantly undervalued, in part because Wall Street has misread Indonesia's political mood. Freeport notes it will reduce debt $200 million in 1999 and has received permission to boost ore production at Grasberg from 200,000 tons a day to 270,000 tons in exchange for doubling its royalty payments to the government.

Realistically, Indonesia needs the mine to keep operating, both for the local economy and to keep dollars coming into the country. The company spends roughly 1% of its gross revenues on housing, health care and education. Even leading politicians who once called for expelling the company now say they recognize that driving out foreign capital would harm efforts to revive Indonesia's battered economy.

Yet it may be that Freeport has misread Indonesia's political mood. If the reform-minded parties capture the majority of votes, as looks likely, and the military does not intervene, which seems plausible, popular resentment over the company's connections with Suharto might encourage the new government to re-evaluate even the revised contracts, or to jack up royalty payments further, just as copper prices seem to be turning up. That in turn could erode the firm's low-cost structure. Even worse, Jim-Bob Moffett's old friends in high places would no longer be there to help.

With reporting by Jason Tedjasukmana/Jakarta