Busang – a River of Gold

Challenges for Bre-X Minerals in Indonesia Bre-X Minerals Ltd. faced numerous challenges in 1996, biggishst among them being the say-so loss of the majority stake in property that could yield up of 100 million ounces of gold. The Indonesian political sympathies was threatening to redistribute ownership of Busang, the archeological site region in which Bre-X had property rights, due to its fear that Bre-X was a short-term player not serious ab protrude extracting the gold or a long term commitment in Indonesia. These fears were justified condition Bre-Xs small size (it had a net loss of $Cdn. 66,677 in 1995 comp bed to a net income of $Cdn. 218 million from Barrick Gold Corp. , a potential presidency activity-corporate partner) and modified connections within the country (established only in 1993 by exploring in the eastward Kalimantan rainforest). Another critical challenge faced by Bre-X was the prevalent rallying cry over a foreign firm taking advantage of Indonesias wea lth of natural resources. This mineral exploitation resulted in cries for public litigate to seize the land and deny Bre-X any compensation. Prominent public figures Dr. Amin Rais and Mr.Hartojo Wignjowinoto were about vocal in these demands. This is a classic example of the risk an spur-of-the-moment ships company takes on when operating in a country that is transitioning both(prenominal) politically and economically. Over the first half of 1996, analysts predicted increasing success at Busang and as a result, Bre-Xs stock value rose. Indonesia, however, is a complex economy where the government uses public action to manipulate and influence the unavowed sector with ease. Bre-Xs failure to collaborate with an influential local company from the beginning of its sham led it to the current crisis.The companys developmental and operational stagnation resulted in increased pressure from the worlds largest mining firms, Barrick included, and the Indonesian government. The Sudjana Proposal Bre-X Minerals & Barrick Gold Due to the corruption and public action of the Indonesian government and the potential for continued bureaucratic challenges to extracting the gold, Bre-X should get Minister Sudjanas intention to partner with Barrick. The Indonesian government has shown, by means of its interactions with Bre-X, that it is easily influenced by the demands of President Suhartos family and by pressures from respected individuals.For example, the Barrick proposal received endorsement from the government only after Barrick hired Suhartos daughter (Tutut) and encouragement from former U. S. President George Bush and former Canadian Prime Minister Brian Mulroney. Despite making an alliance with PT Panutan Duta in late October, Bre-X was late in recognizing the importance of relationship building in conducting business in Indonesia. With only eight-spot days to negotiate the tummy with Barrick, Bre-X does not have time to develop the necessary connections to suc ceed in Indonesia without a competent partner.Strong property rights are an essential destiny in any successful market economy. Although Indonesia has regulations regarding mineral geographic expedition and extraction, the government has found ways to manipulate the regulations to best serve its interests. Making it finished the various stages of mining approval requires complex paperwork and numerous negotiations with various government offices. Bre-X had navigated this system and received a Contract of Work ( browbeat) to mine the southeastern Zone. However, after Kuntoro Mangkusubroto declined to revoke Bre-Xs CoW, Sudjana had transferred the processing of CoWs out of Mangkusubrotos office.This move suggested that Sudjana could manipulate the regulatory structure to revoke Bre-Xs CoW and pay back it much more difficult for the company to continue exploration or begin mining. Rejecting the Barrick deal proposed by Sudjana would expose Bre-X to future challenges that whitethor n prevent them from ever capitalizing on its Busang II claim. However in judge the Barrick deal, Bre-X stands to lose a large portion of their claim to the future benefit from Busang. Bre-X has made large investments to purchase and explore the properties in Borneo and needs to make sufficient earnings to recoup its costs and satisfy its investors.Therefore, Bre-X should use the eight days that they have to reach an agreement with Barrick in which they receive a greater than 22. 5% stake in Busang. Beyond Barrick Other roads to Busang One alternating(a) Bre-X could pursue is a different joint venture with either Placer noggin or Tech Corps, which would align Bre-X with a large enough company to develop and melt in Busang. At the homogeneous time, Bre-X needs to cultivate their existing relationship with Suhartos son to relent the company an inside track in navigating the corrupt regime.This alternative is gentle for all parties involved because it increases investor confid ence and Bre-Xs stake in Busang, allows Placer Dome or Tech Corps to get involved in the project, and increases the governments claim through Suhartos inner circle. Another alternative for Bre-X would be a total buy-out by Barrick. This option would result in a substantial capital inflow for the company to pursue its substance business model exploration and partnership. Throughout the companys history, Walsh has unendingly had to seek out investment from a number of sources to successfully operate his business due to its small size.The operations thus far in Busang have been reminiscent of the Australian speculators in the 1980s, and the Indonesian people are again faced with a situation where estimates of total gold reserves are skyrocketing, while little infrastructure development or mining activity has taken place. The national sentiment towards Bre-X and its inability to carry out mining operations on its own, makes a buy-out proposal an attractive alternative whereby Bre-X ca n pursue new exploration in a friendlier environment.