Hedge funds slash bullish wagers on gold over Trump election win
Hedge funds and other large speculators boosted net-long positions by 11% to 197,362 as of Nov. 12, the lowest in 14 weeks.
Every year, Freeport-McMoRan Inc. dumps tens of millions of tons of mining waste into the Ajkwa River system in Indonesia. The company has been doing it for decades, and is demanding the right to keep at it for decades to come.
The discharge of what are called tailings, the leftovers of mineral extraction, is perfectly legal under Freeport’s current contract with the government. But recently, after more than a year of tense negotiations over the terms of a new deal, Indonesia suddenly changed the rules: The Grasberg mine in the highlands of Papua province would have to operate by heightened standards. It shouldn’t have been a surprise, really, considering most every other miner in the world has been forced or has elected to stop discarding tailings in rivers.
Freeport, though, has said that won’t happen at Grasberg. Chief Executive Officer Richard Adkerson has been blunt about it. “You can’t put the genie back in the bottle,” he said in April. “You simply can’t say 20 years later ‘we’re going to change the whole structure’.” Grasberg’s waste management, he added, has “always been controversial.”
The tailings tussle is the latest twist in the complicated relationship between the mining giant and the Southeast Asian republic. How it plays out will have far-reaching consequences in Indonesia. Freeport is a major taxpayer and job provider and has built homes, schools and hospitals in one of the poorest provinces. But Grasberg has also long been a target for environmentalists, indigenous and separatist groups and human-rights watchdogs.
At stake for Freeport are reserves that Bloomberg Intelligence estimates to be worth $14 billion at the world’s biggest gold deposit and second-largest copper mine. Grasberg accounted for 47 percent of Freeport’s operating income in 2017, according to data compiled by Bloomberg.
“What happens at Grasberg has global significance,” said Payal Sampat, the mining program director at the mining watchdog-group Earthworks. “It involves some of the largest global players in the mining industry and one of the leading mining economies.”
Most countries have banned tailings deposits in waterways over concerns they can be toxic, destroying habitats, suffocating vegetation and changing the topography of rivers, causing floods. Most miners have said they’re against the practice regardless of local rules. The industry’s biggest, BHP Billiton Ltd., won’t “dispose of mined waste rock or tailings into a river or marine environment,” as the company put it in a statement.
Only two other industrial-scale mines — and a third, small operation — are known to get rid of tailings as Grasberg does, and they’re in Papua New Guinea, which occupies half of the island of New Guinea; Indonesia owns the rest, which is home to the Freeport-run mine. In recognition of risks that could leave “a massive environmental burden for future generations,” the practice has been phased out everywhere else, according to the United Nations’ International Maritime Organization.
Freeport sees things differently. “As we have stated before, the tailings are benign,” said Eric E. Kinneberg, a spokesman, referring to the corporate website for a detailed explanation.
The Phoenix-based company maintains that much of the sediment in the Ajkwa River system downstream from Grasberg is caused by natural erosion, and that tailings pose no significant — or at least unexpected — threats. “There have been no human health issues or impact on the environment that wasn’t anticipated,” Adkerson said on a quarterly earnings call in April.
The company’s partner in the Grasberg complex, Rio Tinto Group, recently addressed concerns about waste removal. “Riverine tailings disposal is very, very far from best practice,” Chairman Simon Thompson told a meeting in London in April, perhaps highlighting one of the reasons Rio may be willing to sell its 40 percent interest to a state-owned company for $3.5 billion. A spokesman for the company declined to comment for this story.
Rio declined 1.4 percent in Sydney trading, as an index of the country’s largest energy and mining companies fell 1.2 percent.
“If you think about it from Rio Tinto’s perspective, one of the biggest problems with this mine is the environmental issues. I think that’s an incentive for Rio to get out,” said Christopher LaFemina, an analyst at Jefferies LLC. “This is a critically important part of Freeport’s overall value. For Rio Tinto, it’s not.”
The problem for Freeport and Indonesia is that there’s no easy solution. “There has been no realistic alternative identified,” Thompson said. Freeport’s local unit studied 14 alternatives for tailings disposal — including dams and pipelines — and concluded all were too risky in a mountainous terrain prone to earthquakes and heavy rainfall.
As it is, the heavy ooze wends its way through glacier-capped valleys, descending almost 4 kilometers (2.5 miles) to tropical lowlands and a 230 square kilometer deposition zone, where roughly half the tailings are parked. The rest flows on to a river estuary and the Arafura Sea.
“The company has sacrificed not just the river, but also the coastal area,” said Pius Ginting, coordinator of Action for Ecology and People’s Emancipation, an Indonesian environmental group.
According to Earthworks, Freeport sends more than 76 million metric tons of tailings and waste rock into Indonesian rivers every year. The company puts the 2017 figure at 50 million tons. Without spelling out precisely how the requirement should be met, Indonesia told Freeport that it would boost to 95 percent from half the amount of tailings that must be recovered from the river system, according to Adkerson.
That was a shock that sent Freeport’s stock tumbling after Adkerson revealed it on April 24. Shares have largely recovered as investors bet the government will fail to follow through.
The negotiations to secure the right to keep mining Grasberg until 2041 had already been complicated by an edict that foreign miners sell majority stakes in their assets to local interests. Rio’s apparent interest in divesting would ease that problem for Freeport, reducing how much it would need to unload.
Even if its share dropped below 50 percent, Freeport as an operator could still win big — Grasberg is a stunning asset, expected to produce more than 520,000 tons of copper in 2018 and more gold than any other mine. Of course, Indonesia’s tailings mandate may be a negotiating tactic, as some Freeport investors said they suspect. Ilyas Asaad, inspector general at Indonesia’s Environment & Forestry Ministry, didn’t respond to a request for comment.
The company is holding its position: The discharge of tailings into the river system is an inescapable consequence of keeping the mine in operation. If the government backs down, it will be “a political decision,” said David Chambers, a geophysicist who runs the U.S. nonprofit Center for Science in Public Participation. “There aren’t many governments that are willing to sacrifice those kinds of environmental resources for the financial resources.”
Few investors have publicly seized on the tailings mess as a reason to shun Freeport. One was Norway’s $1 trillion sovereign wealth fund, which in 2006 excluded Freeport from its investment universe and in 2008 sold its holding of about $850 million of Rio shares, citing Grasberg’s use of the river system to dispose of tailings.
“The spotlight has shone on these issues a lot more brightly in the last couple of years,” said Andrew Preston, head of corporate governance in Australia for Aberdeen Standard Investments, which owns shares in Rio and BHP. The “wake-up call,” Preston said, was the 2015 failure of a tailings dam at BHP’s Samarco iron-ore joint venture with Vale SA in Brazil. Billions of gallons of sludge escaped to travel hundreds of kilometers down the Doce river, killing at least 19 people and leaving hundreds homeless.
Jefferies’ LaFemina said investors are betting on the status quo in Indonesia. “In negotiations, different sides are trying to get leverage.” In the end, “I am not expecting there to be a significant change to how this asset operates.”
By Danielle Bochove and David Stringer
