Freeport's Motherlode

Jim Bob Moffett knows how to turn a phrase. The Australian Financial Review recently quoted the CEO, president, and chairman of the board of Freeport-McMoRan as saying that the pollution coming from his company's mining operation in Irian Jaya, Indonesia was "equivalent to me pissing in the Arafura Sea."

Well, either Jim Bob is full of cyanide or he wasn't completely forthcoming about the pollution caused by his company's operation. In any event, the Overseas Private Investment Corporation (OPIC), the federal agency which provides insurance and financing to American companies doing business overseas, has cancelled a $100 million political risk insurance policy which covered Freeport-McMoRan Copper & Gold, Inc.'s huge mining operation. (Freeport-McMoRan is the parent company of Freeport Copper & Gold. According to the company's 1994 annual report, it owns 68% of the subsidiary, and Moffett is the chairman of the board of the subsidiary.)

The cancellation of Freeport's insurance, which took effect at midnight on Halloween, was the first and only time OPIC has ever cancelled a client's insurance for environmental reasons.

In an October 10 letter to Freeport obtained by the Chronicle through the Freedom of Information Act, OPIC general counsel Robert O'Sullivan said the tailings below the mine have "severely degraded the rainforests surrounding the Ajkwa and Minajerwi Rivers. Additionally, the Project has created 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."

In a statement released November 2, Freeport said that the "environmental concerns expressed by OPIC have no basis in fact. FCX [Freeport-McMoRan Copper & Gold] is committed to the highest environmental standards in its mining operations."

OPIC cancelled the company's insurance despite a massive lobbying effort launched by, among others, former Secretary of State Henry Kissinger. Now a lobbyist who earns about $400,000 per year for his part-time job at Freeport, Kissinger reportedly met with officials at the State Department and worked the halls of Capitol Hill.

The Indonesian dictator, Suharto, also reportedly brought up the matter during his meeting with President Clinton at the White House on October 27. Suharto's meeting with Clinton occurred the morning after the Indonesian strongman was fêted at a dinner at the Washington Hilton hosted by Moffett.

OPIC's move has clearly put Freeport on the defensive. With nearly $5 billion invested in the mine, the company's environmental practices have now been assailed not by an environmental group, but by a federal agency which was under tremendous pressure not to take any action against a powerful adversary like Freeport. In addition to its massive investment, the company also has to worry about the future operation of a mine which sits atop the world's largest gold deposit. Freeport's mine contains at least 40 million ounces of gold, 81 million ounces of silver, and 28 billion pounds of copper. All told, the metals in the mine are worth more than $50 billion.

OPIC's action confirms what many environmental groups in the U.S. and Indonesia have been saying for years: that the tailings below the mine are toxic, and that they have degraded rivers below the mine. For its part, Freeport has consistently denied that any of the tailings are toxic. On October 6, the Chronicle printed a letter from Thomas Egan, a Freeport vice president, who excoriated this reporter for "lack of objectivity." Egan said the "mine tailings put into the Ajkwa River are not toxic and are indeed the same material that drains naturally into this river."

In its most recent annual report, Freeport says it has taken a "strong position in protecting the environment and is a leader in initiating and supporting scientific and academic programs dealing with maintaining and improving the environment. The company's environmental policy commits its operations to full compliance with all laws and regulations."

But in July of 1994, OPIC sent a team of scientists to the mine. And in the agency's October 10 letter, OPIC makes it clear that it believes the company has not been completely truthful. "Indeed, contrary to representations made by Freeport in the 1990 Environmental River Study," says the letter, "it appears the tailings have been discharged to fluvial systems other than the Ajkwa River system (e.g., massive sheeting has occurred to the Minajerwi River system). The River Study specifically indicated that the Minajerwi River would not be impacted in this manner."

OPIC scientists also found that the mine posed a range of problems including "acid mine drainage from overburden and tailings; the concentration, mobilization and bioavailability of toxic metals in the tailings; [and] the degradation of surface and groundwater quality."

While Freeport's credibility has been damaged by OPIC's move, the insurance cancellation may also spawn a series of lawsuits by American environmental groups, who may be able to sue the company for violating U.S. environmental laws. The key to a successful lawsuit will likely be the groups' ability to obtain documents from OPIC. The Chronicle and several other groups have filed requests under the Freedom of Information Act for the scientific studies which OPIC used to formulate their cancellation of Freeport's insurance coverage.

The Freeport mine has been under increased scrutiny in recent months due to a pair of reports which allege several dozen instances of human rights violations in and around the mine site. In April, the Australian Council for Overseas Aid released a report called "Trouble at Freeport," which claims that 22 civilians and 15 alleged guerillas had been killed or had disappeared in the region. The report also alleged that Freeport security personnel took part in several of the murders. In August, the Catholic Church of Jayapura released a report confirming many of the allegations in the Australian report, and adding allegations of torture, some of it occurring in shipping containers owned by the company.

Freeport officials have repeatedly denied any involvement in the killings. However, in recent weeks, the company has admitted that it provides food, transportation, and shelter to Indonesian military personnel at the mine, but it does not "provide transportation or other assistance to military personnel involved in combat operations."

OPIC would not comment on the allegations of human rights abuses, or on whether the incidents led to the cancellation of the insurance.

OPIC's decision to cancel the insurance was likely guided by a 1979 Executive Order, which provides environmental guidelines to the projects that it insures or finances. The purpose is to "ensure that all significant environmental effects of its actions outside the United States are considered by OPIC in its review of proposed insurance and finance projects." The law covers issues ranging from hazardous waste and water pollution to indigenous people and tropical forests.

Freeport is planning to fight the cancellation. Company spokesperson Gregg Probst said, "We believe OPIC lacks a legal basis for cancelling the coverage. Therefore we believe the coverage remains in effect and we will operate on that basis pending a resolution of the dispute, which has been submitted to arbitration as provided by our contract with OPIC."

Freeport has reportedly asked the American Arbitration Association, a non-profit group that hears about 60,000 disputes per year, to arbitrate the case. According to sources close to the matter, Freeport's case is being handled by James Woolsey, the former head of the Central Intelligence Agency. Woolsey's office, at the Washington law firm of Shea & Gardner, would not confirm or deny that he is working on the case.

As for Wall Street's reaction to the news: barely a blip. On November 2, the day the New York Times and the L.A. Times published stories on OPIC's cancellation, Freeport-McMoRan's stock rose one quarter of a point. Now selling for about $37 per share, it is near a 52-week high. As for Freeport Copper & Gold, which has seven classes of stock, three of the stock issues declined slightly. The others were unchanged.