Bre-X Minerals Ltd forms part of Bre-X, a chain of Canadian-based companies. The Calgary-situation Bre-X Minerals Ltd struck gold in 1995. The company discovered not only the world’s largest but also the most valuable deposits of gold in the heart of the Borneo jungle in Indonesia. As a result, its stock price rose to the extent that the eager would-be partners and investors overwhelmed the company’s managers. For a successful gold-mining process, Bre-X’s management team established crucial relationships, including financial, political, and business partnerships with entities outside Indonesia. In this light, it is crucial to examine some of the rules that are regarded as crucial for foreign investors in Indonesia’s mining industry, including how they are made. This paper also highlights how Bre-X can attain leverage over its relationships in Indonesia. It also presents the possible response that David Walsh may give concerning Minister Sudjana’s statement.
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Important Rules for Foreign Investors in Indonesia’s Mining Sector
Before presenting the rules that are pertinent in establishing foreign investments in Indonesia’s mining industry, Bell et al. reveal how Indonesia attracted foreign companies, for instance, Freeport, through joint ventures (4). The first rule requires foreign investors to ensure that a given portion of wealth extracted from within Indonesia is brought back to the country. Indonesia’s body in charge requires foreign mining companies that show interest in the gold-mining business to adhere to complex regulations, which the authors term as “baffling” (Bell et al. 4). The second rule that foreign companies are subjected to include the need to partner with a local Indonesia-based company.
Consequently, this rule would merit the process of application to the Ministry of Mines and Energy (MME). As a rule, the MME has to issue “Kuasa Pertambangan” (KP) authorization that serves as the exploration claim (Bell et al. 4). It allows overseas companies and local partners to carry out preliminary drilling and sampling within a confined geographical expanse. After obtaining the KP permit from MME, foreign investors have to abide by the rule of applying for the “Contract of Work (CoW)” (Bell et al. 4). The CoW rule provides foreign investors with information concerning the timeline for exploration, including the need to set environmental evaluation principles and target production and mine construction production levels.
How the Rules are Made
Making rules concerning the mining of gold in Indonesia involves various stakeholders. For instance, given the significance of Contract o Work, Bell et al. assert that the rules are made administratively since the CoW belongs to numerous Indonesian Institutions (4). Hence, the respective parties have to be consulted. Initial negotiations are made between the Director of General of Mines (DGM) and the overseas business. Afterward, details are passed to the MME regarding the specific project to be carried on. Upon approval of the particulars, the CoW is sent to the legislative body. The mandate of this body is to vote for or against the details in line with the law. Whereas the legislative body may pass several CoWs, significant ones are directed to the presidency for approval.
How Bre-X can Gain Leverage Over Indonesian Relationships
In gaining leverage over Indonesian relationships, Bre-X has two strategic options. It may opt to take the deal or abandon it. Based on the first option, the company can accept the deal or try to rework the terms to attain a slightly meaningful offer. However, this option has a few advantages. Firstly, Bre-X has minimal negotiating powers. Although it may present its claims concerning its business terms, the honors to verify them lies with Indonesia. Secondly, Bre-X might attain some returns on its investments. However, it may not secure a fair market value. The advantage of accepting the deal is that it may enhance the value of Bre-X, owing to the corruption allegations laid against the mining minister (Bell et al. 3). Consequently, the ideal option that will give Bre-X considerable leverage entails abandoning the deal. This strategy will portray to both counterparties that Bre-X understands its rights and the value of the claim. Thus, it will not be intimidated by dishonest and corrupt business practices.
David Walsh’s Response to Minister Sudjana’s Announcement
In responding to Minister Sudjana’s statement, David Walsh needs to be pragmatic enough to confront the challenges the company is facing. The business is experiencing financial issues. It also seeks to fight for its legitimacy following the laid corruption allegations. Therefore, David Walsh should go along with Barrick Gold Corporation’s deal (Bell et al. 7). For instance, since Bre-X needs to provide enough funds to Felderhof to enhance its continued exploration at the Busang site, Barrick’s deal will be a welcome concession for Bre-X.
Albeit agreeing to go by Barrick’s arrangement, David Walsh may also opt for other viable options in response to Minister Sudjana’s announcement. Firstly, Bre-X would heed the minister’s advice and instructions concerning the need for Bre-X and Barrick to have the site developed jointly. This plan would help Bre-X not only in terms of enhancing its financial requirements but also networking and receiving backing bearing in mind that the minister and other influential people such as George W. Bush have massive stakes in the business.
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The above analysis predicates Bre-X’s claim of legitimacy concerning its gold mining deal in Busang. It is apparent that where international relationships and host countries’ internal regulations play a significant role, different political environments affect international business relations both negatively and positively. For Bre-X to succeed in the Indonesian gold-mining market, its management needs to observe Indonesia’s operating environment keenly while emphasizing business efficacy and profit maximization.
Bell, Jeffrey, et al. Busang: River of Gold (A). Harvard Business School, 1997.