Munk's Indonesian Gold Coup

Munk's Indonesian Gold Coup

Peter Munk was in Budapest, doing the ribbon-cutting thing on what happens to be the largest shopping centre in Eastern Europe, which happens to have been built by TrizecHahn Corp., his multibillion-dollar real estate company. While in Budapest, he received a fax requesting his attendance in Jakarta one week hence to discuss Barrick Gold Corp., his multibillion-dollar GOLD-mining company. So instead of heading home to Toronto, where he was due to attend a swish roast for Barrick president Bob Smith, Munk took the company Gulfstream jet and headed for Indonesia. Peter Munk is not the type to hop-to for just anyone. But this, he knew, was big. Very big. It was not a time for lieutenants.

On Nov. 14, Peter Munk left his presidential suite at the Jakarta Grand Hyatt and headed to the government offices of Ida Bagus Sudjana, Indonesia's minister of mines and energy. Munk had in tow a Madame Yoke, assistant to Siti Hardiyanti Rukmana, eldest offspring of Indonesian President Suharto, as well as the son of one of Suharto's superministers, who happens to be Sudjana's boss. Munk's power team, supporting the sleek corporate vision of Barrick, met not only Sudjana and various government types, but David Walsh, John Felderhof and Roly Francisco representing the far-less polished vision of a heretofore pip-squeak mining outfit out of Calgary called Bre-X Minerals Ltd. Bre-X had staked the Busang gold find in Kalimantan, the minimum 40-million-ounce bonanza that some predict will hit 100-million ounces one day. Busang is the mine find of the century. Munk wanted it. Luckily for him, the Bre-X boys have been cast as a crew of unsavvy operators who so mishandled themselves, and so misjudged others, that it appears Munk will get his way.

The meeting ran its course, Munk giving his pro-Barrick spiel; Walsh, who only found out the day before that Barrick would be present, giving his pro-Bre-X spiel. It was all a set piece, for at the end, Sudjana, reading from a prepared text, outlined the rough terms of what he wanted. Barrick, he said, would get 75 per cent of Busang; Bre-X, 25 per cent. He gave the parties a deadline of Nov. 20 to reach an agreement on mine development. The next day, the parties met again, this time Bob Smith taking the lead for Barrick, supported by Gary Sugar and Jamie Anderson of RBC Dominion Securities, Barrick's investment advisers. The Nov. 20 deadline came and went with no agreement. Discussions, which had initially been cordial, had become acrimonious. On Nov. 22, Secretary General Umar Said extended a new deadline of Dec. 4. "I expect to hear only one word from you," he said. "Agreement."

This week, both companies will again go back at it in Jakarta. If Munk wins, he will have built, over a mere decade, the largest gold-mining house in the world, bigger, even, than the South Africans. Last week, Bay Street dubbed Munk a "latter-day Cecil Rhodes."

Munk has played his imperial hand beautifully. It was Christmas, 1986, when he purchased the Goldstrike Mine, sunk in the Carlin Trend near Elko, Nev. Many said that Munk was, well, crackers. True, the Carlin Trend was seen as a great gold prospect, but the thought that Munk had anything at all at Goldstrike, a site already worked over by a major American mining house, was far too rich for the majority of gold analysts. Munk phoned John Tumazos, a Wall Street heavyweight, to convince him of Goldstrike's lustre, which, he said, contained 15-million ounces of gold. Munk's plan was to dig the biggest, deepest gold-mining pit the world had ever seen. "A great canyon," Munk called it. "Bunch of bullshit artists," said Tumazos as he hung up.

Much of the derision sprang from Munk's past: from the Clairtone days, the television/hi-fi extravaganza that the Hungarian entrepreneur co-founded with partner David Gilmour in the 1950s, which crashed in 1971 leaving the government of Nova Scotia with something on the order of $23 million in losses; and from the colorful company he keeps - Saudi princes, the Khashoggi brothers, Essam and Adnan. And given that Munk's most successful enterprise was hotel building on South Sea islands, in which the Khashoggi clan held a major stake, and given that he admittedly knew zip about gold mining, that he did not draw huge early support was no surprise.

But Goldstrike was the mother lode that its name suggests, eventually producing two million ounces of low-cost gold annually. Barrick became the continent's most profitable gold producer, and the cash flow fed by Goldstrike in turn fed Barrick's acquisitive nature. In the fall of 1994 it took over Lac Minerals Ltd., a pursuit that took Munk six years. And last summer, Barrick acquired Arequipa Resources, a promising junior for which it paid $1.1 billion because it liked what it saw in Arequipa's Peruvian properties.

But it is Bre-X that will deliver Munk's ambition, which he stated a scant year ago, to be the largest gold-mining house on the globe. Barrick smelled Bre-X early. Before Bre-X even started drilling, Barrick geologists Larry Kornze and Paul Kavanagh visited the site, and recommended to headquarters that Barrick do a deal with Bre-X. A tentative agreement was struck that would have seen Barrick take control of the junior company. When that fell apart, apparently over Barrick demanding changes to terms of the deal, it looked as though Munk had made a serious error. Bre-X was confident it could make a deal elsewhere: there was Placer Dome Inc. and Teck Corp., both of Vancouver, and there was Newmont Mining Corp. of Denver. Each was desperate to make Busang theirs.

But Munk had not misread the situation at all. He merely started to play the game from the smart end, the Indonesian end, getting inside the politics of one of the world's nastiest, and greediest, regimes. Munk is not new to the region. Barrick has its hands on 22-million acres spread largely through Kalimantan and Irian Jaya, two of the country's provinces. Barrick's modus operandi in Indonesia has been to forge joint ventures with junior mining outfits, funding their exploration efforts. Take International Pursuit Corp., run by Munk's old pal, and former corporate hire, Stephen Dattels. International has more than 10-million acres in Kalimantan circling the Busang site.

Barrick's various Indonesian mining projects are currently awaiting about five Contracts of Work, key government approvals. These so-called COWs are the crucible of the Bre-X saga: of Walsh's inability to secure a COW for the key part of the Busang site; of Bre-X's aggressive drilling of the site when it had a mere provisional licence in hand; of challenges laid to Bre-X's control by its Indonesian partner, billionaire Jusuf Merukh; of questions raised about the offshore corporate transfer of the Busang property in the first place. Yet Bre-X has said repeatedly that it has not transgressed the letter of Indonesian mining law.

In October, in a desperate effort to get the Indonesians onside, Walsh announced a deal with Sigit Harjoyudanto, eldest son of Suharto. Sigit was to get 10 per cent of Busang, and $1 million a month in "consulting fees" for 40 months. It was what it was, a payoff. Unfortunately for Mr. Walsh, he picked the wrong Suharto in the relatively powerless Sigit. That the government would then step in to force its preferred resolution has been seen as an attempt to make an example of the presumably misbehaving Bre-X. "It was like being caught sleeping with the virgin princess," says one Bay Street observer, referring to the reverence with which the Indonesians hold their precious resources. "They," he says, referring to the Bre-X team, "had their proverbials chopped off."

The moves of Peter Munk have been positively stealth-like by comparison. While Munk has never met Suharto, he struck a neat deal last summer with Suharto's eldest and extremely powerful daughter, Siti Hardiyanti Rukmana (Tutut). Munk has a gold-plated international advisory board, including former prime minister Brian Mulroney, former Bundesbank head Karl Otto Pöhl and former U.S. president George Bush to help him gain entrée in various countries. That is what they are paid for. That is precisely what Mulroney delivered when Munk and Power Corp.'s Paul Desmarais decided to pursue mining prospects in China, a plan that was subsequently shelved.

The right Indonesian entrée was found in Tutut. To Tutut's Citra Lamtoro group, Barrick agreed to award all contracts for road construction, should it ever build a mine. At the time, none of Barrick's own interests were anywhere near such decision-making. Busang, in rugged, jungle-covered terrain, will need infrastructure soon. And the Indonesians are desperately eager to get the mine, which will take two years to construct, on the go. According to Kontan, an Indonesian weekly, Tutut herself met Sudjana in the course of the November meetings, apparently to discuss work contracts for Busang. The news that Barrick would be in control of the project broke in Kontan days before Bre-X issued its news release stating that "the Indonesian Government is very concerned about the immediate development of the Busang Gold Deposit" and that the Indonesians had "given guidance to Bre-X to finalize a joint venture between Bre-X and Barrick Gold Corp. on the basis of 25 per cent to Bre-X and 75 per cent to Barrick." Bay Street found the wording bizarre, but then, it had been written by the Indonesian government. In its reporting of the 75/25 split, the Jakarta Post said the battle pitted a Canadian company against an American one, wrongly assuming that Munk's empire is a U.S. gold colossus.

If he is successful in getting Busang, the devoutly Canadian Munk will have to wrestle with two large issues. There is, first, Indonesia's request that the "parties should consider" handing over 10 per cent of the project, a piece that could be worth at least $600 million. Last week, Bay Streeters were arguing that they far preferred the optics of money flowing into government coffers over the Walsh plan of directly lining the pockets of a mini-Suharto. But the two are indistinguishable. Tutut is a mighty member of the House of Counsellors, and Barrick can provide no details on how contracts to Tutut will be priced, essential in determining just how different the two styles of payment precisely are.

Barrick also has to deal with the Bre-X shareholders, those who have struck it so rich in a place so far away. Five years ago, Bre-X was, literally, a 10-cent stock on the Alberta Stock Exchange looking for diamonds in the Northwest Territories. The stock has made millions for many, some of whom mortgaged their houses to buy in. Given that Bre-X has not released results of its exploration program for the past four months, investors have been left in the dark as to what their shares are worth, and what Barrick might pay for them. Most analysts believe that because Bre-X is widely held by institutional investors, including a number of large mutual funds, Munk will deal fairly with the shareholders.

Individual investors, however, are panicked. Gregory Chorny, who says he and his family own about one per cent of Bre-X's shares, circulated a letter to other shareholders on Friday, urging them to register their concerns by faxing form letters to Barrick and Bre-X. But Barrick has no intention of taking out Bre-X. It simply gets to cherry pick Busang, for which it will likely ante up all of the capital expenditures to bring the mine into production, estimated to cost about $1.5 billion. How shareholders will be compensated, whether in the form of warrants, options, special shares, cash, or a combination of those is not yet known. A U.S. class-action suit could result if they do not get satisfaction.

Some suggest that the fight for Busang is not over. Jean Anes, vice-counsel for investment at the Indonesian Consulate in Toronto, said his government will consider other bids to develop Busang right up until the Dec. 4 deadline. One contender, Placer Dome of Vancouver, says it had "high level" discussions with Bre-X about joining the Busang project just days before the Barrick announcement. "This," says Anes, choosing a strained description of what has gone on in Jakarta, "is just a pure business deal."

Through it all, Munk has remained his sleek, reserved self. The night the Bre-X news came out, Munk and his second wife, Melanie, were doing the Christmas tree lighting thing at the Gardiner Museum of Ceramic Art in downtown Toronto. That very day, he had been mulling further real estate acquisitions for Trizec. He will soon be heading for Switzerland for his annual ski holiday, from which nothing can keep him. Not even Busang. By the time he gets there Peter Munk should know whether he is, after all, king of the hill.

A 10-Year Conquest of the Gold Market

December 31, 1986

Peter Munk's three-year-old American Barrick Resources Corp., originally created to explore for oil, pays $60 million for 50 per cent of Nevada's Goldstrike mine, North America's richest gold deposit.

December 31, 1986

Peter Munk's three-year-old American Barrick Resources Corp., originally created to explore for oil, pays $60 million for 50 per cent of Nevada's Goldstrike mine, North America's richest gold deposit.

January 17, 1987

American Barrick pays $50 million to acquire PanCana Minerals, which owns the remaining 50-per-cent interest in the Goldstrike project.

November 1, 1993

Five months after vacating the Prime Minister's Office, Brian Mulroney joins Barrick's board of directors.

March, 1994

American Barrick and Exall Resources Ltd., a Toronto-based mining company, jointly buy the El Triunfo gold property on the southern tip of Baja from the Mexican government.

September 6, 1994

Barrick wins a bidding war against Royal Oak Mines Inc. for Lac Minerals Ltd., a Toronto-based gold producer with mines in Canada, the United States and Chile. The price: $1.9 billion.

January 18, 1995

American Barrick Resources Corp. is renamed Barrick Gold Corp.

May 3, 1995

To assist Barrick's overseas expansion, Munk establishes an international advisory board. Its members now include former U.S. president George Bush and Paul Desmarais, Sr., past chairman of Power Corp.

December 1, 1995

Barrick Gold acquires a 40-per-cent interest in the High Desert Mineral Resources Nevada Inc. gold property.

August 27, 1996

Munk's company pays $1.1 billion for 93 per cent of Arequipa Resources Ltd., a Vancouver company that controls an open-pit gold mine and exploration properties in Peru.

November 26, 1996

Barrick, with the support of the Indonesian government, confirms that it is negotiating to acquire a majority interest in that country's Busang gold deposit, believed to be one of the largest gold finds ever.

Maclean's December 9, 1996