Sep 11, 2008

West Papua: Analysis on Rio Tinto Pull-Out

Sample ImageNorwegian withdrawal from Rio Tinto highlights political potential of sovereign wealth funds.

Below is an article published by the Globe and Mail Report on Business :

They could be a menace, these sovereign wealth funds - too rich, too powerful and too political. Pumped up with their petrodollars, who knows how they will use their financial muscle to influence the running of our greatest companies.

Well, we now know because one of the biggest petro funds has just smacked Rio Tinto, the Anglo-Australian miner, but the surprise is the identity of the investor and the reason for its confrontation with Rio's management. Norway's Government Pension Fund has accused Rio of causing severe environmental damage in Indonesia through its 40-per-cent stake in the Grasberg copper and gold mine in West Papua. After failing to influence the company's investment in the mine, operated by the U.S. miner Freeport-McMoRan, the Norwegian fund decided in April to sell its Rio shares, a stake worth £500-million ($940-million).

This week, the Norwegian Finance Minister added insult to injury with a humiliating rebuke, publishing its findings that the Grasberg mine would cause "severe long-term environmental damage" in West Papua.

Grasberg is notorious, a gaping pit in a mountainous region of West Papua at 4,000 metres altitude, and a hideous gash on the landscape. It is also the biggest gold deposit in the world and the supplier of 4 per cent of the world's copper. But the operation's history has been one of endless conflict, not just with environmental campaigners but also with the local population, including trade unions, indigenous tribal people and separatist groups seeking independence from Indonesia.

The mine employs about 20,000 and a vast town has been erected to supply the enormous excavation. Freeport-McMoRan has been accused of helping the Indonesian military with funding and intelligence in a campaign against dissidents. Locals accuse the police of arbitrary detention and murder, but Freeport denies any involvement in the repression.

The Norwegians have focused on environmental damage, notably the daily dumping by Freeport of 230,000 tonnes of tailings - the waste rock from the mine - into the local river. According to the Norwegian fund, the tailings will pollute the river system with sulphuric acid, as well as other toxic chemicals that are byproducts of mining activity. Referring to Freeport's insistence that the disposal of waste in the river is the best solution, the Norwegians conclude that the miner has chosen the cheapest solution. "Freeport knew that riverine disposal would cause severe damage to the natural environment but the company and the [Indonesian] government attached little importance to environmental concerns."

This is not the first time that Norway's sovereign wealth fund has jousted with corporations. Freeport was earlier excluded and the fund has excluded several arms manufacturers, notably British Aerospace, Lockheed Martin, Raytheon, France's Thales and EADS, the European aerospace company. Wal-Mart faced Norway's moral opprobrium over its labour practices in developing countries.

This is more than just snooty stock picking because the Norwegians seem to genuinely want to change company policy - and it gets very political.

Kerr-McGee, the American oil company, was excluded over its exploration efforts in Western Sahara. Following an invasion by Morocco, the territory has been locked in dispute for decades between the Moroccan military and the Polisario Front, the liberation army of the Saharawi people. The Norwegian fund decided that Kerr-McGee was in violation of international law for accepting Morocco's shilling but the oil company got the message, ended its exploration activity in Western Sahara and the Norwegians reinvested in Kerr-McGee.

This is Norwegian government policy at work and it has the backing of a fund that is worth some $375-billion (U.S.). It is the most striking example of a sovereign wealth fund used to implement social and political policy at the corporate level with a detailed ethical investment policy.

It is ironic that none of the Gulf Arab funds or even Russia's oil fund have yet sought to use their financial clout to engineer such deliberate political or social goals. Norway failed to persuade Rio to make any changes at Grasberg. With a minority stake, the company had little option other than to sell out of Freeport's project and forgo the massive profits. It is unclear what happened to the Rio stock sold by the Norwegians. Chinese funds have already taken a stake in the Anglo-Australian miner. It would not be surprising if they had bought a few more shares, and they are unlikely to worry too much about Grasberg.