No safe haven for Archipelago Resources in Indonesia

AIM-listed Archipelago seeks shareholder support but can't reveal extent of problems.

LONDON - 

Institutional investors in the London AIM market are this month being asked to subscribe fresh funds in the hope that Archipelago Resources, the Perth-based junior goldminer (ticker AR: LN), can secure its rights to mine Toka Tindung, a gold mine which has seen the failure of a string of proprietors over the last dozen years, as they came under attack by the Indonesian authorities. 

Archipelago's troubles in Indonesia are similar to those of the Canadian junior goldminer, Crystallex, in Venezuela. Both companies have run into local government resistance to a new goldmine, complicated by conflicting claims over water protection, bureaucratic rivalries, and allegations of corruption. Ostensibly and publicly, the problems facing both Archipelago and Crystallex can be solved by the issuance of the environmental permits required for mining. Announcements from company managements regularly promise that issuance is just around the corner.

Meantime, shareholders must foot the bill for the waiting, and the market is prone to misleading rumours, triggering volatile share price movements. 

Archipelago's prime asset is Toka Tindung. Located in the northeast corner of North Sulawesi Island, near the regional capital, Manado, company documents suggest it contains 1.75 million oz of gold. It is acknowledged by Archipelago management to be the company's principal money-maker: http://www.archipelagoresources.co.uk/toka_tindung_gold.13.html

Historically, the project was developed by an Australian Stock Exchange-listed company called Aurora Gold. Aurora acquired the original holder of the Contract of Work to start the project in 1995; then for several years Aurora financed exploration. By mid-1997, Aurora had done a feasibility study, and was preparing for fundraising to start production.  

However, in 1998, as the Asian financial crisis struck, Aurora ran into difficulties with other Indonesian projects, and trouble raising cash for Toka Tindung. Aurora decided to sell its interest to a well-known Indonesian banking family.

The Indonesian proprietors then combined with Australians based in Perth to form Archipelago Resources, which listed on AIM in 2003. Archipelago doesn't identify the Indonesian stakeholders in the nominee list of principal shareholders: http://www.archipelagoresources.co.uk/major_shareholders.11.html 

If all had gone well, Archipelago aimed to start production in 2007. But in February 2007 the Governor of North Sulawesi province, Sinyo Harry Sarundajang, sent a letter to the Central Government  in Jakarta, requesting revocation of the  environmental approval for the Toka Tindung, on the ground that the pit, tailings, and processing were all potentially damaging to the local environment. He made clear he opposed granting the environmental permit known in Indonesia as AMDAL. 

In parallel, several other foreign mining companies, including a local unit of Newmont Mining Corp. (NEM), ran into legal troubles with the provincial Indonesian governments. The latest Mineweb story on Newmont in Indonesia makes clear the underlying source of the troubles is hostile raiding by competing interests: http://www.mineweb.com/mineweb/view/mineweb/en/page67?oid=48378&sn=Detail 

Investment bankers and fund managers in London have been told by Archipelago that for the past twelve months, they have been trying to play the support of the central Indonesian government off against the regional governor, in order to press the latter into lifting his veto of the AMDAL.

In June 2007 Indonesia's Environmental Minister Rahmat Witoelar told reporters his ministry would not issue a licence to the project, due to opposition from the local government, parliament, and people near the intended mining site. He was backed by statements from the central ministries of fisheries, and of social affairs. In July 2007, Governor Sarundajang publicly declared that he wanted sustainable and eco-friendly development for the island. Referring to Archipelago's Toka Tindung project, he added that a goldmine would mean waste dumps on land, and contamination of inland and sea water.  

The environmental threat is real; it is also compounded by local perceptions, as well as the financial interests backing tourism instead of mining. The project is less than 20 kms from the seashore, on the Molucca Sea, where the locals aim to develop a national resort zone. Several developers have already started building resorts and planning beaches there, hoping to attract tourists away from nearby Bali.

Open mine pits eating away at the forest; exhaust fumes from excavators and lorries; explosions from pitwall dynamite; tailings and dams leaking poisons into the water-table, and downhill into the seawater: Archipelago counters that this is unfair, but this is how Archipelago is perceived in the project area. Because Archipelago has been unable to start production in the time period required by the two Contracts of Work which implement the licences, cancellation of the contracts, and thus of the mining rights, is now under administrative review. 

It is difficult to find acknowledgement of the revocation risk in Archipelago's presentations or reports. The last annual report for 2006, issued in June 2007, acknowledged the AMDAL obstacles, but noted "there is no basis in fact for the concerns raised":     (see pp.3-4)

Then this past January, the German investment bank, WestLB, decided not to run the environmental risk by investing in the project, and announced it would not renew its credit arrangements with Archipelago. WestLB is one of four banks, which had originally agreed to provide project financing for Toka Tindung. The others are Australia's ANZ and Investec, and the French bank Société Générale.  

International environmental organizations, allied with local NGOs, are now campaigning to persuade the remaining banks to pull out; Société Générale is particularly vulnerable. The international press has picked up reports from the Urgewald organization of Germany as saying: "We are amazed that WestLB held on to this project as long as they did.  Since 2005 the people of Northern Sulawesi Province have consistently demonstrated and spoken out against the project and both the provincial parliament and the Governor have given a clear 'No' to Toka Tindung. This--and the fact that the company pushed forward construction without obtaining valid permits--are a clear indication, that Archipelago Resources is not a company that banks should invest in."

Archipelago has been hedging its future by proposing to shareholders to spin off its non-precious metal assets into a separately listed vehicle. A share offer from the company to effect this closed on February 25:  

The first hints that Archipelago's management may be making a virtue of necessity, and preparing to refocus the company on assets elsewhere, came in the Annual Report for 2006, last June, when the Chief Executive, Colin Loosemore,  suggested the company was looking to Vietnam and Philippines for its gold projects;  and to the spinoff scheme creating Archipelago Metals. Company notices suggest this will be listed separately on the ASX soon.

London shareholders and fund managers appear to be betting against the risk that Archipelago will fall victim - as have Newmont and others -- to the arcane legal and regulatory environment existing in Indonesia, and be torn between the central and provincial governments.  Archipelago's share price has trailed after the environmental campaigners, and Governor Sarundajang, hitting a low of 20p.  The fall came after a vote by the North Sulawesi regional parliament to endorse the project, and support the issue of the AMDAL.  

Loosemore claimed: "This support from the regional government is consistent with the previously announced support for the project from local people within the ten villages in closest proximity to Toka Tindung... We look forward to AMDAL approval and a substantial re-rating of the company's present share price which we consider does not reflect the project's unhedged position and very robust economics at the current gold price." But the market disagreed: Archipelago's share price fell 20% from a high of 25p at the start of the November to the year-low of 20p on December 6.

It is not clear why sentiment suddenly improved to push the share price upwards.

Perhaps a stakeholder has a hunch it isn't sharing with the market, not yet.  

On March 3, Archipelago's share price reached 31.2p. In two days, despite the absence of any news from Indonesia, the market has driven up the share by 35%. It began to fall again on Tuesday.

There is talk among London brokers that Archipelago is now staking all on persuading the central government to override the North Sulawesi governor, and confirm the AMDAL over his objections. This short-lived expedient may turn out to be good for the share price. But it isn't likely to mollify the governor. If he becomes angry enough, the local opposition to the mining project will grow.  And if that happens, Archipelago's troubles could turn out to be as unstoppable as the tides rolling in from the Molucca Sea.

http://www.mineweb.com/mineweb/view/mineweb/en/page66?oid=48656&sn=Detail