A British company and Indonesia’s mining boom – the scandal continues « Mining Blog

A British company and Indonesia’s mining boom – the scandal continues

14. November 2012,

During late summer this year, the UK’s Financial Services Authority (FSA) was rocked by the news that a London-listed mining company had sustained some US$400 million in debts – which it couldn’t account for.

At the time of writing, Bumi plc – the world’s largest exporter ofr thermal coal from mines in tropically-forested East Kalimant (Indonesian Borneo) – still hasn’t got to the root of this gob-smacking event.

It’s one which has left Britain’s financial regulators, and the London Stock Exchange itself, floundering. How to explain why such an ill-managed enterprise could be invited into London in 2011, when such poor due dilgence had been performed on its operations?

Not only that: Bumi had been allowed to take the leading investment role in a UK-listed firm called Vallar plc, set up by Nat Rothschild of the eponymous banking dynasty.

This enabled Bumi to raise vital capital outside Indonesia. The notorious Bakrie family group, whose pater familias had recently faced corruption charges in Jakarta, used Bumi as a “trojan horse” into the English capital, effecting a “reverse takeover”. Later another powerful Indonesian family firm, the Roeslanis, got in on the act.

In its latest proposals to tighten listing regulations, the FSA says it will ban such manoeuvres. But, in the Bumi-Vallar case, the horse had already been allowed to bolt.

All this came as little surprise to NGOs, in both Indonesia and the Uk, who for years had sought to expose the irregularities – both financial and environmental – which lie at the heart of Bakrie-Bumi on its home ground in Kalimantan. (See: http://www.minesandcommunities.org/article.php?a=11939&l=1).

Bumi plc is still being allowed to sell shares on the London Stock Exchange, and is trying to repay a debt owed to Credit Suisse, for a loan made by the bank to the Bakries, which assisted its London “invasion”. (JP Morgan was the prime agent in facilitating the move).

* * *

Last week, in a commentary on this scandal, William Gamble of Money Life magazine (12 November 2012), compared the Bakries (and the Rothschild dynasty) to Chinese elite families.

Said Gamble:

“Nathaniel Rothschild, scion of the English branch of the famous banking family, teamed up with the Bakries and the Roeslanis of Indonesia to exploit its mineral wealth. But it dawned on him too late that the Bakries and the Roeslanis were acting in concert from the beginning.

” The enormous wealth and power of elite families is not just limited to China. It extends to all emerging markets. The reason is simple. The rules are different. Investors in any given market are aware of the local rules and adapt their business practices and models to them. The problem comes when outside investors want to play too.

“… Over the past several years Indonesia’s vast mineral wealth has been exploited to feed the seemingly ever growing demand from China. Even with China slowing, Indonesia has grown at an enviable 6.2%. Its market has increased at twice the rate of the S&P 500 since 2009 and is up 13% since June.

“The idea of exploiting this market and especially Indonesia’s mineral wealth seemed to be a “no-lose” situation especially if investors could be protected by listings on markets with better safeguards. This was the brain child of Nathaniel Rothschild.

“Nathaniel Rothschild is the scion of the English branch of the famous banking family and the future fifth Baron Rothschild. He believed that with the world’s growing demand for energy resources, an investment in Indonesian coal, would net investors returns of “two to three times their money”. To exploit this idea he created a company, Vallar. With the magic of his name and the promise of unlimited growth in emerging markets, he was easily able to raise $1.07 billion from Vallar’s IPO on the London Stock Exchange in July of 2010.

“With all that money, Mr Rothschild went looking for local companies and local partners who he could help with foreign capital. He found them in the Bakrie family of Indonesia — an aristocratic lineage in their own country equal to his…

“There was one problem with the Bakries. Their business practices were adapted to Indonesia. They survived, not through the legal protections, but because they developed strong relationships with the government and other powerful families.

“The Bakries’ empire was created through leverage made possible by a corporate shell game. It had nearly collapsed twice in the past 12 years, after the 1997-98 Asian financial crisis and again in 2008. When this was pointed out to Mr Rothschild by a local journalist in December of 2010, he brushed it off. He told the Jakarta Post that there was nothing wrong with them.

“So Rothschild teamed up with not only the Bakries, but with another powerful Indonesian family, the Roeslanis. They contributed their interests in two large coal mining concerns, Bumi Resources and Berau, in exchange for shares in Vallar which was renamed Bumi plc. The deal seemed quite a success. After it came out, Bumi’s shares increased by 30% by April 2011, but then things began to go horribly wrong.

“The Bakries, true to form, had leveraged up their interests. By fall, the stock had fallen 40% from April and was 20% below its IPO price…But the Bakries had been here before and knew how to handle these problems. They called in one of their friends — another Indonesian business tycoon—Sami Tan. Like the Roeslanis, Mr Tan had a long term relationship with the Bakries and arranged to bail them out. They didn’t even bother to contact Mr Rothschild. He wasn’t part of the family. When he called, they didn’t bother to pick up the phone.

“In November [2001] Rothschild vented his anger in the press, but it didn’t help. By February Tan and the Bakries almost removed him from the board.

“But that wasn’t the only problem. By September of 2012 Bumi investors learned of $400 million inter-party loans to the Roeslanis that, despite promises, were never repaid…

“By October [2012] Rothschild resigned from the board when it finally dawned on him that the Bakries and the Roeslanis “were acting in concert from the beginning”. He never understood until it was too late that the relationship systems in emerging markets are transparent only to the locals. He was playing in a game where he never understood the rules.”

* * *

Whether, as Gamble comments, Mr Rothschild did indeed fail to “understand the rules” of emerging markets, is open to question.

Certainly he chose to ignore the rules he should have been playing by in London.

But then, UK regulators were all too content to go along with both these games and they should take primary responsibility for the debacle that ensued.

After all there were several informed voices warning what could happen, and which went unheeded.

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