Briefing on Bumi Resources (BUMI:IJ) – Upcoming Offering and Risks

Chain Reaction Research has developed a briefing in anticipation of the Indonesian coal mining company Bumi Resources’ (BUMI:IJ) upcoming rights offering. Bumi Resources is a holding company for Bumi, Asia’s largest thermal coal exporter.

Potential Financial Risks

Controlled by Indonesia’s Bakrie family, Bumi has experienced financial turbulence in the past. In 2010, a former Indonesian tax official admitted to receiving over US$ 11.1 million in bribes to falsify Bumi’s tax documents. Nearly a quarter of this money originated from the Bakrie Group, including Bumi Resources. In 2012, Bumi faced international probes over its multibillion-dollar debt and financial irregularities. Suspicious transactions led to a boardroom dispute between the Bakrie Group and Nathaniel Rothschild of the British Rothschild banking family, who had a 29% stake in the company. Rothschild ended up leaving the board of directors and losing much of his stake in the company.

At the head of the Bakrie family is politician and business tycoon Aburizal Bakrie, who was previously considering a run for President in 2014. Reuters alleges the Bakrie business empire is “known for acquisitions funded through debt that are linked to shares in its firms – a strategy that backfires when global financial crises hit equity and debt markets.” The Guardian has gone as far as stating “the chaos surrounding… Indonesian coal-miner Bumi Resources shows no sign of ending.”

Potential Sustainability Risks

Coal mining in Indonesia, predominantly open pit mines, is linked to human rights abuses and environmental damage. The Indonesian State Auditor has found that open pit mining is associated with coal fires, land subsidence, soil erosion and landslides. Communities in mining areas complain that mining companies are squeezing their food and energy supplies. In addition, their housing structures are often affected by tremors from drilling and mining blasts.

Bumi is affiliated with oil and gas company PT Lapindo Brantas, a company accused of being responsible for the 2006 mudflow disaster in Sidoarjo, East Java. The Indonesian State Auditor found that PT Lapindo Brantas Inc. had not employed experienced personnel, had not used standardized equipment, and neglected safety precautions in handling well problems. The mud volcano continues pouring out mud to this day, with serious environmental and social impact.

Through its holding company Bumi Resources, Bumi holds majority stakes in two significant coal producers — the 90,000 ha concession PT Kaltim Prima Coal and 70,000 ha concession PT Arutmin Indonesia, both in Indonesian Borneo. The International Federation of Chemical, Energy, Mine and General Workers’ Unions (ICEM) reported military violence against 20 miners striking at the Kaltim Prima mine in March 2012. In 2012, campaigners attended the Bumi annual general meeting and asked for clarity on violence used by Indonesian security forces against Kaltim Prima workers. They also criticized Bumi’s dumping of coal and chemicals in a marine conservation area by Berau Coal, another one of Bumi’s subsidiary companies.