Letter from the Overseas Private Investment Corporation to Freeport-McMoRan cancelling $100,000,000 of risk insurance

This letter was obtained through Freedom of Information Act request.

Overseas Private Investment Corporation (OPIC),
1100 New York Avenue, N.W.,
Washington, DC 20527-0001,

October 10, 1995

Henry A. Miller, Esq.,
Vice President and General Counsel,
Freeport-McMoRan Copper & Gold Inc.,
1615 Poydras Street New Orleans, LA 70112

Re: OPIC Policy of Contractors and Exportors Insurance No. C592

Dear Mr. Miller,

Pursuant to Article 7.02(c) of Policy of Contractors and Exporters Insurance No. C592 ("the Contract"), the Overseas Private Investment Corporation ("OPIC") hereby notifies Freeport-McMoRan Copper Company, Inc. ("Freeport-McMoRan") that OPIC will terminate the contract and underlying policy effective October 31, 1995. [1]

As set forth below, OPIC will terminate the Contract in response to Freeport-McMoRan's continuing material breaches of its duties as set forth in Article 7.01(1) and other provisions of the Contract. Additionally, OPIC is terminating the Contract as an exercise of its statutory charge under the Foreign Assistance Act of 1961 [2] to ensure that overseas investment projects do not pose unreasonable or major environmental hazards or cause the degradation of tropical forests in developing countries. OPIC has discovered as a result of its monitoring visit in July of 1994, a review of the data subsequently provided by Freeport-McMoRan, conversations with Freeport-McMoRan personnel, and a consideration of the various studies of the impact of Freeport's activities on the rivers, forests and environments of Irian Jaya (West Papua), that Freeport-McMoRan's expansion of the P.T. Freeport/Indonesia project ("Project") has caused substantial adverse environmental impacts which compel OPIC to deny all further coverage of this project.

Freeport-McMoRan's material breaches of the Contract include, but are not limited to, its failure to perform the Project as it was defined in the Contract and as Freeport described it in the application materials submitted to OPIC. For example, Freeport-McMoRan represented to OPIC prior to the effective date of the Contract that the maximum ore throughputof the project would be 52,000 dry metric tons per day. However, OPIC's monitoring activities reveal that Freeport has increased its ore production to over 100,000 dry metric tons per day (and plans to increase ore throughput to as high as 160,000 tons per day). This change in the scope of work has caused the discharge of tailings to increase significantly beyond the volumes anticipated by OPIC, resulting in the massive deposition of tailings in the Ajkwa River and the sheet flow of tailings that has degraded a large area of lowland rainforest between the Ajkwa River and Minajeri River. These and other effects of the Project have posed an unreasonable or major environmental, health, or safety hazard in Irian Jaya (West Papua). [3]

If OPIC had, prior to the issuance of the Contract, understood that the Project's ore and tailings production rates would be at such high levels (and that such unreasonable or major environmental, health, or safety hazards would result), the agency clearly would not have issued the subject policy.

Finally, OPIC is terminating the Contract as an exercise of its statutory duty under the Foreign Assistance Act of 1961 to ensure that Freeport's implementation of the Project does not pose unreasonable or major environmental hazards to, or cause the degradation of the tropical forests in, Irian Jaya (West Papua). [4] As noted, OPIC has determined through its monitoring activities that Freeport's implementation of the Project, and especially its tailings management and disposal practices, have severely degraded the rainforests surrounding the Ajkwa and Minajeri Rivers. Additionally, the Project has created and continues to pose unreasonable or major environmental, health or safety hazards with respect to the rivers that are being impacted by the tailings, the surrounding terrestrial ecosystem, and the local inhabitants. [5] Accordingly, in addition to and consistent with the agency's contractual right to terminate the Contract on the basis of Freeport's defaults, OPIC's refusal to provide further coverage for the Project is grounded on statutory environmental concerns.

If, prior to October 31, 1995, Freeport-McMoRan wishes to voluntarily terminate the policy as provided in Article 6.08 of the Contract, that option still remains open. Additionally, although OPIC is convinced that it has no alternative but to terminate the Contract, OPIC is willing to provide Freeport with an opportunity to meet with the agency and its outside counsel prior to the effective date to discuss the termination.

OPIC currently is processing a pro rata refund of the policy premium for 1995-96 that Freeport-McMoRan submitted to the agency on September 29, 1995.

Please contact me at 202-336-8420 if you have any questions regarding this matter.

Robert C. O'Sullivan,
Associate General Counsel for Insurance and Claims

[1] OPIC recognizes that Article 7.02(c) provides that termination of the Contract is effective "as of the date of the breach," which clearly predated this notification. However, OPIC is extending the effective date of the termination to provide Freeport with an opportunity to discuss this matter, make alternative insurance arrangements if necessary and/or voluntarily terminate the policy.

[2] Indeed, contrary to representations made by Freeport in the 1990 Environmental River Study, it appears that tailings have been discharged to fluvial systems other than the Ajkwa River system (e.g., massive sheeting has occurred to the Minajerwi River system). The River Study specifically indicated that the Minajerwi River would not be impacted in this manner.

[3] See 22 U.S.C. sections 2191(3) and 2191(n). OPIC notes that Freeport-McMoRan was specifically apprised that OPIC's statutory goals serve as a fundamental basis for the Contract and underlying policy. (See Contract sectioin 7.01(1).)

[4] OPIC's monitoring activities and the data supplied by Freeport indicate that numerous other unreasonable or major environmental, health, or safety hazards may exist as a result of the Project. These include, but are not limited to, problems associated with acid mine drainage from overburden and tailings; the concentration, mobilization, and bioavailability of toxic materials in the tailings; the degradation of surface and groundwater quali6ty as a result of the Project's operations; the increased sedimentation, sheeting and other adverse effects that have been caused by discharges of higher percentages of coarser graintailings; the impacts of a 1990 log jam that occurred on the Ajkwa River, and the mismanagement of solid and hazardous wastes at the site. OPIC explicitly reserves the right to base the termination on these additional environmental bases or any other ground as provided in Freeport-McMoRan's policy application or n Article 7.02 of the Contract if subsequently obtained data or information so indicates.