Bre-X
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Bre-X Minerals Ltd. was a junior Canadian mining company that was once reported to be sitting on an enormous gold deposit at Busang, Indonesia (on Borneo). Bre-X bought the Busang site in March 1993 and in October 1995 announced significant amounts of gold had been discovered, sending its stock price soaring. Originally a penny stock, its stock price reached a peak at $286.50 (Canadian dollars) on the Toronto Stock Exchange (TSX), with a total capitalization of over $6 billion Canadian dollars.
The gold reserves at Busang were alleged to be 200 million ounces (6,200 t), or up to 8% of the entire world's gold. However, it was a massive fraud and there was no gold. The core samples had been faked by salting them with outside gold. An independent lab later claimed that the faking had been poorly done, including the use of shavings from gold jewelry. In 1997, Bre-X collapsed and its shares became worthless, in one of the biggest stock scandals in Canadian history.
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History
David Walsh founded Bre-X Minerals Ltd. in 1989 as a subsidiary of Bresea Resources Ltd. The company did not make a significant profit before 1993, when Walsh followed the advice of prospector John Felderhof and bought a property in the middle of a jungle near Busang River in Borneo, Indonesia. When they hired Filipino geologist Michael de Guzman to evaluate the site, the results were impressive: the first estimate was 17 million ounces of gold, at the time worth $25 billion, which would have made it the richest gold deposit ever.
The estimate of the site's worth increased over time; in 1995 it was 30 million ounces (900 t); in 1996, 60 million (1,900 t); finally, in 1997, 200 million ounces (6,200 t). The stock price of Bre-X rose to $280 per share by 1997 (split adjusted) and at its peak it had a market capitalization equal to US$4.4 billion. As the estimated size of the deposit grew, so did the stock price and the hysteria. Junior energy and mining stocks usually flounder and are ignored by the financial establishment, but the immensity of this opportunity was too great for the big players to ignore. In a greedy frenzy the Toronto Stock Exchange listed Bre-X in its premium TSE 300 index, and there was real talk about adding it to the Dow Jones Industrial Average.
Some other mineral companies organized failed takeovers, but the Indonesian government of president Suharto also got involved. Believing that a small company like Bre-X could not exploit the site on their own, the Indonesians suggested that Bre-X share the site with American Barrick Resources (today simply called Barrick), in association with Suharto's daughter Siti Rukmana. Bre-X hired Suharto's son Sigit Hardjojudanto to handle their side of the affair. Mohamad Hasan, another Suharto acquaintance, negotiated a deal whereby Bre-X would have a 45% share, Freeport-McMoRan Copper & Gold would run the mine and Hasan would get a cut as well. Bre-X would have the land rights for 30 years. The deal was announced February 17 1997 and Freeport-McMoRan begun the final evaluation of the site.
Unraveling of the fraud
The fraud began to unravel on March 19, 1997 when Filipino Bre-X geologist Michael de Guzman jumped to his death (or was pushed) from a helicopter in Indonesia. His body was found four days later in the jungle, mostly eaten by animals and identified from molars and a thumbprint.
On March 26 the American firm Freeport-McMoRan, a prospective partner in developing Busang, announced that its own due-diligence core samples showed "insignificant amounts of gold". A frenzied sell-off of shares ensued and Suharto postponed signing the mining deal.
Bre-X demanded more reviews and commissioned a review of the test drilling. Results were not favorable to them and on April 1 Bre-X refused to comment. David Walsh blamed the whole affair on web "ghost writers" who had spread rumors on the Internet and damaged the company's reputation. Canadian gold analyst Egizio Bianchini considered the rumors "preposterous".
A third-party independent company, Strathcona Minerals, was brought in to make its own analysis. They published their results on May 4: the Busang ore samples had been salted with gold dust. The lab's tests even showed that the gold had been shaved off gold jewelry. Trading in Bre-X was soon suspended on the TSX and the Nasdaq and the company filed for bankruptcy protection.
More details began to emerge; Although Bre-X had claimed that the gold vein was clearly visible, local residents had never seen anything like that. De Guzman had controlled the access to the site and he and his aide Cesar Puspos had handled the original samples during the transfer from the drill site to the assaying lab.
The aftermath
By May, Bre-X faced a number of lawsuits and angry investors who had lost billions. Among the major losers were three Canadian public sector organizations: The Ontario Municipal Employees Retirement Board (loss of $45 million) the Quebec Public Sector Pension fund ($70 million) and the Ontario Teachers Pension Plan ($100 million). There was fallout in the Canadian financial sector also; the fraud proved a major embarrassment for Peter Munk, the head of Barrick Gold, as well as for the then head of the Toronto Stock Exchange (resulting in his ouster by 1999), and began a tumultuous realignment of the Canadian stock exchanges whose effects are still being felt.
Walsh moved to Bahamas and died there in 1998, still protesting his innocence; Felderhof moved to the Cayman Islands.
In 1999 the RCMP (Canadian federal police) announced it was ending its investigation without laying criminal charges against anyone. Critics charged that the RCMP was underfunded and understaffed to handle complex criminal fraud cases, and also charged that Canadian laws in this area were inadequate. However, despite the dropping of criminal charges, civil class action suits continued.
Bre-X finally went bankrupt in 2002 although some of its subsidiaries like Bro-X have continued until 2003.
Felderhof remains in the Cayman Islands, which has no extradition treaty with Canada, although some reports place him in other countries. In 2000 and 2001, the Ontario Securities Commission charged him with insider trading. A trial took place in his absence, but was suspended in April 2001 when the OSC tried to have presiding judge Justice Peter Hryn removed for alleged bias against the prosecution. This was denied, and on December 10, 2003 the appeal was also denied.
The trial resumed on December 6 2004 and is expected to continue until at least April 2005.
Books
- Douglas Goold & Andrew Willis - The Bre-X Fraud
- James Whyte & Vivian Danielson - Bre-X: Gold Today, Gone Tomorrow
- Kerry B. Collison - Indonesian Gold - a fictionalised account