THE BRE-X BUST
Is the 'world's greatest gold find' a fraud?
On the morning of Tuesday, March 18, Mike de Guzman and Rudy Vega climbed aboard a French-built Alouette helicopter at Balikpapan, a lush resort town on the east coast of Borneo. For de Guzman, chief geologist with Bre-X Minerals Ltd., Balikpapan was not a place for R and R, but rather home to Indo Assay Laboratories, a company that was doing mineral testing, or assaying, of ore samples for Calgary-based Bre-X. Vega, a Bre-X metallurgist, recalled later that de Guzman was in high spirits that day.
From Balikpapan, the helicopter took Vega to Samarinda, where Bre-X has an office. De Guzman himself was headed 160 km to the northwest, to Busang, to the fabled gold discovery that he and fellow geologist John Felderhof claimed to have found. Waiting for de Guzman at Busang was a technical team from Freeport-McMoRan Copper & Gold Inc., the U.S. mining firm handpicked by the Indonesian
regime to operate the future mine. For two weeks, Freeport had been drilling holes, 250 m deep, alongside the holes sunk by Bre-X— the ones that, de Guzman said, proved that Busang was the mother of all gold deposits. Freeport wanted to double-check.
At Samarinda airport—a registered airport, not just a jungle-hop strip—the practice is to ensure that helicopter passengers are strapped in before takeoff and the doors securely shut. The Alouette took off for Busang. That was the last anyone other than the occupants of the helicopter saw of de Guzman alive. Seventeen minutes later, he plunged—the first reports said he “fell”—240 m into the dense Borneo jungle. But people do not just fall from helicopters, and de Guzman was no exception. The news was later revised. De Guzman had jumped, committing suicide because, said a Bre-X spokesman, he was suffering from hepatitis B. There was, said BreX, a suicide note left behind in his bag that spoke to the illness issue, along with a watch, a much-prized gift from his Filipina wife, Teresa Cruz, and some cash, including an unspecified amount of Pana-
manían currency. Bre-X CEO David Walsh expressed sadness upon hearing the news. In a news release, he said he did not know the geologist that well.
If de Guzman had worked for another company, in another place, the bizarre events of March 18 might not have drawn much notice. But Bre-X long ago developed a pathology unlike any other. De Guzman’s death had Bre-X players and observers, from mutual fund managers to small-time investors, spooked. That he was said to have committed suicide spooked them more. De Guzman had only recently returned to Indonesia from Toronto, where he did a celebrity turn at the Prospectors and Developers Convention, which included a black-tie fete for Felderhof, who was named “explorationist of the year.” He was wealthy, he was on top of the world—or so it seemed. He also, for what it was worth, appeared robust, as he had when interviewed by Maclean’s in Jakarta the previous month.
For Bre-X players, who had fumed as the Busang prize was nearly
taken over by Toronto-based Barrick Gold Corp., who railed against the often-outrageous behavior of the property’s host country, who feared a further diminution of Bre-X’s hold on Busang, the death of de Guzman was the most bracing news yet. “When I first heard de Guzman had fallen out of a helicopter, I thought, my God, what an awful tragedy,” says John Embry, who manages a $403-million precious metals fund for the Royal Bank of Canada. “The next morning, when I heard he had jumped out of the helicopter, I thought, uh oh. That sort of sent a chill up my spine.” Benny Wahju, the president of PT Ingold Management in Jakarta and a member of the Indonesian Mining Association, was in Vancouver when he heard the news. Wahju knew de Guzman. “I told my brother that it doesn’t sound right,” he says. In February, when Wahju met with Maclean’s in Jakarta, he had made some interesting observations. A building at Busang had burned down a couple of weeks previously, “taking drill results with it.” Also, the country’s mines department did not have inspectors working in the field, meaning the whole show was being run by Bre-X. At the time, he didn’t find it suspicious.
The death of de Guzman got everyone rethinking. “I said, this is enough for me,” recalls one Montreal institutional trader who sold his shares immediately. Speaking to Maclean’s last week, he said he had never been a true believer, wondering for a long time whether Bre-X might be a hoax. He had visited Busang last year, and brought back a piece of drill core. He had it assayed. There was nothing there. He knew of other people who had brought back pieces of core. These were also tested and came up barren. But the pieces were small, and a bit of core is not representative of anything. Curiously, at the same time, Bre-X appears to have suspended the release of individual hole results, disclosing instead reserve estimates for the property as a whole. The small band of skeptics initially had nothing to test their results against. Later, when Bre-X did release detailed results, that particular core was rated 1.78 grams of gold per tonne of ore. Mines have been built on less. “I was getting less than 0.03,” the trader says. That does not prove anything, either. Metallurgy is notoriously inconsistent. But then there was the fire. And now, he says, “we’ve got a dead man here.” Suddenly, investors and analysts were talking about the “preponderance of evidence.” Busang started sounding like O. J. Simpson in Indonesia.
Three days after de Guzman’s demise, a Jakarta newspaper published an explosive rumor. The assay results, the paper asserted, were seriously flawed at Busang, so flawed that Busang might not even be worth mining. From his home in the Bahamas, Walsh issued a rebuttal. “The company’s board of directors has absolute confidence in the integrity and accuracy of assay results and resource calculations reported by the company for the Busang gold deposit,” he said. He complained of the “continuing proliferation of falsehoods and misinformation based on unsubstantiated allegations by unnamed sources.” He said Bre-X might sue.
Could it really be that a property so recently seen as so rich could be nothing more than jungle mud? Many rushed to defend Bre-X. Early on March 24, Gordon Capital in Toronto issued its morning
CAUGHT IN THE CROSSFIRE
The Bre-X panic hit precious-metal mutual funds hard
TD Green Line Precious Metals
First Canadian Precious Metals
CIBC Precious Metals
Scotia Excelsior Precious Metals
Marathon Equity Fund
AGF Canadian Equity Fund
Closing prices per share
March 25 March 27 $21.67 I $18.21
$13.05 I $11.95 I -8.1% I $15.86 I $14.75 I -6.9% | $14.62 I $13.64 I -6.7%
DOWN TO EARTH
Closing price of shares in Bre-X Minerals Ltd.*
March 27 $2.50
*0mits days on which no trading occurred
comment to Gordon insiders and clients. “Quality of Busang asset not in question,” said the investment house. “Buy this undervalued asset. We maintain our belief that the Busang gold deposit will become a world-class gold mine.”
Others took a different tack. Daniel McConvey, a New York City gold analyst who had visited the site in the summer of 1996 and who had written one of the most comprehensive reports on the project, downgraded his stock recommendation to a neutral from outperform. It wasn’t that he believed the rumors, but rather that he no longer knew what to believe. McConvey had met with Felderhof and de Guzman at the prospectors convention. It was Felderhof who, weeks earlier, had shocked McConvey and other analysts by tripling the “official” reserve estimate on Busang to 200 million ounces. “We asked Michael de Guzman what level of confidence he had that Busang would end up with 200 million ounces,” McConvey wrote in a report. “He paused to think, then answered: ‘80 per cent.’ De Guzman was upbeat. He told us, with a smile, that the Bre-X team had beaten some employees of Freeport at a friendly basketball game on-site.”
McConvey was stunned by the reported suicide. Activist Bre-X shareholder Gregory Chorny did not buy the suicide explanation at all. “Prove to me he’s dead,” said Chorny, an Aurora, Ont., investor who had already made $40 million from Bre-X stock. “I want to see the autopsy reports. Show me an open casket. Show me the fingerprint evidence.”
Before trading began on March 26 on the Toronto Stock Exchange, Bre-X’s stock was halted at $15.50. Chorny got wind of a rumor coming out of the brokerage community. “There’s a big Bre-X story coming,” he told Maclean’s that morning. “You’ll know it by the end of the afternoon. I think that Freeport [is] making a takeover offer for Bre-X in the $20 range.” But when Freeport finally issued its news release later in the day, it was a different bomb altogether. During the previous three weeks, the company said, it had drilled seven core holes on the Busang site to confirm the results of holes previously drilled by Bre-X. ‘To date, analyses of these cores, which remain incomplete, indicate insignificant amounts of gold.” Bre-X issued its own news release, disclosing that it had been advised by Strathcona Minerals Ltd., an independent consulting company, that “there appears to be a strong possibility that the potential gold resources on the Busang project in East Kalimantan, Indonesia, have been overstated because of invalid samples and assaying those samples.”
For those who believe in Busang, the Freeport release was not proof that the discovery was a dud. It was incomplete. It did not specify where the holes were drilled, or give detailed results. As Chorny put it, the company could have been drilling “in the back 40 somewhere.” Why would Freeport do that? One popular theory was that the New Orleans company wanted to portray the gold find as made of fairy dust, to see the stock collapse, to buy control of Bre-X on the cheap, to see Bre-X expelled from Busang.
Hartojo Wignjowijoto, an economist and consultant to the mining industry in Jakarta, has criticized Bre-X for being a stock play. “First, Bre-X blew up the capital gain,” Hartojo said last week. “Then, they sell the capital gain. Now, the new guy plays another game to dilute Bre-X.” Others held the view that Freeport’s results, however disappointing, were based on too few holes to be conclusive. “It’s almost inconceivable that there’s not a lot of gold there,” said John Willson, CEO of Placer Dome Inc., which had earlier made its own pitch to partner with BreX. If he had seven dry holes, said Willson, he would keep drilling.
But the holes weren’t merely bad. They were disastrous. Bre-X itself released the results on Freeport’s sampling. The comparisons between the Bre-X and Freeport holes, drilled 1.5 m apart, could not have been more contrary. In one sample, where Bre-X had reported a rich 4.39 grams of gold per tonne, Freeport found 0.01, tanta-
mount to nothing. While the Bre-X results ranged from 1.33 to 5.68, the Freeport results were consistently microscopic. There was, in practical terms, no gold there. “It obviously makes the thing look less favorable,” says Willson. “However, I believe the market is overreacting at this time.”
The market reacted instantaneously. It cratered. When trading resumed on Bre-X stock, it fell $13 to $2.50. Eight million shares changed hands in slightly more than 3,000 trades. The TSE’s computers crashed twice from all the activity. Three billion dollars in capitalization was wiped out. Bre-X, at its peak, had been valued at $6 billion. Now, it was $600 million. Traders had not seen such a collapse since Marlboro Friday, the day in April, 1993, when shares of cigarette maker Philip Morris crashed on the New York Stock Exchange, leaving investors $13 billion poorer. The Bre-X collapse, in relative terms, was bloodier, wiping out 83 per cent of the value of the stock. It “appears to be a fraud,” said Bob Farquharson, vicechairman of AGF Management Ltd., a Toronto-based mutual fund company. “You’ve got to assume there’s something quite wrong. I think you have to look to Bre-X. They’re responsible for the integrity of the analysis on their property.” AGF funds had scaled back their positions in Bre-X well before the meltdown, so the hit, says Farquharson, was not severe. “There’s no question if this is indeed fraudulent, this is the biggest fraudulent thing I’ve seen." If there were any gold at Busang, says Ross Beaty, chairman of Pan American Silver Corp. in Vancouver, Freeport would have found it, even in just seven holes. “I’m convicting Bre-X absolutely,” he says. “I hope I’m wrong.” If he’s not, he says, Bre-X will go down as “a shocking and disgraceful episode in Canadian mining history.” Even New York was rivetted by the debacle. CNBC, an all-news cable channel, could not stop talking about Bre-X, joking at one point that it might have been the interest-rate-hiking Alan Greenspan, chairman of the U.S. Federal Reserve, who pushed de Guzman from the chopper.
Bre-X took other junior gold companies with it, though their tumble was less dramatic. The fallout is not yet over. “Canadians have
The holes weren't merely bad—they were disastrous
gone to the world and have been very successful,” says Beaty. “For this, the biggest and noisiest play, to collapse under a bad smell is devastating.” Small exploration companies now face the challenge of trying to raise money from investors who feel badly burned. And if the gold really is not there, the Bre-X bust will cast a pall over future Indonesian mining prospects. “This kind of story has huge ramifications for the business,” says Ron Stewart, country manager for PT Placer Ernas Indonesia, the Indonesian arm of Placer Dome. “It throws a real negative light on the business.”
In February, Indonesia’s director general of mines, Kuntoro Mangkusubroto, told Maclean’s that Bre-X would soon be awarded the crucial contract of work (COW), giving it and its partners title to the portion of Busang that Bre-X had said contained almost all of the reported gold reserves. Last week, Kuntoro said the ministry was freezing all COW applications until the Busang mess is cleared up. And the mess is about more than gold. “Freeport and Bre-X are fighting each other about the value of money,” says mining consultant Hartojo. “But they don’t realize their fighting will have an impact on domestic policy in Indonesia. People will judge that the government has no control and that the government has been fooled by a junior company like Bre-X. Busang is the salvo in the beginning of the earthquake.”
And Bre-X CEO Walsh is standing on the fault line. Last Thursday, he spoke briefly to reporters outside the Calgary offices of BreX. He stood by his team’s technical work, he
said. And he was holding onto his shares. “I personally believe there has been a hidden agenda coming up for about 10 months now,” he said. He did not elaborate, but the time frame, casting back to June, coincides with the point at which the Indonesian government began manoeuvring to dictate the ultimate ownership of Busang.
Walsh’s comment suggested that Freeport’s results are purposely misleading. When the rumors first flew about the validity of Bre-X’s sampling, there was
much talk of the cyanide leaching method of assaying, which Indo Assay had been conducting on Bre-X’s behalf. Cyanide leaching is not a standard method of testing in the industry. Fire assay, which involves melting the ore, is considered far more accurate. But Bre-X said long ago that fire assay was not as effective in its case, an explanation that was accepted by many analysts. Was there ever a suggestion that Bre-X bring in outside consultants to verify the results? ‘You’re talking about God here,” says one investment executive of Felderhof, who
ruled the site. ‘You’re asking God to bring in [outsiders] to double-check results.” Felderhof has a near-mystical reputation, a water walker who “has had malaria more times than most of us have had sex.” Pan American’s Beaty was surprised to hear of the absence of fire assays. He has gone short—that is, bet against companies—that have made similar admissions in the past: “It’s a standard short for me if the company says it can’t get the gold out by fire assay.” At least two groups of analysts visited the site. None wrote negative reports after the fact. That has led to criticism of that community, on whose information investors have come to rely. Some of the analysts did not care for the fact that Bre-X controlled its own prep lab, where the samples were bagged before being shipped to Indo Assay. They would have liked to have seen an outside contractor overseeing the site.
The presence of Kilborn engineering, a division of the SNC Lavalin group, provided a level of comfort. Kilborn was the largest, most recognizable company associated with Busang. The only other outsiders on site were the small local contractors that drilled the nearly 300 holes at Busang. Kilborn now says that its role was merely to build a database from the Indo assays. From there, the engineering firm prepared a pre-feasibility report. It was Kilborn that came up with the 70-million-ounce figure based on data from the assay lab.
John Robertson is the manager of engineering for Kilborn in Jakarta. In mid-February, he met briefly with Maclean’s at Kilborn’s offices on the outskirts of the capital. He expressed a tremendous sense of relief that the ownership issue appeared to have been resolved, with Freeport getting 15 per cent, Bre-X 45 per cent and the Indonesians 40 per cent.
Freeport conducted both cyanide and fire assay tests at Busang. Alarmingly, the company also said there were “visual differences” between the gold taken from the Bre-X core samples and the gold taken from those of Freeport. In the mining game, visual differences are a red flag, a tip-off that samples may have been salted.
Salting is an old trick. Promoters take a couple of drill holes, pulverize the rock, then sprinkle in a little gold to make the samples look pretty. The purpose is to run the stock up, then run with the profits before the scam is revealed.
The closest any outsider got to sampling Busang prior to Freeport was Barrick Gold Corp. Barrick signed a confidentiality agreement last Nov. 24 I at a time when it was hoping to take I control of Busang. Early the next S month, Barrick moved a crew of se-
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I N D O N E S PÁ
nior technical people, including Alan Hill, the company’s executive vice-president of development, onto the site. The company crated as many as 100 samples of crushed ore, provided by Bre-X, and delivered them to Lakefield Research Ltd. outside Toronto. There was no whole core to ship, because rather than splitting the core and saving half, as is the common practice, Bre-X crushed the entire core on-site. There was no material to compare the Bre-X samples with. Barrick’s next step would have been to drill its own holes. But before it got to that stage, the partnership was scuppered. On the samples it did have, it is widely understood that there were inconsistencies against the Bre-X numbers. Chorny believes that retesting turned up more positive results for Barrick, and will not entertain the salting theory.
The speculation about salted assays harkens back to 1980 and the case of New Cinch Uranium Ltd., a Canadian junior whose stock ran from $2 to $29 over four months. New Cinch said it had a rich gold deposit in New
Mexico, piquing the interest of Willroy Mines Ltd., which paid $26 million for 15 per cent of New Cinch. Trouble was, when Willroy did its own drilling, the company could not find the gold. In this case, the salting took place at the assay stage. “It has been a stock market roller-coaster ride reminiscent of the wildest tales of rags to riches to rags in the early era of Canadian ‘penny-mining’ euphoria,”
Maclean’s reported at the time. “Prospectors in faraway places, long-shot mineral claims in moose pasture, excited promotion within financial circles, frantic buying on flimsy evidence—and the whole panoply of spontaneous irrationality largely eliminated from the stock market in recent decades with increasing regulation designed to protect investors and promoters from their own stupidity and greed.” The stock crashed and burned. Oh, and there was a murder, too, of an employee of El Paso Chem-Tec Laboratories, which had done the assay work. Lawsuits ensued.
As they will for Bre-X. Early this week, Ralph Sahrmann, a lawyer with Lang Michener in Vancouver who represents a Chorny-led group of disaffected shareholders, will, along with the law firm of
Baker & Botts in Houston, file a class-action suit against BreX somewhere in the United States. Sahrmann will not say where, exactly. There is no small irony to the legal action, given that when Chorny retained Sahrmann in December, the idea was to make a case against Barrick for interfering in Bre-X’s affairs. Now, says Chorny, “the Bre-X guys don’t talk to me any more. They think that I and my shareholder group are a bunch of disloyal, avaricious pigs.” Chorny made it clear in February, at the time of the Bre-X partnership with Freeport, that he hated the deal, which cut Bre-X’s stated 90-per-cent interest in half. The suit will accuse Bre-X of overstating its ownership and, says Sahrmann, go after the “quantum of gold” issue. Sahrmann says the suit will focus in part on the insider trading that saw Walsh, Felderhof and two others pocket $37.6 million last summer and fall. He won’t specify how much the plaintiffs are seeking, but he says the suit will be big. Big enough to shake David Walsh, who is already feeling the earth quake.
With JOHN SCHOFIELD in Toronto