Greatest gold hoax of all time suckers small and big investors alike
Looks at the 'monster deposit' that never existed
The subsequent de-listing of Bre-X by the Toronto Stock Exchange and Nasdaq in New York means its shares are worthless. On Thursday Bre-X was also granted bankruptcy protection.
An audit by Strathcona Mineral Services concluded there was "virtually no possibility of an economic gold deposit" on the Bre-X property at Busang in the jungles of East Borneo. Thousands of ore samples from Busang had been cleverly salted for three years to falsify assay values. "To our knowledge (it) is without precedent in the history of mining," said Strathcona.
Only three months ago, John Felderhof, Bre-X deputy chairman and geologist (and Canada's Mining Man of the Year), said Busang could contain 200- million ounces of gold and a profit potential of $50-billion.
Bre-X was an investment fairytale - and now an obvious film plot - which sucked in thousands of small investors as well as financial giants such as JP Morgan, Republic National Bank, Merrill Lynch and Fidelity, as well as major mining groups as its value ballooned upwards on ever rising estimates of the Busang gold reserves.
It was also a capitalist fairytale. An ex-stockbroker, fund manager and bankrupted mining entrepreneur, David Walsh, head of Bre-X, goes to the Indonesian capital Jakarta in 1993 where he meets John Felderhof, a Dutch-born geologist he had known for 10 years.
Felderhof was also down on his luck. Since achieving fame in 1968 as the joint finder of a major gold prospect in Papua New Guinea, Felderhof had explored Borneo for Pelsart Resources of Australia. There he met the Filipino geologist Michael de Guzman, who was to become the central, ultimately tragic player in the Bre-X saga.
Pelsart did not strike rich in east Borneo; nor did Felderhof who had share options in the company but failed to cash in before its value plummeted.
But Felderhof and De Guzman had continued trawling fruitlessly through East Borneo convinced that there were domes of volcanic rock which held large gold deposits.
Results came with dazzling speed. After only two months, Felderhof reported the first drill hole had shown a potential deposit of more than 1.5 million ounces of gold. Armed with that geological report, Walsh raised nearly $5-million in risk capital from investors, tempted by the low estimated mining costs of no more than $90 an ounce.
From that point the Busang story blossomed. After drilling 105 holes, Felderhof doubled the gold content estimate to 3-million ounces and claimed Bre-X had found a volcanic dome measuring 72kmē.
Bre-X stock shot up seven-fold to C$15 in five dizzy months between March and July 1995 as investors piled in. The gold fever was fanned by more reserve estimates: Bre-X upped its figure to 10-million ounces. Independent stock market mining analysts talked of 40-million, a figure that was actually confirmed by the Indonesian Mines and Energy Ministry.
The Bre-X shares then went ballistic, hitting a peak of Canadian $280 before the 10-for-1 split in May 1996.
Good news continued to pour in from the assay tests carried out by an independent consultancy, PT Indo Assay Laboratories, which does work for a number of international companies.
By July Busang had become a 47-million ounce mine. And an analyst from JP Morgan -- the blue-blooded US investment bank which became Bre-X's adviser - returned from a visit to Busang to report that the prospect could hold three times even that estimate, or around 140-million ounces!
The Busang honeypot was never going to be exploited by a small Canadian exploration company alone. A large mining partner was needed.
First on the scene was Barrick of Canada, the world's second biggest gold producer. The Indonesians talked of a joint venture with Barrick owning 67.5%, Bre-X 22.5%, and the Indonesian government 10%.
Then, through PT Nusamba, which is President Suharto's investment vehicle, his closest adviser Mohamed "Bob" Hasan reportedly negotiated a stake.
If Freeport's due diligence sampling of Busang ore confirmed Bre-X's findings, the Americans would invest $400-million and then raise $1.2-billion for full development.
The deal was signed on February 16. The following day Bre-X raised its estimate for Busang to 71-million ounces, and on February 19 an exuberant Felderdof said the final total could be a stratospheric 200-million.
It was to start the count-down to the end. Freeport drilled seven holes in the richest part of the Busang property. Its geologists found that in January a fire at Bre-X's offices had destroyed most of the sample logs and other records relating to more than 25 000 samples taken from 300 drill holes.
By mid-March Freeport was finding its samples did not match the Bre-X assays. It was told chief geologist De Guzman and a team of Filipino colleagues had kept the Bre-X sampling under wraps. On March 19 De Guzman was on his way by helicopter to meet Freeport officials "to explain what he thought might be the problem". When the helicopter was 250m above dense jungle, De Guzman plunged to his death.
Police said he had left a suicide note in his bag on the helicopter saying he had incurable hepatitis B. His family disputes this and believes he may have been pushed - the mystery has not been solved.
The following day a Jakarta newspaper reported tests showing Busang was "not economically viable" and Bre-X started to crash despute Walsh's furious denials. Then a week after De Guzman's death, Freeport issued a statement. Its tests had found "insignificant amounts of gold" and that the value of Busang may have been "overstated because of invalid samples".
Bre-X shares were immediately suspended but fell by an horrendous 84% in a single day when trading resumed.
Walsh, however, blamed Freeport's findings on inadequate testing (compared to the thousands of samples assayed for Bre-X) and brought in Strathcona, a prestigious mining consultancy, to double-check the Bre-X figures.
And last Sunday came Strathcona's damning report. It did not name culprits, but other reports made De Guzman and his Filipino geologist and metallurgist colleagues the most likely suspects. Cesar Puspos, De Guzman's deputy, has abruptly disappeared with his family to the US on "an extended visit". The rest of the Filipino team have left Busang on "home leave".
An investigation by the Asian Wall Street Journal reported how Busang samples were sent down the Mahakam River and warehoused at Loa Duri - a previously unreported Bre-X facility - or at Samarinda 22km away on the coast.
Bre-X Indonesian workers told how they had seen the Filipino geologists and metallurgists opening the bags and blending the pulverised rock samples with "reddish, white and gold-coloured powders". Blending work at Loa Duri apparently reached a frenzy in December and extra workers were hired to mix in the powders which were carefully measured by the Bre-X metallurgists.
The samples were then rebagged and put in sealed drums to be taken to Samarinda for onward shipment to Indo Assay in the port city of Balikpapan.
Strathcona's report admitted its own experts had found it hard to believe that "the tampering has occurred for so long a period, on such a scale, and with such accuracy as to give assay values the appearance of being plausible".
It confirmed that samples in plastic bags inside fibre glass bags were opened to be "checked" for damage which Strathcona found an incredible reason. "We can only suggest that somewhere en route there has been a 'laboratory' or facilities established that have allowed very precise additions of the foreign gold identified (by Strathcona) in the Bre-X samples delivered for assaying."
Walsh was devastated by the report which showed that "the company's belief about the size of the Busang reserve was based on falsified data. We share the shock and dismay of our shareholders and others that the gold we thought we had, now appears not to be there."
At one stage Walsh was worth $1.5-billion on paper. But he and his Bre-X co-founder Felderhof have not been left penniless. Last year, between April and October, extensive "insider" selling of Bre-X was recorded. Walsh and his wife sold shares and options to raise $26-million; Felderhof cashed in to the tune of $23-million and bought a $3-million house in the Cayman Islands from which he too expressed shock at the report. On Friday he applied for permanent residency in the Cayman Islands, which will protect him from legal action in North America.
The hunt is on for scapegoats and the approximately $4-billion lawsuit claims are piling up in Canada and the US against Bre-X and its executives and consultant companies which lent credence to the Busang myth. And Indonesia will prosecute the hoaxers if they are ever found.
The fallout has hit the shares of other small exploration companies and damaged the reputation of the Toronto stock exchange and the brokers who pushed Bre-X shares - making an estimated $100-million in commissions.
In Jakarta, however, "Bob" Hasan appeared to shrug off his disappointment. Like Freeport (apart from its verification costs), the Indonesian interests had finally not put any money into Busang. Hasan, who has no plans to sue Bre-X, said: "That's business. Sometimes you make money, sometimes you don't."