Bre-X, Part I
Brian Trumbore
President/Editor, StocksandNews.com

A little over three weeks ago, I read a story from Asia concerning a geologist by the name of Michael de Guzman. I had forgotten him, but certainly not his former employer, Bre-X Minerals Ltd.

Mr. de Guzman, you see, had reportedly committed suicide back on March 19, 1997. Around that time it had been determined that a gigantic gold mine in Borneo that Bre-X owned with others really didn't contain 200 million ounces as the company had been reporting. Instead, it would prove to be closer to zero. Bre-X ended up being one of the largest stock swindles in history.

Well, this past August, Genie de Guzman, one of Michael's four wives, as it turned out, spoke to Singapore's Straits Times newspaper in her first interview since her husband's disappearance. Michael, she said, is still alive. In fact, he phoned her back in April 1997, just weeks after he supposedly leaped to death from a helicopter at 600 feet. Leaving word with their maid, he said Genie would find $200,000 in a Citibank account, which sure enough was there.

"I realized that although he was still alive, I had to live my own life," Genie told the paper. She never heard from him again all these years until this past February, when she received a fax from Brazil informing her that another $25,000 had been deposited in the account.

Back in 1996, Genie recalled, Michael de Guzman had been summoned to a meeting with then Indonesian President Suharto. Genie says her husband "realized he had a big problem on his hands. Essentially, they wanted to take over the mine. He had the impression they wanted it for free."

Genie then claims a female Indonesian military officer visited her after Michael's 1997 disappearance and told Genie to shun the press "for the good of the country" and her family. Mrs. de Guzman now believes Michael will reemerge. "The longest any secret should be kept is eight years," she said.

And so by now you should be wondering, just what was Bre-X? And why did de Guzman, as long suspected, perhaps fake his death? Pull up a chair.

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The following early company history is from the archives of the Canadian Broadcasting Corporation.

Bre-X was a small Calgary-based mining company. The "X" stands for exploration. The "Bre" is derived from Bresea Resources Ltd., Bre-X's sister company, which had existed since 1984. The name Bresea was an amalgamation of Brett and Sean, the names of founder David Walsh's sons.

Walsh incorporated Bre-X Minerals Ltd. in 1989 and listed it on the Alberta Stock Exchange. Shares opened at 30 cents (U.S.) and generally fluctuated between 10 and 30 cents for four years.

Initially, Walsh operated Bre-X out of his basement, with wife Jeannette helping out. The company suffered financially early on and Walsh started his shareholder letter in 1991 with, "Yes, we are still in business." By 1992, Walsh had declared personal bankruptcy, having wracked up debts of $60,000 on his credit cards.

Then in 1993, Walsh hooked up with an old acquaintance, Dutch-born geologist John Felderhof who was well known in the mining community. Walsh asked for Felderhof's help in selecting some land in Indonesia that might be worth exploring for minerals and Felderhof suggested Bre-X acquire the rights to part of Busang (in Kalimantan, Borneo) for $80,000. Felderhof joined the company and focused on the search for all things precious, while Walsh promoted the stock.

Busang spans 850,000 acres and Bre-X held the rights to over half of that, 475,000 acres. It's basically jungle.

In 1994, Felderhof and chief geologist Michael de Guzman, who had a rather checkered past in the industry, began to uncover gold deposits in Busang. Walsh issued press releases to this effect and by the end of the year, Bre-X shares were trading at US$2.80. Word was spreading and on Nov. 24, 1994, Dow Jones reported, "Bre-X Minerals Ltd. says recent drilling at its properties in Indonesia will soon lead to gold reserves of more than 2 million ounces." This sizable estimate was about to grow exponentially.

In a May 1997 story for Maclean's, Jennifer Wells reports on a conversation she had had with Felderhof in February of '97.

"When did you know you had hit the motherlode?" I asked.

"When we drilled line 59, three holes 150 meters apart," he said. "That's when I called David (Walsh) up and said, 'We've got a monster by the tail.'"

Wells:

"Drill line 59. That was back in 1995, when work was gearing up at Busang. Through the fall of that year, Bre-X's crew of Filipino geologists was working flat out. Bobby Ramirez was logging core samples as fast as he could. Under chief geologist Michael de Guzman's orders, there was a mad rush to get the core downriver to Samarinda. Overseeing operations, Cesar Puspos would spend weeks at a time there, staying up late into the night, working on his personal computer, which he never let anyone borrow. 'There were bags and bags of core there,' recalls a Canadian geologist who worked for a time at Busang. He accepted the explanation that there was a sampling backup 100 km away at the assay lab in Balikpapan. There wasn't."

[The above proved to be a key to the story. As Wells writes, Felderhof opted to "have pieces of whole core crushed for sampling. It is common practice in the mining industry to split the core, crush half, and retain the other half. An acquiring company, a Barrick Gold or a Placer Dome, would then have crushed and assayed the rest of the core, to be checked against the initial results. Felderhof's explanation, that splitting the core meant losing too much of the gold, seems not to have alarmed any of the analysts."]

1995 proved to be the year that shares in Bre-X first took off in earnest. Financial advisors, brokers, and journalists all jumped on the story as estimates of the Busang find grew from the initial 2 million ounces to 50 million and later 200 million. By October '95, that little 30 cent stock from 1993 had soared to $39.50. And it would keep going up from there.

At the Prospectors and Developers convention in March, 1996, de Guzman gave a speech to an anxious Toronto mining crowd. In discussing the potential for Busang, he said, "The resource calculation there shows our internal estimate as against drill- based calculations by Kilborn."

Ah yes, Kilborn Engineering, a highly respected outfit that had been retained by Bre-X. Michael de Guzman's presentation and others that followed led investors and analysts to believe that Kilborn was independently auditing Bre-X's results. "The Kilborn figures come up to be, this time, better than we were," said de Guzman to that Toronto audience. "Looks like I'm sleeping a little bit on this one." [Laughter]

A few weeks later, CEO David Walsh issued a release following a Financial Post story that raised technical questions about the validity of Bre-X's assay methods. In it Walsh quoted Felderhof:

"Metallurgical test work conducted by internationally recognized Kilborn Engineering, as part of their recently completed pre- feasibility study on Busang, resulted in their determining that Bre-X's current and previously reported gold assay results are in fact understated by as much as 12.9 percent."

Phew. The investment community relaxed. Kilborn later acknowledged, however, that its job was only to use Bre-X's data in providing calculations. It did not drill its own samples.

On April 23, 1996, Bre-X listed on the prestigious Toronto Stock Exchange and opened at a staggering $184 per share. By the end of the month it was $200. It would peak in Sept. 1996 at $280. [The $280 is a pre-split calculation?10-for-one?in mid-'96. Thus $28, post-split, is the high.] Countless shareholders, many from the small towns surrounding company headquarters in Calgary, had become millionaires? "Bre-X millionaires." It only took an astute broker or two to get the word out and if you heard your neighbor had just made a killing, well, you sure as heck had to get your piece of the pie as well.

Lehman Brothers analyst Daniel McConvey wrote in a report following a site visit in the summer of 1996, "If our aggressive development assumptions come close to future reality, in five years Busang may be the largest-producing gold mine in the world. Only uncertainty over tenure disputes, concern over politics and the reaction of the major mining companies to the current project and investment risks put a lid on our target price. (Busang) was not only a geologist's dream but a metallurgical dream."

McConvey and others simply accepted Felderhof and de Guzman's methods of sampling.

The story intensified. From the Wall Street Journal, Nov. 25, 1996:

"Bre-X Minerals Ltd. said it could face more disputes over the ownership of its large gold deposit in Indonesia, amid speculation that a major mining company will soon offer to acquire all or part of Bre-X in a multi-billion dollar transaction.

"Bre-X?announced an alliance a few weeks ago with a company associated with Panutan Group, an Indonesian conglomerate controlled by the eldest son of Indonesian President Suharto. That announcement triggered a run-up of Bre-X's share price, as investors concluded that the alliance would fend off claims by corporate partners of Bre-X that they own a larger piece of the deposit than was expected, and pave the way for required Indonesian mining permits?.

"Lehman Brothers Inc. mining analyst Daniel McConvey said last Thursday in a note to clients that an offer by a major mining company for Bre-X 'may happen in the very near future with the support of the Indonesian government.'"

Wall Street Journal, Dec. 4, 1996:

"Bre-X Minterals Ltd. said its Busang gold discovery in Indonesia is bigger than previously thought, adding to concerns that a possible sale of control of the deposit will be unfavorable to Bre-X shareholders.

"Last week, Bre-X said it's in talks to sell control of the deposit to Toronto gold producer Barrick Gold Corp., under the direction of the Indonesian government?.

"Placer Dome Inc. ?said it's seeking permission from the Indonesian government to make a competing offer for Busang?.

"Barrick maintains the Indonesian government wants Barrick to develop Busang for its experience in developing mines. Barrick hasn't disclosed details about what it calls its 'relationship' with a company controlled by a daughter of Indonesian President Suharto. Analysts last month expected Bre-X to win the required mining permits in Indonesia, after announcing a financial pact with a son of President Suharto. But that deal has fallen apart, and Bre-X still hasn't won the permits?.

"Bre-X shares have fallen sharply in the last few days, but rebounded Tuesday to $13.78." [Reminder, post-split.]

"Derek Webb, who manages shares of Bre-X and Barrick in a few Chancellor LGT funds, said he's concerned Barrick is using its 'musclepower and political connections' to 'steal' control of Busang. Barrick employs former U.S. President George Bush and former Canadian Prime Minister Brian Mulroney as advisers."

We're just heating up. The Bre-X story continues next week.

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Sources: Agence France-Presse
South China Morning Post
The Straits Times
Canadian Broadcasting Corporation
Maclean's
Wall Street Journal

Brian Trumbore

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