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

We pick up our story on Bre-X, early 1997. Recall that at the end of '96, Bre-X was in discussions with Barrick Gold Corp., while Placer Dome was seeking permission from the Indonesian government to make a competing offer for Bre-X's Busang property; what one Wall Street analyst said had the potential to be the world's largest gold deposit. Complicating matters was the fact that under Indonesian law, while foreigners could drill and develop mines, the actual permit could only be held by an Indonesian citizen. So partnerships were the name of the game and the government normally took 10 percent of the earnings. President Suharto signed off on every deal.

From the Wall Street Journal, Jan. 15, 1997:

"Placer Dome Inc. offered to acquire Bre-X Minerals Ltd. in a stock swap valued at $4.5 billion, in an attempt to thwart Barrick Gold Corp.'s bid to buy control of Bre-X's big Busang gold discovery in Indonesia.

"The latest offer pits two of the world's biggest gold producers in a battle for control of what many describe as the biggest gold discovery of the century. The winner would rival South Africa's gold-mining titans in terms of production.

"Placer Dome said it's currently offering one share for every share of Bre-X, subject to minor variations. Placer Dome Tuesday closed at $20.625, off 75 cents, in New York Stock Exchange composite trading, while Bre-X jumped $1.50, or 9.5%, to $17.25 on the Nasdaq. [Bre-X's all-time high was $28, post-split, Sept. '96.]

"Bre-X?said it will respond to Placer's offer 'in due course,' and that its 'highest priority remains providing the best return for our shareholders, the Republic of Indonesia and the Indonesian people.'"

Meanwhile, Barrick said Placer's offer didn't impact their joint- agreement with Bre-X; one they continued to keep under wraps while the parties worked out details with the Indonesian government.

"Barrick had apparently locked up control of the Busang property with behind-the-scenes maneuvering that won the support of the Indonesian government. For example, former U.S. President George Bush, acting as an adviser to Barrick, wrote Indonesian President Suharto expressing 'respect' for Barrick, Mr. Bush's chief of staff confirms?.

"(Placer's) move underscores the high value that mining companies attach to Busang, a high-grade gold deposit that Placer Dome estimated would cost $1.7 billion to develop and could produce three or four million ounces of gold a year. At that rate, a mine at Busang would single-handedly produce more than all but a few gold companies in the world."

[Ed. Consolidation in the gold mining business was in full bloom, back then. Newmont and Homestake were fighting for control of Santa Fe Pacific Gold, to cite one notable example.]

Placer was rumored to be offering the Indonesian government a 40% interest.

Wall Street Journal, Feb. 18, 1997

"The brawl over who will develop Indonesia's giant Busang gold find has ended, with Bre-X Minerals Ltd. ?confirming it has teamed up with Freeport McMoran Copper & Gold Inc. of the U.S. and powerful Indonesian businessman Mohamad 'Bob' Hasan.

"A Bre-X statement Monday confirmed that the parties had agreed to form a joint venture that will be 45%-owned by Bre-X, 15%-owned by Freeport, which will operate the new mine, and 40% by Indonesian interests, including 10% for the government and 30% for two companies controlled by Mr. Hasan 'and their partners.'

"Bre-X said Freeport will provide $400 million, or 25%, of the construction costs and $1.2 billion in additional funding.

"Also on Monday, Bre-X increased its estimate of Busang's gold reserves to nearly 71 million ounces from the 57-million-ounce figure it announced in November. Many mining analysts believe Busang, on the island of Borneo?may hold more than 100 million ounces, which would make it one of the greatest gold deposits ever found.

"With the starting lineup set for developing Busang, the next step is formal Indonesian government endorsement, expected Tuesday, of the deal that Mr. Hasan, President Suharto's confidant, has struck. Next will be due diligence on the planned project by partners and bankers?. [uh oh!]

"Although there is no immediate sign of any obstacles to the deal as announced Monday, one mining analyst suggested that 'we haven't heard the last' from Busang's two failed Canadian suitors: Barrick Gold Corp. and Placer Dome Inc?.

"In a statement Monday, Bre-X Chairman David G. Walsh paid homage to Mr. Hasan for his role in setting up what Mr. Walsh called a 'great day for both Bre-X shareholders and the people of Indonesia.'"

The following relies on Jennifer Wells's report for the May 19, 1997 issue of Maclean's.

On February 19, 1997, chairman Walsh and Bre-X geologist John Felderhof, along with their two investment advisers from J.P. Morgan in New York, held a conference call with analysts to sell them on the Freeport deal.

"Morgan's Doug McIntosh reviewed the economics of Busang, the milling rate, the cash costs, the capital costs, all based on Kilborn [Engineering's] intermediate feasibility study. Felderhof allowed as to how he was 'comfortable' with 200 million ounces as a resource estimate for Busang. There was, he said, 'lots of blue sky.' Felderhof went on to say that early discussions with Freeport had gone smoothly. 'The more they look into this, the more pleased they are by the excellency of the data.' The company's due diligence, he said, might take as little as 10 days."

Well, this is kind of like watching a train wreck, isn't it? And the situation is about to change, drastically. Jennifer Wells continues:

"Rather than being thrilled with the excellence of Bre-X's results, Freeport had become very nervous very early. 'It was clear to me after asking questions for two days that no one had ever done an independent analysis of this project, and the Bre-X people had controlled this project for three years and nobody had been allowed to do independent drilling,' [Freeport chairman James] Moffett said?There was no gold at the surface, no 'geochem halos,' no surface anomalies. When Freeport drilled seven holes in the sweet spot of the southeast zone, there was simply no gold at all."

"On March 12, Moffett phoned Toronto, where Walsh and Felderhof and [chief geologist Michael] de Guzman were moving like royalty among the crowd at the Prospectors and Developers convention. 'I hated to interrupt their joy,' said Moffett?'But I informed them that they needed to get somebody back to the job site because we had run into difficulties.' Walsh was the first to take the call. 'He started out by telling me that he was a financial person and he didn't understand all that stuff.' Walsh put Felderhof on the line. Felderhof said there must be some mistake, a mix-up. De Guzman was dispatched to the site. 'It was almost a four-day wait,' said Moffett. 'Then, he didn't arrive at all.'"

We'll finish the story of one of the greatest stock swindles in history next week.

Sources for part II:

Wall Street Journal
Maclean's
Canadian Broadcasting Corporation

Brian Trumbore

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