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

It's March 1997, as we wrap up our story of Bre-X, one of the biggest stock swindles in history. On March 12, Freeport- McMoran chairman James Moffett phoned Bre-X CEO David Walsh and his geologists to tell him that Freeport's own work on the Busang, Indonesia property, which was being hyped as the largest gold find in the world, revealed there was no gold.

Bre-X chief geologist Michael de Guzman was to meet with his Freeport counterparts on site as soon as possible. He never showed.

On March 19, de Guzman leaped to his death, 600 feet, from a helicopter taking him to Busang. A suicide note was found, explaining he couldn't bear to live as a carrier of Hepatitis B anymore, which struck some as strange since he had an entirely treatable form of Hepatitis and had previously weathered 14 bouts of malaria. [Canadian Broadcasting Corp.]

Supposedly, a body ripped up by wild pigs was found in the jungles near where he jumped and it was later identified as de Guzman. But had he faked his death? To date, the circumstances surrounding his demise remain a mystery, though as I noted in part I of our story, one of his four wives is now claiming she has been in contact with him twice, including this past February, and that she suspects he'll reveal himself shortly.

Continuing with the coverage of the day, from the Wall Street Journal, March 25, 1997

"Bre-X Minerals Ltd. took to the offensive Monday in support of its battered share price, issuing a statement reaffirming its confidence in the level of gold at its Busang deposit in East Kalimantan and warning those who have questioned it.

"The slide in Bre-X's share price was sparked by media allegations last Friday that Busang's reserves were less than the Canadian company had previously reported. The drop was also facilitated by the apparent suicide last week of Bre-X geologist Michael de Guzman, whose body Indonesian search and rescue officials said Monday they have recovered?.

" 'The company's board of directors has absolute confidence in the integrity and accuracy of the assay results and resource calculations reported by the company for the Busang gold deposit since inception of exploration in 1993,' Bre-X's president and chief executive officer, David G. Walsh, stated in a news release.

"This statement by Bre-X follows last Friday's report by the Indonesian newspaper, Harian Ekonomi Neraca, which claimed that initial core samples taken by Bre-X's joint-venture partner at Busang, Freeport-McMoran, were less than the 71 million ounces Bre-X reported existed there?.

"Friday's report caused a substantial sell-off in Bre-X shares both in Canada and New York. On Friday, Bre-X's share price tumbled to [$11 on Nasdaq, off $1.625.] Monday, the shares closed at $11.375 in New York.

"The Indonesian government also appears to have grown uneasy about the status of Busang following the media report and Mr. de Guzman's death."

But Freeport had already flown all its initial core samples from Busang back to the U.S. for inspection, making a full government investigation virtually impossible.

"Amid this recent turmoil, the discovery of Mr. de Guzman's body is expected to damp at least some of the uncertainty in Busang. Few either in Indonesia or Canada could understand why Mr. de Guzman, apparently at the top of his profession as a result of the Busang find, would end his life at this juncture, so close to the mine being developed."

On March 26, Freeport-McMoran announced: "To date, analyses of these cores, which remain incomplete, indicate insignificant amounts of gold," adding "there appears to be a strong possibility that the potential gold resources on the Busang project have been overstated because of invalid samples and assaying of those samples." Trading was halted in Bre-X shares.

On March 27, trading resumed and shareholders dumped Bre-X in a "wholesale panic." The stock plummeted to $2.50. A week earlier it was $17.45. After being silent on the 26th, David Walsh offered an independent audit would prove Bre-X was telling the truth. "I'm holding onto my shares," he said.

From the Wall Street Journal, April 8, 1997

"Bre-X Minerals Ltd.'s shares fell 22% Monday in heavy trading amid continued concerns about the amount of gold at the company's Busang property in Indonesia.

"Investors were largely focused on an article published Friday in a mining-industry newspaper, the Northern Miner, which raised doubts about Bre-X's rock-sampling methods and the company's descriptions of the gold at Busang."

The shares, which had 'rallied' to $3.00, fell back to $1.84 on Nasdaq.

From the Wall Street Journal, May 7, 1997

"Bre-X Minerals Ltd. shares staged a spectacular collapse to near-worthless levels in frantic trading as investors reacted to news that the company's supposedly huge gold discovery is really a highly engineered fraud.

"Bre-X shares plunged 3.145 Canadian dollars (US$2.28), or 97%, to 8.5 Canadian cents on the Toronto Stock Exchange, where heavy volume again temporarily overwhelmed the exchange's computer system and interrupted Bre-X trading for about an hour Tuesday. More than 58 million shares changed hands?as investors stampeded for the exits."

[Nasdaq had halted trading in the shares "due to concerns raised over the legitimacy of company claims." "We have no obligation to trade companies that had admitted to fraudulent claims," said Nasdaq President Alfred Berkeley in a statement.]

"The last hopes of Bre-X investors that the company would find commercial quantities of gold at Busang ended Sunday, after Bre-X's independent mining consultant, Strathcona Mineral Services Ltd., said its drilling results at Busang show 'virtually no possibility of an economic gold deposit.'

"Investigators are now sorting out how Busang was 'salted' with foreign gold, and who did it?.

"The Strathcona report also said that 'those involved in the tampering process have had a very good understanding of the geology of the Busang property.'

"John Felderhof, one of Bre-X's top geologists, this week denied involvement in the fraud from his seaside home in the Cayman Islands, a tax haven with no extradition treaty with Canada. Mr. Felderhof and Bre-X Chairman David Walsh made tens of millions of dollars selling Bre-X shares over the past few years?.

"Freeport-McMoran?this week confirmed Mr. de Guzman knew Freeport was coming up empty at Busang before he died?.Several other Filipino geologists oversaw Bre-X's rock- sampling operations in Indonesia. Their whereabouts now are unknown."

Bre-X's valuation had topped out at $4.5 billion. Now it stood at $13 million.

The Wall Street Journal ran the following editorial on May 8, 1997

"The saga of Bre-X Minerals Ltd., the Canadian mining exploration company that falsified the gold strike and then hyped its stock price to the heavens, is a cautionary tale akin to those found in Charles Mackay's classic 1841 work 'Extraordinary Popular Delusions and the Madness of Crowds.' We now know with a fair degree of certainty that there aren't 200 million ounces, 70 million ounces, or even 30 million ounces of gold waiting to be dug out of the ground at Busang, a remote spot in the Borneo jungle. As one mining executive aptly put it, 'All the red flags were there but people wanted to believe.' But unlike in Mackay's time, instead of putting the blame on the gullible and greedy, we now will observe a search for scapegoats in the regulatory world?.

"But all the early clues that pointed to Bre-X's fraud were missed by investors themselves, who bear the ultimate responsibility to understand the risks of their investments. Even before Bre-X geological records were destroyed in a fire and the chief geologist fell to his death from a helicopter?there were other, more mundane reasons for investors to be wary.

"For instance, there was no outside verification of the amazing results from the Bre-X core samples. SNC-Lavalin Group Inc., a firm that calculated the size of the reserve, and Barrick Gold Corp., which bought into the site last year, both relied on Bre-X samples. And the company was also using unorthodox methods, like crushing its core samples rather than keeping half intact for later verification. There were delays in sending samples to the lab, which made fraud easier?.

"Investors aren't usually trained in geology, it's true, and even the experts were reluctant to cry foul because of the incredible logistics behind the fraud. As the Journal reported?laborers sequestered in a secret facility worked day and night to skillfully adulterate the rock samples. There were reportedly miles of core samples from 260 holes to be 'salted' with minerals consistent with the area's geology?.

"But even without geological know-how, investors should have recognized the psychology Bre-X executives were employing. Even as CEO David Walsh and his Vice Chairman John Felderhof were selling their stocks during 1996, according to reports now available, they drew in new investors to support their stock price by revising ever upward the Busang reserves estimates, based on new 'evidence' from the jungle. The two reportedly extracted tens of millions of dollars while the stock was near its peak. It is now alleged that they continued to sell stock after learning that the Indonesian government was questioning ownership of Busang, but before telling shareholders of this news."

---

Wall Street Journal, June 5, 1998

"David Walsh, founder of the disgraced Bre-X Minerals Ltd. that attracted thousands of investors with tales of the greatest gold find this century, died in a Bahamas hospital. He was 52 years old."

Walsh was living in a multimillion-dollar estate that he moved into after the collapse.

And what of John Felderhof? He went on trial for insider-trading and misleading investors back in 1999 and, ironically, I just saw that on Sept. 27 his case was suspended until this coming November 2. Yes, the same trial. The Ontario Securities Commission alleges Felderhof cashed out about $55 million in Bre-X shares before the company went under, and as far as I can tell he is still in the Cayman Islands, though his assets are frozen. Long ago, the Royal Canadian Mounted Police gave up their search for evidence sufficient to bring criminal charges against anyone involved in Bre-X, though the OSC had its own ideas.

[At least this is the best knowledge I have at this moment. I'll try and update you if this whole debacle ever reaches a conclusion. And to my Canadian friends, if you become aware of any further details, since they are likely to show up in your papers before mine, I'd appreciate you passing it along.]

Sources for part III:

Wall Street Journal
Maclean's
Canadian Broadcasting Corporation
Business Week
South China Morning Post

Brian Trumbore

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