The Bre-X Mining Scandal

 

Bre-X was a group of companies in Canada. Bre-X Minerals Ltd., a major part of Bre-X based in Calgary, was involved in a major gold mining scandal when it reported it was sitting on an enormous gold deposit at Busang, East Kalimantan, Indonesia. Bre-X bought the Busang site in March 1993 and in October 1995 announced significant amounts of gold had been discovered, sending its stock price soaring. Originally a penny stock, its stock price reached a peak at CAD$286.50 (split adjusted) in May 1996 on the Toronto Stock Exchange (TSE), with a total capitalization of over CAD $6 billion. Bre-X Minerals collapsed in 1997 after the gold samples were found to be a fraud.

Busang's gold resource was estimated by Bre-X's independent consulting company, Kilborn Engineering (a division of SNC-Lavalin of Montreal), to be approximately 71,000,000 troy ounces (2,400 short tons; 2,200 t). Reports of resource estimates of up to 200,000,000 troy ounces (6,900 short tons; 6,200 t) were never made by Bre-X though the property was described as having this potential by John Felderhof, Bre-X's Vice-President for Exploration, in an interview with Richard Behar of Fortune magazine.

Bre-X's gold resource at Busang was a massive fraud. Encouraging gold values were intersected in many drill-holes and the project received a positive technical assessment by Kilborn. Crushed core samples had been falsified by salting which In mineral exploration, salting is the process of adding a valuable metal, especially gold or silver, to a sample to change the value of the sample with intent to deceive potential buyers of the mine. A well known Example is the diamond hoax of 1872.

In 1871, veteran prospectors and cousins Philip Arnold and John Slack traveled to San Francisco. They reported a diamond mine and produced a bag full of diamonds. They stored the diamonds in the vault of the Bank of California, founded by William Chapman Ralston.

Prominent financiers convinced the "reluctant" Arnold and Slack to speak out on their find. The cousins offered to lead investigators to their field. Investors hired a mining engineer to examine the field. They planted their diamonds on a remote location in northwest Colorado Territory. They then led the investors west from St. Louis, Missouri in June 1872. Arriving by train at the town of Rawlins, in the Wyoming Territory, they continued on horseback. But Arnold and Slack wanted to keep the exact location a secret, so they led the group on a confusing four-day journey through the countryside. The group finally reached a huge field with various gems on the ground. Tiffany's evaluated the stones as being worth $150,000.

When the engineer made his report, more businessmen expressed interest. They included banker Ralston, General George S. Dodge, Horace Greeley, Asbury Harpending, George McClellan, Baron von Rothschild, and Charles Tiffany of Tiffany and Co. The investors convinced the cousins to sell their interest for $660,000 ($14.9 million today) and formed the San Francisco and New York Mining and Commercial Company.  They selected New York attorney Samuel Latham Mitchill Barlow as legal representative.  Barlow convinced them to add U.S. Congressman Benjamin F. Butler to the legal staff. Barlow set up a New York corporation known as the Golconda Mining Company with capital stock of $10,000,000, while Butler was given one thousand shares for amending the General Mining Act of 1872 to include the terms “valuable mineral deposits” in order to allow legal mining claims in the diamond fields. The U.S. Attorney General, George H. Williams issued an opinion on August 31, 1872, specifically stating that the terms “valuable mineral deposits” included diamonds.

Financiers sent mining engineer Henry Janin, who bought stock in the company, to evaluate the find. Arnold and Slack led him and a group of investors to just north of what is now called Diamond Peak in the remote northwest corner of the Colorado Territory, where Janin and the investors found enough diamonds in the soil to satisfy themselves. Janin submitted a highly optimistic report, which found its way into the press.

Geologist Clarence King who had led a survey team that recently completed a Geological Exploration of the Fortieth Parallel had a chance meeting with Janin on a train. King and his team were alarmed at the reports of such an prominent diamond field which their survey had not noted. King sent geologist Samuel Franklin Emmons and cartographer A. D. Wilson ahead to investigate, with King joining them soon after. Upon locating the site, they quickly concluded that it had been salted (as a geologist, King was aware that the various stones formed under different conditions and would never be found together in a single deposit), and notified investors.

Further investigation showed Arnold and Slack bought cheap cast-off diamonds, refuse of gem cutting, in London and Amsterdam for $35,000 and scattered them to "salt" the ground. Most of the gems were originally from South Africa.

Arnold returned to his home in Elizabethtown, Kentucky, and became a successful businessman and banker. Diamond-company investors sued him, and he settled the cases for an undisclosed sum. Years later he died of pneumonia after he was wounded in a shootout with a rival banker.

John Slack dropped from public view. He moved to St. Louis, where he owned a casket-making company. He later became a casket maker and undertaker in White Oaks, New Mexico, where he lived quietly and died in 1896 at the age of 76.

Salting is just one example of a confidence trick.

Michael de Guzman took core samples from the ground, which were supposedly from the Borneo site. After the samples were crushed and collected, De Guzman made sure he had some alone time with them before they were sent to be analyzed. He shaved gold flakes from his wedding ring and mixed them in with the samples (at a ratio of approximately 3 oz of gold per ton of rock). Later, when he ran out of gold from his ring, he paid locals for their river gold, buying up $61,000 worth of panned gold over the following two-and-a-half years.

with gold that has a wide variety of characteristics that had been subjected to mineralogical examination by Bre-X's consultants. In fact in an old report, found in Bre-X files, a mineralogist had reported that some gold particles in Busang samples had the darker yellow skin compared to the interior and some had delicate morphologies composed of electrum. The yellow rims result from selective leaching of silver from the surface of gold particle during river transport or during supergene (in-situ) processes. Electrum is inconsistent with an alluvial origin.

The mineralogy gave no indication that it was alluvial gold and was consistent with the assumed origin of the samples. None of the mineralogists who studied the gold grains gave any indication that the gold was not consistent with a hard rock origin. The salting of crushed core samples with gold constitutes the most elaborate fraud in the history of mining. In 1997, Bre-X collapsed and its shares became worthless in one of the biggest stock scandals in Canadian history, and the biggest mining scandal of all time.

History

David Walsh founded Bre-X Minerals Ltd. in 1989 as a subsidiary of Bresea Resources Ltd. The company did not make a significant profit before 1993, when Walsh followed the advice of geologist John Felderhof and bought a property in the middle of a jungle near the Busang River in Kalimantan, Indonesia. The first estimate of the site by its project manager (Filipino geologist Michael de Guzman) was approximately 2 million troy ounces.

Felderhof, who was previously responsible for finding the largest gold mine on Papua New Guinea, hired the Philippines-born de Guzman as the project manager for the Borneo operation.

While the two men had worked together before, it is not certain if Felderhof was aware of de Guzman’s bizarre private life — he had four wives and families, none of whom were aware of each other, and at the time of his death, he reportedly attempted to secure the fifth marriage but was turned down by his would-be bride.

Four years earlier, de Guzman was fired from a mining company job when it was discovered he was using the company’s funds to keep one of his paramours entertained.

Despite living a life that seemed more suited for sitcoms, de Guzman was a respected professional in his field. But once he arrived in Borneo, he realized he was on an impossible mission and feared losing his Bre-X job after his first two attempts to locate gold came up empty. De Guzman later acknowledged that Walsh considered selling the property in order to stem his losses from the unproductive gold searches.

De Guzman managed to fool his employer by salting his core samples with gold dust that he created with shavings from his wedding ring. Encouraged by this deception, Walsh directed de Guzman to continue his work. For the next two-and-a-half years, de Guzman produced thousands of core samples salted from locally panned gold that he acquired for $61,000 that I mentioned earlier.

Interviews with on-site workers revealed suspect operational procedures. The testing labs were "very downstream" from the mining facility, giving De Guzman privacy to prepare the samples. Workers reported De Guzman leaving open bags of rock samples in his office and often "blend[ing] pulverized rock samples with reddish, white and gold-colored powders" into the samples. Some journalists speculate that initial salting was simply to extend the project, but the salting continued after the enormous estimates returned from the lab.

The estimate of the site's worth increased over time; in 1995 it was 30 million ounces (850 metric tons); in 1996, 60 million (1,700 metric tons); finally, in 1997, 70 million ounces. The stock was originally listed on the Alberta Stock Exchange in 1989, and subsequently in 1996 on the Toronto Stock Exchange and NASDAQ. The stock price of Bre-X rose to CA$280 per share by 1997 (split adjusted) and at its peak it had a market capitalization equal to US$4.4 billion, equivalent to US$7.4 billion in 2021.

As word of the discovery spread, investors flocked to Bre-X. J.P. Morgan made public statements endorsing the Busang site and Lehman Brothers labeled it "the gold discovery of the century." In 1996, Walsh began trading the once penny-stock on the Toronto Stock Exchange. The stock price soared from 30 cents to $170 in just two years. Local investors saw immediate gains, with one Canadian woman claiming to know "about five new millionaires."

Independent auditors that were sent in by large institutional investors found that the panned gold had rounded edges, but de Guzman again had an ace up his sleeve to explain this away and explained it was because of what he called the “volcanic pool” theory.

Volcanic Pool Theory

Prior to joining the Bre-X operation, De Guzman developed the "Volcanic Pool Theory." De Guzman believed that when a volcano "collapse[s] back onto itself," gold is created from the "massive buildup of heat and pressure." The "Volcanic Pool Theory" motivated Bre-X's selection of Busang and justified their unorthodox mining practices. Busang's proximity to volcanoes made it the ideal location to test De Guzman's life work and potentially prove his Theory. Under typical mining conditions, after extracting a core sample from the ground, half is sent to the lab for testing and the other half is stored for future audits. De Guzman argued that volcanic pressure causes a non-uniform distribution of gold across the core sample. For this reason, the entire sample must be tested to accurately measure the gold content. This procedure resulted in minimal core sample storage, preventing future auditors from accurately assessing the valuations.

De Guzman surrounded himself with young geologists that recently graduated from college. Their inexperience resulted in minimal questioning of management, despite De Guzman's unorthodox practices. An observer likened the Bre-X team to "the geological equivalent of the batboys for the World Champion Yankees." While they were excited to partake in the gold rush, their inexperience limited their role in the operation. This limited role allowed De Guzman's tactics to go unchecked.

During the due diligence process, several investors questioned Bre-X's testing of the entire core sample. Felderhof responded by asserting De Guzman's expertise, arguing he does "not have time to educate them on the various grade determination methods for gold commonly used on a global basis in the mining industry." Because most investors lacked experience in the mining industry, many blindly trusted the "Volcanic Pool Theory" justification, leading to high valuations and minimal further questioning.

Normalization deviance has also plagued investors in the mining industry. Investors have fallen for similar scandals in the past including a Uranium scandal in Utah in 1954, a Nickel scandal in Australia in 1969 and most recently, a gold mining scandal in China in 2007. Overconfident market expectations caused the stock prices of these companies to soar. Although skepticism of reported findings increases after a scandal like Bre-X is uncovered, decision fatigue eventually settles in and investors fall for similar traps over time.

Some other mineral companies, including Placer Dome, organized failed takeovers, but the Indonesian government of President Suharto also got involved. Stating that a small company like Bre-X could not exploit the site by itself, the Indonesians initially suggested that Bre-X share the site with the large Canadian mining firm Barrick Gold, in association with Suharto's daughter Siti Hardiyanti Rukmana. Bre-X hired Suharto's son Sigit Hardjojudanto to handle their side of the affair. Bob Hasan, another Suharto acquaintance, negotiated a deal whereby Bre-X would have a 45% share, Freeport-McMoRan Copper & Gold would run the mine, and Hasan would get a cut as well. Bre-X would have the land rights for 30 years. The deal was announced February 17, 1997 and Freeport-McMoRan began their initial due diligence evaluation of the site.

A fire in Bre-X’s Borneo field office occurred in January 1997 shortly before the new company began its work. This fire destroyed many of de Guzman’s sampling records — while the cause of the fire was not determined and de Guzman was never accused of arson, the timing of the blaze and the items that were destroyed seemed more than a bit suspicious.

Fraud exposed

The fraud however began to unravel on March 26, 1997, the American firm Freeport-McMoRan, a prospective partner in developing Busang, announced that its own due-diligence core samples, led by Australian geologist Colin Jones, showed "insignificant amounts of gold". A frenzied sell-off of shares ensued and Suharto postponed signing the mining deal. Bre-X demanded more reviews and commissioned a review of the test drilling. Results were not favorable to them, and on April 1, 1997, Bre-X refused to comment.

On Friday 11 April, Northern Miner magazine put a "news flash" on its site laying out three lines of evidence that Bre-X had been duped.
First, contrary to company statements, the Busang core samples had been prepared for assay in the jungle, not in the testing lab. A videotape made by a visitor to the field site showed the humble machines common in assay labs—hammer mills, crushers, and sample splitters. Well-labeled sample bags clearly had finely crushed ore in them. Security was lax enough that samples could easily have been spiked with gold.
Second, the local inhabitants had begun panning for gold in the Busang River, but in two years they never found any. Yet Bre-X claimed that gold was visible, a sign of unusually rich ore. And de Guzman's technical report, confusingly, called the gold submicroscopic, which is typical of hard-rock gold ore.
Third, the assayer that tested the samples said the gold was predominantly in visible-sized grains. Also, the grains showed signs consistent with being typical river-panned gold dust, such as rounded outlines and rims depleted in silver. The assayer dodged the 64-billion-dollar question, saying that there were indeed ways for hard-rock gold grains to acquire rounded edges—but that argument was a fig leaf.

Canadian gold analyst Egizio Bianchini, of BMO Nesbitt Burns, considered the rumors "preposterous". A third-party independent company, Strathcona Minerals, was brought in to make its own analysis. They published their results on May 4, 1997: the Busang ore samples had been salted with gold dust. The lab's tests showed that gold in one hole had been shaved off gold jewellery though it has never been proved at what stage this gold had been added to those samples. This gold also occurred in quantities that did not support the actual original assays. Trading in Bre-X was soon suspended on the TSE and NASDAQ, and the company filed for bankruptcy protection.

Mysterious death of Michael de Guzman

on March 19, 1997, Filipino Bre-X geologist Michael de Guzman was summoned back to Busang to explain his findings however en route to the drill site he reportedly committed suicide by jumping from a helicopter in Indonesia. After he plummeted from the helicopter to the jungle floor below, his body was was found four days later in the jungle, missing the hands and feet, "surgically removed". with his innards hollowed out and his genitalia gone.

Reports state that his body was also handless, footless and faceless. Journalist Jennifer Wells, who had been sent to Borneo and was shown pictures of De Guzman's dead body, believes that his neatly sutured corpse seemed inconsistent with one that had been ravaged by a wild animal. Could De Guzman have been tortured and murdered before plummeting from the helicopter? Was it even his body? We'll likely never know.

Another interesting point to note is that although it has been widely speculated that the body found was Michael De Guzman The body that was found was never actually positively identified. So we can’t matter of fact say with 100% certainty that the body they recovered in the Jungle was actually De Guzman

It gets even weirder when you dig deeper into the facts surrounding the body because In addition, the body was reportedly mostly eaten by animals. (According to journalist John McBeth, a body had gone missing from the morgue of the town from which the helicopter flew. The remains of "de Guzman" were found only 400 metres from a logging road. No one saw the body except another Filipino geologist who claimed it was de Guzman. And one of the five women who considered themselves his wife was receiving monetary payments from somebody long after the supposed death of de Guzman.) the story was that she got paid $25,000 fro. south America, the origin of which, as I understand it, was never ascertained.

Another interesting point was that Workers on site the day Guzman disappeared claimed he was carrying large duffel bags of cash. Some say he ran to South America with a few hundred thousand dollars, while others say it was upwards of hundreds of millions. With this amount of money he could have bribed his way to freedom.

There was also a rumour that that Michael de Guzman had been seen in Canada, years after the scandal. The explanation would be that, as was rumored at the time, an anonymous corpse was thrown from the helicopter.

Aftermath

By May, Bre-X faced a number of lawsuits and angry investors who had lost billions. Among the major losers were three Canadian public sector organizations: The Ontario Municipal Employees Retirement Board (loss of $45 million), the Caisse de dépôt et placement du Québec, the Quebec Public Sector Pension fund ($70 million), and the Ontario Teachers' Pension Plan ($100 million). There was fallout in the Canadian financial sector also; the fraud proved a major embarrassment for Peter Munk, the head of Barrick Gold, as well as for the then-head of the Toronto Stock Exchange (resulting in his ousting by 1999), and began a tumultuous realignment of the Canadian stock exchanges.

Bre-X went bankrupt November 5, 1997 although some of its subsidiaries continued until 2003.

Walsh moved to the Bahamas in 1998, still professing his innocence. Two masked gunmen broke into his home in Nassau, tying him up, and threatened to shoot him unless he turned over all his money. The incident ended peacefully but three weeks later, on June 4, 1998, Walsh died of a brain aneurysm.

In 1999 the Royal Canadian Mounted Police (RCMP) announced it was ending its investigation without laying criminal charges against anyone. Critics charged that the RCMP was underfunded and understaffed to handle complex criminal fraud cases, and also charged that Canadian laws in this area were inadequate. However, despite the dropping of criminal charges, civil class action suits against Bre-X directors, advising financial firms and Kilborn continued.

In May 1999, the Ontario Securities Commission charged Felderhof with insider trading. No other member of Bre-X's board of directors, or others associated with the Busang project, were charged by the OSC. The OSC admitted that there is no evidence that Felderhof was either involved in the fraud or was aware of the fraud. The trial was suspended in April 2001 when the OSC tried to have presiding judge Justice Peter Hryn removed for alleged bias against the prosecution. This was denied by an independent judge, and on December 10, 2003 the appeal was also denied by a panel of judges.

The trial resumed in 2005. Felderhof attended, without testifying, a number of the Court hearings as the six-year case made its way through the system. The basis of the OSC action as well as the civil class-action suits is the alleged existence of numerous and obvious "red flags", as detailed by Strathcona Minerals, which should have been recognized.

Begun in 2001, the trial of John Felderhof was concluded on Tuesday, July 31, 2007, with a not-guilty verdict of illegal insider trading. Days after the verdict, the OSC also decided not to appeal the decision, a landmark victory for Felderhof and his lawyer, Toronto-based Joseph Groia. A class-action lawsuit was discontinued by court order in early 2014; $3.5 million (CAN) damages were donated to charity and the University of Ottawa since funds were deemed too low to be meaningfully distributed amongst the large number of plaintiffs.

Felderhof passed away on October 28, 2019, in Manila, Philippines, at the age of 79.

One effect of the Bre-X scandal was to strengthen securities regulation in Canada. National Instrument (NI) 43-101 implemented Standards for Disclosure for Mineral Projects after Bre-X imploded in order to improve the transparency of mining projects. Since many companies in Canada are engaged in mining operations, it was considered imperative to establish a regulatory authority over the industry’s geological practices.

Sources:

https://en.wikipedia.org/wiki/Bre-X

https://www.investopedia.com/terms/b/bre-x.asp

https://www.mining.com/web/bre-x-scandal-a-history-timeline/

https://www.historyvshollywood.com/reelfaces/gold/

https://www.businessinsider.com/bre-x-6-billion-gold-fraud-indonesia-2012-7

https://www.thoughtco.com/the-bre-x-gold-scandal-1439098

https://www.benzinga.com/news/21/07/22226078/wall-street-crime-and-punishment-bre-x-minerals-and-the-gold-mine-that-never-was

https://en.wikipedia.org/wiki/Great_Diamond_Hoax

https://en.wikibooks.org/wiki/Professionalism/Michael_de_Guzman_and_the_Bre-X_Scandal