BY JENNIFER WELLS
On the morning of Tuesday, March 18, Mike de Guzman and Rudy Vega climbed aboard a French-built Alouette helicopter at
Balikpapan, a lush resort town on the east
coast of Borneo. For de Guzman, chief geologist
with Bre-X Minerals Ltd., Balikpapan was not a
place for R and R, but rather home to Indo Assay
Laboratories, a company that was doing mineral
testing, or assaying, of ore samples for
Calgary-based Bre-X. Vega, a Bre-X metallurgist,
recalled later that de Guzman was in high spirits that day.
From Balikpapan, the helicopter took Vega to
Samarinda, where Bre-X has an office. De Guzman
himself was headed 160 km to the northwest, to
Busang, to the fabled gold discovery that he and
fellow geologist John Felderhof claimed to have
found. Waiting for de Guzman at Busang was a
technical team from Freeport-McMoRan Copper &
Gold Inc., the U.S. mining firm handpicked by the
Indonesian regime to operate the future mine. For
two weeks, Freeport had been drilling holes, 250 m
deep, alongside the holes sunk by Bre-X--the ones
that, de Guzman said, proved that Busang was the
mother of all gold deposits. Freeport wanted to
double-check.
At Samarinda airport--a registered airport, not just a
jungle-hop strip--the practice is to ensure that
helicopter passengers are strapped in before takeoff
and the doors securely shut. The Alouette took off
for Busang. That was the last anyone other than the
occupants of the helicopter saw of de Guzman alive.
Seventeen minutes later, he plunged--the first reports
said he "fell"--240 m into the dense Borneo jungle.
But people do not just fall from helicopters, and de
Guzman was no exception. The news was later
revised. De Guzman had jumped, committing suicide
because, said a Bre-X spokesman, he was suffering
from hepatitis B. There was, said Bre-X, a suicide
note left behind in his bag that spoke to the illness
issue, along with a watch, a much-prized gift from his
Filipina wife, Teresa Cruz, and some cash, including
an unspecified amount of Panamanian currency.
Bre-X CEO David Walsh expressed sadness upon
hearing the news. In a news release, he said he did
not know the geologist that well.
If de Guzman had worked for another company, in
another place, the bizarre events of March 18 might
not have drawn much notice. But Bre-X long ago
developed a pathology unlike any other. De
Guzman's death had Bre-X players and observers,
from mutual fund managers to small-time investors,
spooked. That he was said to have committed
suicide spooked them more. De Guzman had only
recently returned to Indonesia from Toronto, where
he did a celebrity turn at the Prospectors and
Developers Convention, which included a black-tie
fete for Felderhof, who was named "explorationist of
the year." He was wealthy, he was on top of the
world--or so it seemed. He also, for what it was
worth, appeared robust, as he had when interviewed
by Maclean's in Jakarta the previous month.
Walsh: explosive
rumors and a
mysterious death
For Bre-X players, who had fumed as the Busang
prize was nearly taken over by Toronto-based
Barrick Gold Corp., who railed against the
often-outrageous behavior of the property's host
country, who feared a further diminution of Bre-X's
hold on Busang, the death of de Guzman was the
most bracing news yet. "When I first heard de
Guzman had fallen out of a helicopter, I thought, my
God, what an awful tragedy," says John Embry, who
manages a $403-million precious metals fund for the
Royal Bank of Canada. "The next morning, when I
heard he had jumped out of the helicopter, I thought,
uh oh. That sort of sent a chill up my spine." Benny
Wahju, the president of PT Ingold Management in
Jakarta and a member of the Indonesian Mining
Association, was in Vancouver when he heard the
news. Wahju knew de Guzman. "I told my brother
that it doesn't sound right," he says. In February,
when Wahju met with Maclean's in Jakarta, he had
made some interesting observations. A building at
Busang had burned down a couple of weeks
previously, "taking drill results with it." Also, the
country's mines department did not have inspectors
working in the field, meaning the whole show was
being run by Bre-X. At the time, he didn't find it
suspicious.
The death of de Guzman got everyone rethinking. "I
said, this is enough for me," recalls one Montreal
institutional trader who sold his shares immediately.
Speaking to Maclean's last week, he said he had
never been a true believer, wondering for a long time
whether Bre-X might be a hoax. He had visited
Busang last year, and brought back a piece of drill
core. He had it assayed. There was nothing there. He
knew of other people who had brought back pieces
of core. These were also tested and came up barren.
But the pieces were small, and a bit of core is not
representative of anything. Curiously, at the same
time, Bre-X appears to have suspended the release
of individual hole results, disclosing instead reserve
estimates for the property as a whole. The small
band of skeptics initially had nothing to test their
results against. Later, when Bre-X did release
detailed results, that particular core was rated 1.78
grams of gold per tonne of ore. Mines have been
built on less. "I was getting less than 0.03," the trader
says. That does not prove anything, either.
Metallurgy is notoriously inconsistent. But then there
was the fire. And now, he says, "we've got a dead
man here." Suddenly, investors and analysts were
talking about the "preponderance of evidence."
Busang started sounding like O. J. Simpson in
Indonesia.
Three days after de Guzman's demise, a Jakarta
newspaper published an explosive rumor. The assay
results, the paper asserted, were seriously flawed at
Busang, so flawed that Busang might not even be
worth mining. From his home in the Bahamas, Walsh
issued a rebuttal. "The company's board of directors
has absolute confidence in the integrity and accuracy
of assay results and resource calculations reported
by the company for the Busang gold deposit," he
said. He complained of the "continuing proliferation
of falsehoods and misinformation based on
unsubstantiated allegations by unnamed sources." He
said Bre-X might sue.
Could it really be that a property so recently seen as
so rich could be nothing more than jungle mud?
Many rushed to defend Bre-X. Early on March 24,
Gordon Capital in Toronto issued its morning
comment to Gordon insiders and clients. "Quality of
Busang asset not in question," said the investment
house. "Buy this undervalued asset. We maintain our
belief that the Busang gold deposit will become a
world-class gold mine."
Others took a different tack. Daniel McConvey, a
New York City gold analyst who had visited the site
in the summer of 1996 and who had written one of
the most comprehensive reports on the project,
downgraded his stock recommendation to a neutral
from outperform. It wasn't that he believed the
rumors, but rather that he no longer knew what to
believe. McConvey had met with Felderhof and de
Guzman at the prospectors convention. It was
Felderhof who, weeks earlier, had shocked
McConvey and other analysts by tripling the "official"
reserve estimate on Busang to 200 million ounces.
"We asked Michael de Guzman what level of
confidence he had that Busang would end up with
200 million ounces," McConvey wrote in a report.
"He paused to think, then answered: '80 per cent.'
De Guzman was upbeat. He told us, with a smile,
that the Bre-X team had beaten some employees of
Freeport at a friendly basketball game on-site."
McConvey was stunned by the reported suicide.
Activist Bre-X shareholder Gregory Chorny did not
buy the suicide explanation at all. "Prove to me he's
dead," said Chorny, an Aurora, Ont., investor who
had already made $40 million from Bre-X stock. "I
want to see the autopsy reports. Show me an open
casket. Show me the fingerprint evidence."
De Guzman's casket
in Jakarta: the
geologist fell 240 m
into the dense
Borneo jungle
Before trading began on March 26 on the Toronto
Stock Exchange, Bre-X's stock was halted at
$15.50. Chorny got wind of a rumor coming out of
the brokerage community. "There's a big Bre-X story
coming," he told Maclean's that morning. "You'll
know it by the end of the afternoon. I think that
Freeport [is] making a takeover offer for Bre-X in
the $20 range." But when Freeport finally issued its
news release later in the day, it was a different bomb
altogether. During the previous three weeks, the
company said, it had drilled seven core holes on the
Busang site to confirm the results of holes previously
drilled by Bre-X. "To date, analyses of these cores,
which remain incomplete, indicate insignificant
amounts of gold." Bre-X issued its own news
release, disclosing that it had been advised by
Strathcona Minerals Ltd., an independent consulting
company, that "there appears to be a strong
possibility that the potential gold resources on the
Busang project in East Kalimantan, Indonesia, have
been overstated because of invalid samples and
assaying those samples."
For those who believe in Busang, the Freeport
release was not proof that the discovery was a dud.
It was incomplete. It did not specify where the holes
were drilled, or give detailed results. As Chorny put
it, the company could have been drilling "in the back
40 somewhere." Why would Freeport do that? One
popular theory was that the New Orleans company
wanted to portray the gold find as made of fairy dust,
to see the stock collapse, to buy control of Bre-X on
the cheap, to see Bre-X expelled from Busang.
Hartojo Wignjowijoto, an economist and consultant
to the mining industry in Jakarta, has criticized Bre-X
for being a stock play. "First, Bre-X blew up the
capital gain," Hartojo said last week. "Then, they sell
the capital gain. Now, the new guy plays another
game to dilute Bre-X." Others held the view that
Freeport's results, however disappointing, were
based on too few holes to be conclusive. "It's almost
inconceivable that there's not a lot of gold there," said
John Willson, CEO of Placer Dome Inc., which had
earlier made its own pitch to partner with Bre-X. If
he had seven dry holes, said Willson, he would keep
drilling.
The holes weren't merely bad--they were
disastrous
But the holes weren't merely bad. They were
disastrous. Bre-X itself released the results on
Freeport's sampling. The comparisons between the
Bre-X and Freeport holes, drilled 1.5 m apart, could
not have been more contrary. In one sample, where
Bre-X had reported a rich 4.39 grams of gold per
tonne, Freeport found 0.01, tantamount to nothing.
While the Bre-X results ranged from 1.33 to 5.68,
the Freeport results were consistently microscopic.
There was, in practical terms, no gold there. "It
obviously makes the thing look less favorable," says
Willson. "However, I believe the market is
overreacting at this time."
The market reacted instantaneously. It cratered.
When trading resumed on Bre-X stock, it fell $13 to
$2.50. Eight million shares changed hands in slightly
more than 3,000 trades. The TSE's computers
crashed twice from all the activity. Three billion
dollars in capitalization was wiped out. Bre-X, at its
peak, had been valued at $6 billion. Now, it was
$600 million. Traders had not seen such a collapse
since Marlboro Friday, the day in April, 1993, when
shares of cigarette maker Philip Morris crashed on
the New York Stock Exchange, leaving investors
$13 billion poorer. The Bre-X collapse, in relative
terms, was bloodier, wiping out 83 per cent of the
value of the stock. It "appears to be a fraud," said
Bob Farquharson, vice-chairman of AGF
Management Ltd., a Toronto-based mutual fund
company. "You've got to assume there's something
quite wrong. I think you have to look to Bre-X.
They're responsible for the integrity of the analysis on
their property." AGF funds had scaled back their
positions in Bre-X well before the meltdown, so the
hit, says Farquharson, was not severe. "There's no
question if this is indeed fraudulent, this is the biggest
fraudulent thing I've seen." If there were any gold at
Busang, says Ross Beaty, chairman of Pan American
Silver Corp. in Vancouver, Freeport would have
found it, even in just seven holes. "I'm convicting
Bre-X absolutely," he says. "I hope I'm wrong." If
he's not, he says, Bre-X will go down as "a shocking
and disgraceful episode in Canadian mining history."
Even New York was rivetted by the debacle.
CNBC, an all-news cable channel, could not stop
talking about Bre-X, joking at one point that it might
have been the interest-rate-hiking Alan Greenspan,
chairman of the U.S. Federal Reserve, who pushed
de Guzman from the chopper.
Bre-X took other junior gold companies with it,
though their tumble was less dramatic. The fallout is
not yet over. "Canadians have gone to the world and
have been very successful," says Beaty. "For this, the
biggest and noisiest play, to collapse under a bad
smell is devastating." Small exploration companies
now face the challenge of trying to raise money from
investors who feel badly burned. And if the gold
really is not there, the Bre-X bust will cast a pall over
future Indonesian mining prospects. "This kind of
story has huge ramifications for the business," says
Ron Stewart, country manager for PT Placer Emas
Indonesia, the Indonesian arm of Placer Dome. "It
throws a real negative light on the business."
In February, Indonesia's director general of mines,
Kuntoro Mangkusubroto, told Maclean's that Bre-X
would soon be awarded the crucial contract of work
(COW), giving it and its partners title to the portion
of Busang that Bre-X had said contained almost all
of the reported gold reserves. Last week, Kuntoro
said the ministry was freezing all COW applications
until the Busang mess is cleared up. And the mess is
about more than gold. "Freeport and Bre-X are
fighting each other about the value of money," says
mining consultant Hartojo. "But they don't realize
their fighting will have an impact on domestic policy
in Indonesia. People will judge that the government
has no control and that the government has been
fooled by a junior company like Bre-X. Busang is the
salvo in the beginning of the earthquake."
And Bre-X CEO Walsh is standing on the fault line.
Last Thursday, he spoke briefly to reporters outside
the Calgary offices of Bre-X. He stood by his team's
technical work, he said. And he was holding onto his
shares. "I personally believe there has been a hidden
agenda coming up for about 10 months now," he
said. He did not elaborate, but the time frame,
casting back to June, coincides with the point at
which the Indonesian government began manoeuvring
to dictate the ultimate ownership of Busang.
Walsh's comment suggested that Freeport's results
are purposely misleading. When the rumors first flew
about the validity of Bre-X's sampling, there was
much talk of the cyanide leaching method of
assaying, which Indo Assay had been conducting on
Bre-X's behalf. Cyanide leaching is not a standard
method of testing in the industry. Fire assay, which
involves melting the ore, is considered far more
accurate. But Bre-X said long ago that fire assay was
not as effective in its case, an explanation that was
accepted by many analysts. Was there ever a
suggestion that Bre-X bring in outside consultants to
verify the results? "You're talking about God here,"
says one investment executive of Felderhof, who
ruled the site. "You're asking God to bring in
[outsiders] to double-check results." Felderhof has a
near-mystical reputation, a water walker who "has
had malaria more times than most of us have had
sex." Pan American's Beaty was surprised to hear of
the absence of fire assays. He has gone short--that
is, bet against companies--that have made similar
admissions in the past: "It's a standard short for me if
the company says it can't get the gold out by fire
assay."
Drilling rig at
Busang: some
analysts speculate
that the ore may have
been 'salted' with
gold
At least two groups of analysts visited the site. None
wrote negative reports after the fact. That has led to
criticism of that community, on whose information
investors have come to rely. Some of the analysts did
not care for the fact that Bre-X controlled its own
prep lab, where the samples were bagged before
being shipped to Indo Assay. They would have liked
to have seen an outside contractor overseeing the
site.
The presence of Kilborn engineering, a division of the
SNC Lavalin group, provided a level of comfort.
Kilborn was the largest, most recognizable company
associated with Busang. The only other outsiders on
site were the small local contractors that drilled the
nearly 300 holes at Busang. Kilborn now says that its
role was merely to build a database from the Indo
assays. From there, the engineering firm prepared a
pre-feasibility report. It was Kilborn that came up
with the 70-million-ounce figure based on data from
the assay lab.
John Robertson is the manager of engineering for
Kilborn in Jakarta. In mid-February, he met briefly
with Maclean's at Kilborn's offices on the outskirts
of the capital. He expressed a tremendous sense of
relief that the ownership issue appeared to have been
resolved, with Freeport getting 15 per cent, Bre-X
45 per cent and the Indonesians 40 per cent.
Freeport conducted both cyanide and fire assay tests
at Busang. Alarmingly, the company also said there
were "visual differences" between the gold taken
from the Bre-X core samples and the gold taken
from those of Freeport. In the mining game, visual
differences are a red flag, a tip-off that samples may
have been salted.
Salting is an old trick. Promoters take a couple of
drill holes, pulverize the rock, then sprinkle in a little
gold to make the samples look pretty. The purpose is
to run the stock up, then run with the profits before
the scam is revealed.
The closest any outsider got to sampling Busang
prior to Freeport was Barrick Gold Corp. Barrick
signed a confidentiality agreement last Nov. 24 at a
time when it was hoping to take control of Busang.
Early the next month, Barrick moved a crew of
senior technical people, including Alan Hill, the
company's executive vice-president of development,
onto the site. The company crated as many as 100
samples of crushed ore, provided by Bre-X, and
delivered them to Lakefield Research Ltd. outside
Toronto. There was no whole core to ship, because
rather than splitting the core and saving half, as is the
common practice, Bre-X crushed the entire core
on-site. There was no material to compare the Bre-X
samples with. Barrick's next step would have been to
drill its own holes. But before it got to that stage, the
partnership was scuppered. On the samples it did
have, it is widely understood that there were
inconsistencies against the Bre-X numbers. Chorny
believes that retesting turned up more positive results
for Barrick, and will not entertain the salting theory.
The speculation about salted assays harkens back to
1980 and the case of New Cinch Uranium Ltd., a
Canadian junior whose stock ran from $2 to $29
over four months. New Cinch said it had a rich gold
deposit in New Mexico, piquing the interest of
Willroy Mines Ltd., which paid $26 million for 15
per cent of New Cinch. Trouble was, when Willroy
did its own drilling, the company could not find the
gold. In this case, the salting took place at the assay
stage. "It has been a stock market roller-coaster ride
reminiscent of the wildest tales of rags to riches to
rags in the early era of Canadian 'penny-mining'
euphoria," Maclean's reported at the time.
"Prospectors in faraway places, long-shot mineral
claims in moose pasture, excited promotion within
financial circles, frantic buying on flimsy
evidence--and the whole panoply of spontaneous
irrationality largely eliminated from the stock market
in recent decades with increasing regulation designed
to protect investors and promoters from their own
stupidity and greed." The stock crashed and burned.
Oh, and there was a murder, too, of an employee of
El Paso Chem-Tec Laboratories, which had done
the assay work. Lawsuits ensued.
As they will for Bre-X. Early this week, Ralph
Sahrmann, a lawyer with Lang Michener in
Vancouver who represents a Chorny-led group of
disaffected shareholders, will, along with the law firm
of Baker & Botts in Houston, file a class-action suit
against Bre-X somewhere in the United States.
Sahrmann will not say where, exactly. There is no
small irony to the legal |
