Premium Kaiser Express - BUSANG BUST: NIGHTMARE OR REALITY?
Friday, April 04, 1997
#97-5 BUSANG BUST: NIGHTMARE OR REALITY?
After shedding 80% of its value on March 27, Bre-X Minerals turned into a 30 million share a day gambling casino as professional traders and novice investors battled to extract short term profits from the intense uncertainty surrounding the question as to whether Busang is a bust or not. When I first talked about the Busang Bust Nightmare in Kaiser Express 97-3 (March 24), I felt that the probability of a bust was very remote. When Bre-X subsequently reported that Strathcona Mineral Services, an independent mining industry consultant whose arch-conservative approach to ore reserve calculations has earned it the nickname Dr Death (as in death to orebodies), had advised the 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 of those samples", I understood it as a very meaningful statement. Given that the day before Bre-X management had thumped its chest with a pronouncement of absolute confidence in its reserve figures, and threatened lawsuits against anybody who dared to disagree, I found this meek statement a shocking reversal. When Bre-X followed
several days later with Freeport's preliminary findings of insignificant gold values in seven
drill holes, of which four were twinned within 1.5 metres of key Bre-X holes, my
assessment of the Busang Bust Nightmare swung to the other extreme where I
considered the probability that Busang wasn't a bust as very remote. The unqualified
statement by Bre-X that Freeport "also noticed visual differences in gold particles
contained in samples from core holes drilled by Freeport and and core holes drilled by
Bre-X" translated into a confession that the gold in the Bre-X samples did not originate
from the same rock from which Freeport pulled its holes. In other words, the Bre-X
samples involved contamination of some sort. But during the past few days I have studied
the statements made by Bre-X, and concluded that they are so ambiguous and
fragmentary that they provide virtually no basis for any reasoned position on whether or not
the Busang reserves are seriously overstated. In fact, when I heard on Wednesday from an
analyst who has covered Bre-X closely since its early days that Bre-X's David Walsh had
told her for the record that the only basis for Strathcona's statement was communication
with Freeport personnel, I concluded that the biggest travesty was the failure of Bre-X
management to provide proper disclosure and an intelligent defence of its position that its
published Busang results are reliable. If it turns out that Busang is not a bust, and the
market devastation suffered by shareholders of Bre-X and junior resource stocks in general
was totally unnecessary, the blame lands squarely on the shoulders of David Walsh.
At this point to believe that Freeport's preliminary findings of insignificant gold results in
the Busang deposit present an incorrect portrait of the deposit requires one to suspend all
beliefs that both Freeport and Bre-X have acted in a common sense and fair manner. First
of all, we know that Freeport is the gun recruited by the Indonesian dictator and his pals to
take charge of the Busang deposit in exchange for a 15% equity stake. Freeport through
its Grasberg deposit in Irian Jaya has had a cozy relationship with the Indonesian
establishment for a long time. It understands perfectly well the Indonesian business
system where the friends and relatives of the dictatorship are the inevitable winners in any
contract tender bids. While its reward for overseeing development of Busang would be
relatively small, its Indonesian favour bank account would swell. With only little to be
gained directly and lots indirectly, Freeport could be expected to be brutal and ruthless in
its assessment of the Busang deposit, to the point where it at least initially might ignore
Bre-X's warnings that proper measurement of Busang's grade requires special treatment.
The mining industry has a dogmatic attitude only rarely proven wrong that if the gold "don't
show up through normal assaying methods, it ain't there". Given Freeport's disclaimers
that its due diligence study is preliminary and incomplete, it is entirely believable that
Freeport's assaying procedures so far have followed lines that from Bre-X's standpoint
predictably failed to detect the Busang gold.
While it is plausible that Freeport may be proceeding like some sort of robot oblivious to
the damage its mechanical steps are inflicting, it is implausible to believe that Freeport is
oblivious to the intense embarassment the Busang affair is causing for the Suharto
government. For the past six months Suharto and his kids have shamelessly schemed to
steal a big percentage of the Busang deposit from its rightful owner. This debacle has
been witnessed not just by the world, but by the country of Indonesia itself. Modern
communications technology operates like a giant mirror reflecting everything back to its
source. While the Indonesian people may have shrugged their shoulders during the past
six months over their leader's antics with the retort "what else is new?", the current fiasco
is infinitely more interesting because it portrays their leaders as a gang of rubes who have
embarrassed themselves and their country by apparently falling for the biggest salt job in
history perpetrated by a bunch of amateur foreigners. This perception of an incompetent,
greedy and gullible leadership has far greater power to destabilize Indonesia's political
regime than any crimes of corruption or repression. Given that Freeport's Grasberg project
hasn't been without serious bumps that required the support of the Indonesian government
to smooth out, it is only common sense that Freeport would go out of its way to avoid
making the Busang deposit look bad even on a temporary basis.
There is a conspiracy theory camp that believes Freeport deliberately set out to discredit
Bre-X and the Busang deposit, with the hidden agenda of scooping the deposit either
through a takeover bid at depressed prices, or directly down the road after the Indonesian
government has confiscated the property and kicked Bre-X out of the country. This view
requires one to make several assumptions that fly in the face of common sense. One is
that Freeport is willing to risk political destabilization of Indonesia and jeopardize the
privileges provided by its relationship with the ruling elite. Another is that Freeport is so
stupid as to believe that regulators would not come roaring back with charges of market
manipulation if Freeport first triggers a price collapse by reporting without precise
qualification results that are misleadingly negative, and then walks in to buy out the
"worthless" deposit at cheap prices. If Freeport's results merely downgraded the deposit,
this might be believable, but not when the results show the gold grade to be virtually zero.
A third assumption is that Freeport would be willing to risk the nasty publicity of class
action lawsuits that not only could cost it lots of money, but also jeopardize development
projects that would suddenly attract environmental lobbyists faster than shit draws flies on
a hot sunny day.
Bre-X reported on March 27 the results of confirmatory drilling conducted by Freeport on
the Busang deposit during the past three weeks. Freeport drilled four holes that twinned
four Bre-X holes within 1.5 metres to a depth of 250 metres. While the Bre-X holes yielded
grades ranging 1-5 g/t gold, the Freeport holes graded 0.01 to 0.06 g/t gold, or about one
hundredth the grade reported by Bre-X. Freeport also drilled three holes that scissored two
of the twinned holes. These Freeport holes graded less than 0.02 g/t gold. To put that into
ounces per ton perspective, that is a grade of less than 0.0005 opt. Bre-X reports that all
assays reported were done by bottle-roll cyanide-extraction. Freeport also conducted
standard fire assays on some samples taken from core holes drilled by both Freeport and
Bre-X, both of which returned insignificant results. Bre-X then reports that Freeport
observed "visual differences in gold particles contained in samples from core holes drilled
by Freeport and core holes drilled by Bre-X". Without further elaboration Bre-X states that
Freeport has indicated its findings are preliminary and incomplete. In its own news release
Freeport states only that its analyses of these holes remain incomplete.
This statement by Freeport is the only thread to which the Busang deposit's original
reserve figures continue to cling. What Freeport has said is that the assaying cycle for
each hole remains incomplete without saying in what regard. The Bre-X defence has
consisted mainly of news releases talking about the coarse gold nature of the Busang
mineralization ("shake the core and the gold dust falls from it like flour"). We can only
optimistically speculate that Freeport has screened out the coarse gold fraction and
submitted it for separate metallic fire assays. In this scenario Freeport will shortly report
that final assays which include both the coarse and fine gold content of the Busang core
are comparable to Bre-X's published figures. Such an outcome would instantly restore the
credibility of Busang as potentially the world's biggest gold deposit. But if this were the
case, why did Freeport and Bre-X neglect to state that Freeport's initial results do not
include assaying techniques designed to measure the coarse gold content? We could
explain away Freeport's minimalist disclosure as the byproduct of ruthless indifference and
arrogance, but there would be no excuse whatsoever for Bre-X management's failure to pin
down and disclose the simple fact that Freeport's assaying procedures do not yet include
fire assays for coarse gold separated from the rest of the sample by metallic sieving.
Given that David Walsh's life has been made absolutely miserable by this situation, it is
very odd that he would not try to make things a little easier by including a simple
statement like: "Freeport is still awaiting assays for the coarse gold fraction extracted
from the Busang drill core samples". Instead the company has babbled about the coarse
gold nature of the Busang mineralization and the special handling it requires without once
stating exactly what Freeport has and hasn't done. Any excuses that Bre-X was forced by
other parties such as lawyers and regulators to state what it stated just don't wash. A
man like David Walsh would have an army of shareholders to back him up if he insisted in
including factual information that provided a meaningful context and rid the Freeport
statements of their ambiguity and incompleteness. Rather than assume Bre-X
management is totally devoid of common sense, I am inclined to believe that there wasn't
much to add to Freeport's results.
The worst part about Bre-X's news released is that they do not respond to the statement
about visual differences in gold particles. A hardrock gold deposit is created when a host
rock is inundated by fluids containing dissolved gold. Gold drops out of solution into
physical form according to a regime of temperature, pressure and chemistry which
determine the location, size and shape of gold particles. Temperature and pressure vary
with depth, while chemistry varies with the host rock, with the result that the physical
appearance of gold particles will vary within a deposit. But when you extract two pieces of
rock with the same mineralogy from the same vertical depth and about 1.5 metres apart
laterally, you are vary unlikely to find visually different particles of gold. There are always
exceptions to the rule, so to make it statistically meaningful for Freeport to note a
difference, it would have had to observe similar differences within a number of comparable
samples. If that is not the case, it would be outrageously misleading for Freeport to make
its statement without a qualifier that the difference was an anomaly rather than the norm. It
would further be incredible that Bre-X management would not make a point of noting the
isolated nature of Freeport's observation.
There is, however, a certain incongruity in Freeport's observation. Freeport has assayed
samples from both its own core and Bre-X core with equally lousy results. What the news
release does not make clear is whether Freeport assayed samples from the skeleton core
(Bre-X apparently retained 10 cm of intact core from each two metre interval that was
crushed and pulverized into a 13 kg sample) or from 13 kg sample bags previously
prepared on site by Bre-X staff. A major speculation has been that contamination of the
Bre-X samples occurred somewhere between pulling core holes and closing the 13 kg
bags of pulverized core. A Kilborn check assay audit shows that there are no problems
with the way the assay samples were handled after Bre-X staff prepared the initial
samples. That still leaves wide open the possibility that gold was introduced during the
sample preparation stage. In Kaiser Express 97-4 I floated the speculation that the only
way thousands of Busang samples could have been systematically salted in an
unobtrusive manner would have been by spraying core during the core logging stage with a
gold chloride or cyanide spiked water bottle. The problem with this scenario is that the
gold particles formed by the evaporation of the water would not have had a coarse-grained
nature. A fine-grained gold residue would have been measured through the bottle-roll
cyanide-extraction assays Freeport conducted on the original Bre-X samples. If indeed
Freeport has screened out the coarse gold fraction from the Bre-X samples it tested, and
is still waiting for fire assays of the metallic sieve fraction, it is possible that we will soon
hear that the final assays for the Bre-X samples show substantial quantities of gold while
those of the Freeport samples have negligible quantities. The moment we hear such a
report of identical procedures but with widely different results, it will be the death of the
Busang deposit. What this would mean is that coarse gold was systematically added to
the Busang samples, probably during the pulverization stage. Given observations by
mining analysts that the variation of gold grade in the Busang deposit has an observable
correlation with mineralogy, such a stunt could only have been pulled off by an individual
intimately involved with the exploration program. This individual would have logged or at
least examined every interval of core, and probably supervised the crushing process. A
pocket full of gold dust acquired from some placer miners and a pinch into the crusher
here and there where the core looked appropriately juicy, and, presto, you have a
systematically salted gold deposit. A "pinch" doesn't sound very scientific, but tell that to
the world's greatest chefs. The problem with this scenario is that the only person who
could rule it out with his testimony is dead, supposedly from suicide. And the conspiracy
theorists are really going wild over this one. The helicopter bringing Bre-X's chief geologist,
Mike de Guzman, to the Busang project at the request of Freeport to help explain why
Freeport was getting such poor results, supposedly made an unscheduled stop along the
way. Some time later a human being wearing de Guzman's clothes drops from the
helicopter into the jungle, where humidity, bugs and vermin quickly render the corpse
unrecognizable by the time search and rescue crews find the body several days later.
Strangely, no positive identification has been made more than a week after the death. Did
somebody kill Guzman because he knew who was responsible? Did he kill himself
because he was responsible? Did he pull a disappearing act? Or was he just depressed?
Good stuff for a movie script, but not really relevant to whether or not Busang is a bust.
Freeport's statement about particle differences means that it has conducted additional
studies on the core samples that involve breaking the material down into physical
particles, separating out the heavy minerals, and studying the gold particles under a
microscope. Both fire assay and cyanide extraction destroy the original gold grains, one
by melting them into a bead, and the other by dissolving them into a solution from which
the gold is subsequently precipitated. If Freeport's assays to date are complete and
represent an accurate picture of Busang's gold content, which is next to nothing, the
question arises as to how Freeport generated a statistically meaningful sample of gold
grains from its core that allowed it to make a meaningful comparison with grains recovered
from the Bre-X sample. I am not aware that Bre-X has published any information about the
physical characteristics of the coarse gold it believes makes up the bulk of Busang's 71
million ounce gold reserve. Samples salted with the coarse grains of placer gold would
certainly be vulnerable to a nugget effect requiring special assaying treatment. However,
the company has stated that it has observed gold in drill cuttings, and literally seen the
gold fall from the vuggy host rock. Are these statements reliable? Was this always
observed, or only occasionally? It is quite possible that the Busang deposit has pods of
coarse gold mineralization that may be quite visible. Given that Freeport did not have
enough gold particles in its own core to make a proper statement about differences,
perhaps what it is telling Bre-X through its brief statement is that the gold particles in the
Bre-X samples are like no particles known to occur naturally in bedrock. Bre-X
management's unwillingness to address the particle difference question makes me wonder
if management itself is deeply disturbed and puzzled by Freeport's report.
The Bre-X affair has turned into a comedy of coincidences, and one of the strangest is the
role of Barrick, which for a while appeared destined to inherit a majority interest in the
Busang deposit. Much confusion has surrounded the degree of due diligence conducted
by Barrick on the Busang deposit. One widely erroneous statement by an Australian
mining executive suggested that Barrick had drilled a hundred holes. In reality Barrick has
never extracted any samples from the property and has only handled samples prepared by
Bre-X, samples that will have been similar to the many sent to various laboratories for
check assaying. An unofficial story making the rounds is that initially Barrick couldn't get
the samples to run any gold, and it wasn't until Bre-X showed Barrick the proper assaying
technique that Barrick became a believer in the deposit. But Barrick is not a stupid
company, and its curiousity would have compelled it to eventually do particle analysis in
an effort to get to the bottom of the Busang deposit's gold nature. When that happened is
unclear, but sometime between December and January Barrick seemed to lose interest in
the Busang deposit. One explanation is that the Indonesians became greedy after Placer
interfered with its bogus merger bid and suggested that 40% should go to the Indonesians.
Barrick may not have been willing to give up this much and politely folded its cards when
the ante was increased, a move that certainly seems uncharacteristic for Peter Munk. The
speculation now making the rounds is that Barrick's deeper investigations of the Bre-X
samples revealed something that prompted it not to fight being squeezed out of the battle
for control of Busang. Barrick's intense interest in Busang has been cited as a key reason
the market was so unquestioning in its acceptance of the Busang reserve figures. The
market is now looking to Barrick for guidance on the question of whether or not Busang is
a bust or for real, but Barrick is hiding behind a confidentiality agreement. It is not clear
who controls the confidentiality, but it would be prudent of Bre-X to release Barrick in an
effort to add at least one credible voice of support to its cause. It would also be nice to
hear from Bre-X whether the confidentiality agreement prohibits Barrick and its insiders
from acting in the market based on what they know about the Busang deposit. While the
rest of us are flying blind based on the pathetic disclosures made so far, the Barrick crowd
enjoys a distinct advantage in predicting what the outcome of Strathcona's independent
audit might be in several weeks.
When I started writing this update on the Busang story, I was ambivalent about whether
Busang was overstated and subeconomic mirage, or the world's biggest gold deposit.
After five hours of intense meditation on this topic I have swung back to the position that
the most likely scenario is that the world's biggest gold deposit is really just a spotty,
subeconomic gold system. While all sorts of intrigues can be imagined as to why the
Freeport revelations are part of an elaborate strategy to shake out ownership of Busang, or
at the very least the result of a colossal misunderstanding, the overwhelming point to
which I find myself repeatedly returning is in what Bre-X management has not said and
done to defend its position. I am not prepared to assume that Bre-X management lacked
common sense or the balls to stand up properly for what they believed. I am more inclined
to believe that they had very little choice in what they could say, and the reasons are that
the outlook for Busang is not good. The current market activity in Bre-X is a game of
musical chairs, and when the music stops in this game, there will be no chairs. My
impression is that Bre-X started as a retail cult stock that transformed into an institutional
play with the result that about $4 billion of cash was lifted from the pockets of millions of
mutual fund investors and swapped into the pockets of tens of thousands of retail
investors. Whether the reason for the swap was a good thing we won't know for a while,
but I can certainly say that the swap itself has been a good thing for the junior resource
sector. It would be a shame if retail investors ploughed their money back into the Bre-X
market, and thereby help the mutual funds get off the hook. At this point it is much wiser
to sit on your cash and wait until the dust settles. Senior equity markets are in the midst
of the biggest correction since 1994, and a further thousand point decline in New York
seems much more likely than a similar increase. The resource juniors have enjoyed
something of a bounce in recent days on the coattails of a sentiment swing in favour of the
scenario that the Busang Bust is really just a big confusion about assaying procedures.
By the time we have a definitive resolution of the Bre-X question, we will be just in time to
greet the summer doldrums. If the news is bad, we could be in for a long junior resource
bear market. If the news is good, it will not undo the damage unnecessarily inflicted on the
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