TO ALL: From the Natural Contrarian Financial Newsletter...analysis
The Bre-x Reality: 3 Possible Scenarios
Regardless of the C$3billion+ of market capitalization that has recently evaporated in the natural resource sector, the real story behind the Bre-x debacle has yet to be established. Thus far, the panic and frenzy that is running rampant across our chosen market sector is being fuelled by rumour and innuendo. There are three possible scenarios, one of which will be verified when the facts of the matter are thrust forward for public scrutiny.
Scenario #1: The boys from Bre-x have successfully orchestrated the greatest investment scam since the colonials convinced the Mohawks to sell Manhattan Island for a box of beads. For 30 months, the world's leading structural geologists and mining analysts closely examined the Busang concession and still did not detect the scam of the century. Although the company's directors, those who would benefit most from such a scam, did not sell their shares beforehand, they were mysteriously motivated to go through with it and hire Strathcona, the premier independent consultants, to catch them at their game.
Scenario #2: The boys from Freeport Copper and Gold and some local Indonesians have successfully discreditted the validity of Bre-x's accomplishments at Busang and the reputation of all the respected industry professionals who endorsed the concession's reserve numbers. All this was done to trigger a drastic selloff in Bre-x stock in order to accumulate more shares, thus a bigger percentage of the Busang, at greatly discounted market prices. If this scenario proves to be the case, we will know who was buying all those shares being sold off during the freefall. All FCX had to do was drill seven dry holes to override the validity of the reserve numbers established by the approximately 319 holes drilled by Bre-x over 3 years.
Scenario #3: There is the possibility of middle ground. Perhaps somewhere between 40 million and 72 million ounces of gold reserves there was a bit of exaggeration. Perhaps the seven holes drilled by FCX were purposely placed in a particular sector of the Busang that FCX's management had previously held in question. When FCX utilized strategic ambiguity by stating that the Busang's gold reserves might be grossly overstated, it served a dual purpose. It allowed FCX to safely declare an overstatement without having to be numerically specific because the odds are good that on such a huge deposit, determined by such an inexact science, the current reserve numbers will be at least somewhat overstated. It also granted FCX the opportunity to accumulate more shares or even negotiate a better deal. If this is the case, I'll bet FCX didn't fathom just how effective the implication of overstatement would be.
The Contrarian Course of Action From Here
I put the odds of occurrence in this order of likelilhood: Scenario #3,#2,#1. If scenario #1 turns out to be the case, then we are in for a very long and painful year. If Bre-x, the current flagship of our market sector is a complete scam, we all pay the price in our current portfolios. It will take some time, some healing, and some forgetting before the investing herd and investment banks come near the junior natural resource sector to fill their role as financial support. If scenario #2 turns out to be the case, no one could trust the major companies again. If it is established that all the gold is really there, the panic button will be switched off and the market capitalizations will gradually return. The real losers in this scenario are all those investors sho had to sell to meet margin calls or who sold in a fear-driven frenzy. Multiple investor class action suits alleging fraud have already begun.
So we are left with my pick, Scenario #3. It turns out that there is a tremendous gold reserve at the Busang, just not quite as tremendous as Bre-x had touted. The market's interest will return to Bre-x but it probably won't move back to its previous high. The rest of the market sector will gradually return to its standard of volatility and insanity. The dominant long term effects will be increased caution and cynicism within investors and banking institutions in regards to their willingness to place capital into our markets and operations of the mining companies of our sector.
What do we do from here? I'm glad you asked. I recommend the following course of action: HOLD everything for now. The emotions of fear and panic, and compulsory margin calls have already spread havoc across our market.
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One of the best "relatively" objective articles I have thus far read on the subject. Figured everyone would appreciate its value. Too bad the Globe and Mail, Northern Miner and the Financial Post can't write like that.. but that is another matter. Words of wisdom from my friend the Hymer, each day that passes without a smoking gun for the scam, is a day in our favour. For what it is worth, I think scenario three is most likely with the odds that Freeport genuinely blew the complex lab analysis and were forced to announce early because of leaked information. Skullduggery may be afoot but it is on a much smaller scale than suggested. Bre-x is now like an accident scene where everyone wants to have a look and analyze what went wrong. When it was a luxury cadillac streaming along the highway, everyone admired its lustre and wanted a ride. Fortunes in this industry (not just gold, but the market itself) are very fickle. |
