Some Old & Some New News.......
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Far Eastern Economic Review, 24April 1997
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Bonanza to Bust
Bre-X shareholders saw the glitter, not the gold
By John McBeth in Jakarta
April 24, 1997
When the father of Californian contractor Richard Petrulis bought
2,000 Bre-X Minerals shares in early 1993, the price was only 20
cents. Following his death some months later, his son built that
inheritance into a 65,000-share holding, buoyed by the flow of good
news coming from a place he had barely heard of: Kalimantan,
Indonesia. "I fell in love with the stock and invested everything I had
in it," he says. "That's why it's been such a wipeout."
Wipeout is the word. Petrulis lost $750,000 in the space of a few
stomach-turning minutes on March 26, with the announcement that
Bre-X had probably overestimated deposits in its Busang field. He now
owes $200,000 in taxes and another $40,000 to credit-card
companies. He expects to lose his home in Oakland-and the $1,000 he
has left in the bank. "Very soon, I'll be living on the street," he says.
Petrulis, 49, is just one of hundreds of small investors devastated by
the Bre-X meltdown. "It's across the board," says American lawyer
Thomas Ajamie, who has followed the Canada-based Bre-X's fortunes
for months. "It ranges from those who fear they are going to be out in
the street, to some who say 'I can't believe I've done this to my
family,' to one who had just come back from the doctor loaded with
anti-depressants."
John Wisinzer, a 46-year-old employee of a small Los Angeles
manufacturing firm, wasn't wiped out, but he did lose his entire
$45,000 retirement fund in the crash. Now he's getting out of the
mining sector for good. "There are too many variables," he says
ruefully. "You just can't trust them." That opinion is shared by New
York analyst Ashoke Vasvani, who bailed out of the stock when Bre-X
Exploration Manager Michael de Guzman plunged to his death from a
helicopter on March 19, just before the share price collapsed. His sage
advice: "Beware of small companies with big numbers."
Institutional investors, at least those readily identifiable, held about
15% of Bre-X's equity. But nearly half of the company's shareholders
were individuals-the same punters who traditionally provide the
financing that allows gritty exploration companies like Bre-X to search
for gold in forested corners of Indonesia and other remote parts of the
world. Many were from rural towns in Texas, Georgia and California
and, of course, in Canada.
"There were a lot of conservative people buying the stock," says
Ajamie. "After all, they all knew there was gold in the ground."
Or so they thought. When Bre-X and new partner-operator Freeport
McMoRan Copper & Gold announced the size of the deposit probably
had been overstated, that due diligence or check drilling had revealed
only "insignificant" amounts of gold, the roof fell in for Petrulis and all
the others who had kept the faith through last year's ugly ownership
squabble between Bre-X and Canadian giant Barrick Gold.
In the early days, Petrulis had put a "stop order" on his stock so it
would automatically be sold off if the price dipped below a certain
level. In late 1995, it did just that, then rebounded strongly. Petrulis
absorbed a loss to repurchase his shares. After that he acquired
more-and more. He bought them on margin, he put them on credit
cards. "It was really volatile," he says. "But I thought it was heading in
one direction."
In February 1996, with $500,000 riding on the firm, Petrulis decided it
was time to travel to Calgary to "check out" Bre-X President David
Walsh. Walsh's wife, Jeannette, wouldn't give him the address of the
firm's office in the basement of their home over the telephone, so
Petrulis had to call back posing as a delivery man to get the
information. He realized he had the right address when he spotted a
black Lincoln Continental in the driveway bearing the registration plate
"Bresea 1," Bre-X's sister company.
For all that, the Californian remains a true believer in the Busang
motherlode. As the mining industry waits on tenterhooks for the
results of a crucial independent analysis by Canada's Strathcona
Mineral Services, he like many others is "still trying to figure it all out."
He's "sure the gold is there," he says. "It's just inconceivable this is a
hoax."
Not to others. Ajamie is the partner in Houston law firm Baker &
Botts, which initiated the first class-action suit against Bre-X, its
senior management and three other companies responsible for sizing
the deposit. Seven more lawsuits have followed in quick succession as
shareholders seek to get back what they have lost.
A sense of bafflement pervades the entire mining industry over the
night-and-day differences between the Bre-X and Freeport results.
Given the legal consequences, experts find it difficult to believe
Freeport could get it this wrong. But they also have trouble
comprehending a hoax involving earlier samples on such an
unprecedented scale. "You've got to ask yourself how they possibly
could have done it," says a Toronto-based analyst who suffered major
losses. "This is not a thug robbing the corner store . . . It would have
to be highly sophisticated."
Even then, the prospect is mind-boggling. One geologist, who spent
three months at Busang in mid-1995, says he never saw any evidence
of the sort of systematic "salting" or gold-spiking process that would
have been required to present a believable pattern of mineralization. He
says many of the 15 holes he logged were from the supposedly rich
southeast zone, or Busang II, which was first drilled in March that
year.
Although he thought it strange the lights in Busang's preparatory lab
were on all night, the geologist, who spoke on condition of anonymity,
says the core samples were being prepared and shipped at such a pace
there was little opportunity for them to be "salted" anyway.
He and a second, independent witness at the site say once the core had
been logged, the two-metre-long samples bound for the assay
laboratory were broken into 4-5 inch chunks and placed in plastic
sample bags. About three times a week, shipments were sent to
Balikpapan, where Indo Assay Utama Nusa, a subsidiary of a
well-regarded Perth-based company, tested them for gold content.
It was the results from Indo Assay that Canada's Kilborn Engineering,
another highly reputable firm, used to calculate the size of the deposit.
At no time, however, did Kilborn do its own drilling. Like other firms
involved in the long-running saga, including Barrick Gold, it relied on
samples supplied by Bre-X. And even when it conducted tests on a
27-tonne bulk sample of leftover ore at Busang, it still came up with a
gold grade that seemed to match everything else.
Freeport and Strathcona are the only two firms to have done
independent drilling since Busang became the darling of the mining
world. The fact that de Guzman chose to take his own life only 13
days after Freeport's due-diligence team landed at Busang has fed the
perception that he had something to hide. A fire at Busang in January,
which destroyed some of his records, and reports that intruders broke
into Freeport Chief Geologist David Porter's Samarinda hotel room
have only added to the air of mystery.
Friends have blamed de Guzman's death on a combination of a heavy
workload, a tangled personal life involving at least four wives and
debilitating illnesses, including a possible attack of hepatitis B. But if de
Guzman did commit suicide fearing what Freeport would uncover, it
doesn't explain why everyone else who possibly could have been
involved in a hoax returned from overseas to observe the due-diligence
process.
An Indonesian businessman who accompanied de Guzman and some
of his field team back from a Toronto mining conference days before
his death says the other employees were clearly upset that Walsh had
not found time to see them during their week-long stay to explain
when they could realize their stock options. The fact that de Guzman
had cashed 150,000 of his 400,000 options last year for what must
have been close to $2.5 million was a sore point among them-they
worried he wasn't telling them the whole truth about his own plans
and what benefits they could expect for themselves.
Only senior officers are required to file insider-trading reports, with
more recent information now showing that Walsh, Bre-X
Vice-President John Felderhof and four other executives collectively
unloaded C$107 million in options last summer. If that has upset some
people, it doesn't mean the Bre-X management doesn't have its diehard
loyalists. (As of early February 1997, Walsh and his wife had 9.4
million Bre-X shares, and 9 million options, while Felderhof had 4
million shares and 6.8 million options.)
Even today, with drill rigs being pulled from the Busang site, retail
investors continue to buy Bre-X. They're betting if Freeport is wrong
their bargain-basement $2 shares will zoom back to $25. They may
also be calculating that despite everything, there could still be a
commercial deposit in an area everyone agrees is brimming with
promise. As many people have learned to their cost, the Busang story
is far from over. |
