Tuesday, December 16, 1997
Bre-X saga the tarnish on a lousy year for gold explorers
TORONTO (CP) - It's one call to his stockbroker Greg Chorny will never forget.
The veteran investor was on a March break ski holiday in the Canadian Rockies when he decided to
check on his shares of a high-flying gold explorer called Bre-X Minerals Ltd.
What he heard sent a shiver down his spine.
Bre-X geologist Michael de Guzman - the man credited with finding one of the largest gold deposits
in the world - had plunged to his death from a helicopter flying over the jungles of Indonesia.
"I found out about it on the ski hill over my cell phone, when I called my broker and got the good
news," Chorny remembers wryly. "I'd seen situations before where the geologist takes the big dive.
"You know there's trouble when that happens."
De Guzman's death signalled the beginning of a dark final chapter for what had been one of the most
sensational rags-to-riches stories in the history of Canadian mining.
Bre-X was a tiny Calgary-based company created by stock promoter David Walsh that dazzled
investors with its spectacular Busang gold play and a meteoric rise from penny-stock obscurity to $6
billion in market value.
Bre-X became a darling of financial markets and came to reflect the excesses of the stocks and
mutual fund boom that pushed share prices into the stratosphere and generated fat profits for tens of
thousands of small Canadian investors.
But it all evaporated in the spring of 1997 as shareholders realized the Busang deposit, said to
contain 200 million ounces of gold, was really just a figment of the late Michael de Guzman's
imagination.
"Bre-X and Busang was very much a once-in-the-history-of-mankind event," said Graham
Farquharson, president of Strathcona Mineral Services Ltd., an independent mining consultant.
Strathcona exposed the Busang deposit in May as a fraud "without precedent in the history of mining
anywhere in the world" and sent Bre-X scurrying for bankruptcy protection as its shares were
rendered virtually worthless.
"Nothing on that scale has ever happened in the past and ever will in the future," said Farquharson.
"The world wanted to believe it was for real."
Heat from the Bre-X meltdown and depressed gold prices - now hovering around $280 US an
ounce - have evaporated the pool of venture capital junior companies depend on to finance their
exploration efforts, said ScotiaMcLeod vice-president Fred Ketchen.
"Junior companies are having a dickens of a job raising the capital to carry out their exploration and
development work because of the Bre-X mess," Ketchen said.
"Compared to what it has been in years past, it is 10 times more difficult trying to raise capital today."
Making matters worse is the price of gold, which has taken a beating in recent weeks as European
countries debate the merits of using it to support their currencies. Argentina sold off its reserves earlier
this month and Switzerland has announced similar plans.
Still, Canada's junior mining sector is still afloat and will survive a difficult 1997, said Vancouver gold
analyst Doug Leishmann.
"Bre-X didn't sink the ship, but the ship got wrecked by commodity prices," Leishmann said.
"Good projects with good people can still get financed, but obviously they'll be at lower prices than in
the past. There are some good things happening right now, exploration-wise."
A private investigator has determined de Guzman and a handful of other Bre-X employees sprinkled
gold bought from a Borneo tribesman into selected ore samples - a practice called salting - before the
samples were tested.
The salting began in December 1993 and was intended to discourage the company from shutting
down the Busang project, the report said.
As a result, the junior mining sector isn't likely to be getting any support from investors like Chorny
for a while.
"I certainly won't be going back for a long time," he said. "I'd have a much better chance at the
blackjack tables in Las Vegas.
Bre-X also earned Canada's financial services industry a reputation as an unregulated frontier where
mining frauds are prevalent and easy to commit.
To counter that, the Toronto Stock Exchange announced new rules forcing mining companies listed
on the exchange to disclose more details about drilling and analytical methods, sampling procedures
and assay techniques.
"If there had been a qualified independent audit of the work (Bre-X) had done, and if they had been
required to produce such, certainly all of the red flags we saw would have become evident,"
Farquharson said.
Canada's largest stock exchange has also set up a mining industry task force with the Ontario
Securities Commission to determine how best to help investors verify the validity of mining claims.
Since May, a barrage of shareholder lawsuits have been launched against Bre-X and its senior
officials, the TSE, the securities commission and several brokerage firms which promoted the stock.
The company itself was petitioned into bankruptcy in November after an Alberta court refused to
extend its protection deadline. Walsh resigned as chairman shortly afterward.
Most of the pending legal action, which should get underway early in the new year, is expected to
coalesce into a global class action suit based in Texas, said Alberta lawyer Clint Docken.
Former Bre-X executive John Felderhof, de Guzman's boss, retreated to the Cayman Islands shortly
after the Strathcona report was released. He has denied any knowledge of the scheme. |
