Monday 12 May 1997
Analysts must shoulder
some Bre-X blame
Gary Lamphier
The Vancouver Sun
So, how were so many smart people fooled so completely
about Bre-X for so long? Clearly one of the biggest culprits
was Canada's corps of gold-mining analysts, who churned out
a barrage of bullish reports on the company.
The parade of plaudits from some of Bay Street's most
respected gold analysts makes for sobering reading given this
week's grim revelations that Bre-X conducted the biggest "salt
job" since the dawn of Creation.
Most junior mining companies would die for the kind of
coverage Bre-X attracted. "Bre-X didn't have to ask analysts
to be nice to them. Analysts were clamouring to be part of the
whole picture," one Bay Street veteran said.
Analysts at some of Bay Street's biggest firms -- Nesbitt
Burns, Levesque Beaubien, CIBC Wood Gundy, First
Marathon and Gordon Capital -- were among Bre-X's biggest
fans. Their reports, along with the involvement of respected
Vancouver mining consultant Kilborn Engineering, helped
confer blue-chip status on a tiny, high-risk junior explorer with
no track record that claimed to have found the world's richest
gold deposit in one of the globe's most inaccessible locations.
Think of it as a daisy chain of credibility -- a daisy chain that
the media and several of the world's biggest gold miners also
relied on for guidance.
Well, let us come clean here. The media were duped, too. We
missed the story. Just like the analysts. And just like major
gold producers such as Placer Dome and Barrick Gold.
But let's get back to the analysts. Their role is critical if the
equities markets are to function in a healthy manner. When
they do their job properly, they act as a kind of firewall against
the incendiary world of stock hucksterism and fraud.
Analysts are supposed to embody the virtues of priests and
the cynicism of Lieut. Columbo in a world of fakery, big
money and smooth-talking pitchmen. Analysts are supposed
to tell the truth even when it hurts. Even when the truth costs
investors money.
Naturally, there are pressures that pollute this Utopian model
of perfection. We all know the so-called "Chinese Wall"
between Bay Street analysts and their corporate finance
departments is porous.
Moreover, analysts are loathe to issue outright "sell"
recommendations in print for fear of being frozen out of the
loop by vindictive CEOs. As one pro puts it: "What's the
point of writing a sell recommendation? Nobody will love you
for that."
Still, sophisticated investors know there are lots of credible,
honest analysts who call it as they see it every day. That's why
investors care what analysts think, at least the good ones.
So far, disgruntled Bre-X investors have filed nine class-action
suits, including one Friday in Windsor, Ont., against Toronto
securities dealer Nesbitt Burns Inc. Nesbitt -- owned by Bank
of Montreal, Canada's third-largest bank -- and its gold analyst
Egizio Bianchini were arguably Bre-X's most important
backers on Bay Street.
As Canada's No. 2 securities dealer behind RBC Dominion,
Nesbitt wields both marketing clout and influence. Its
endorsement lends legitimacy to obscure junior companies.
Indeed, many of its analysts are regarded as the best in the
business.
Mr. Bianchini, like most of the dozen or so Bre-X analysts the
Vancouver Sun attempted to contact this week, couldn't be
reached for comment. Analysts who were once eager to tout
Bre-X have retreated behind a wall of secretaries, lawyers, and
public relations people. Those few that are still taking calls
from reporters are generally tight-lipped.
"I'm going into a meeting. It's a subject I'm just too busy to
talk about," CIBC Wood Gundy analyst Bruno Kaiser said
Thursday. (Mr. Kaiser was among the analysts who
recommended the stock.)
A couple of analysts did talk, however. Their views are
illuminating.
One Bay Street pro said Kilborn -- which created the
geological model and compiled the resource calculations for
Busang, based on Bre-X's data -- must shoulder some of the
blame for the disaster.
"I reckoned if there was any question technically, it would
have surfaced, and there was no hint of that from Kilborn," he
said. "If there was any question as to the integrity of the
information, they would have picked it up. So that always gave
me confidence."
(Strathcona's report indicates Bre-X executives and Kilborn
were aware last fall of a report by an Australian lab showing
alluvial gold in Bre-X's samples from Busang. That would
indicate the gold came from a different site.)
But the analyst also has harsh words for his own profession.
"There is too much pressure put on analysts to churn out
positive reports because corporate finance sees the possibility
of a financing in the works," he said.
What's more, the influx of young mining analysts into the
business has diluted the quality of research, he reckons.
"The quality of work that some people produce is terrible. It's
rubbish, absolute rubbish. Many of these analysts on the Street
have simply not had the experience in the industry to be able to
judge the problems that a company might have."
Other pros question the ethics of a securities industry that
allows analysts to buy the very stocks they promote in their
own research reports.
The analyst quoted above, for instance, confirms that he
bought Bre-X in 1995 -- at about $6, pre-split -- and held it
right through mid-1996, when he sold out in the $25 range.
During this time, he issued a series of buy recommendations
on the stock.
Analyst Vic Lazarovici of New York's Smith Barney takes a
dim view. Canada's junior mining sector "has the feel of an
insider's game," he said. "I've seen brokers buy stock and then
(have their in-house analyst) write a report on it. It does not
provide confidence in a transparent and fair market." |
