Saturday, April 25, 1998
Bre-X board got red flags
One director repeatedly raised concerns about report showing 'wrong gold,'
according to documents filed in Texas class action suit
By SANDRA RUBIN
The Financial Post
Directors of Bre-X Minerals Ltd. debated "again and again and again" a
report showing the gold particles in Busang drill samples were rounded - and
inconsistent with what should have been there, according to documents filed
in a Texas class action suit Friday.
The discussions were held at board meetings on at least four occasions beginning in the fall of 1996.
That's roughly the same time Bre-X directors were told 148 of 150 Busang core samples tested by
potential partner Barrick Gold Corp. had come up empty.
Investors were never informed of either development. Bre-X shares were flying high in November
1996, trading at a record high of $286 on a pre-split basis.
Company officials who have spoken publicly since the salting scandal came to light in March 1997,
including chief executive David Walsh, insist they never saw any red flags.
But documents included in Friday's filing
show that behind the scenes, director Paul
Kavanagh - a respected geologist who
had been Barrick's senior vice-president
for exploration - was troubled by the
presence of rounded gold in the
Indonesian strike and kept bringing it up at
board meetings. Rounded, or placer, gold
is commonly found in rivers, not rock
deposits like Busang.
Kavanagh tangled with Bre-X exploration chief John Felderhof, who each time explained away his
doubts, according to an interview director Hugh Lyons gave private investigators hired by Bre-X.
"We went through those meetings at least four times, with Felderhof and Kavanagh leading the
charge and the rest of us just sitting there listening," Lyons said in the Aug. 27 interview. "Kavanagh
would always come around and he would agree that this does happen with that type of deposit."
The presence of rounded gold first surfaced in a report Bre-X commissioned from Australia's
Normet Minerals Pty. in July 1996. But Lyons said in his interview directors didn't start discussing
the report until "either a mining analyst for an investment dealer or a geologist got hold of [it]."
He said Felderhof told the other directors that rounded particles in hard rock are a "common
occurrence in at least three major deposits in Indonesia and New Zealand and ... this is the way it
happens...."
But Kavanagh was apparently unconvinced, because he kept coming back to the issue.
"He would question it," Lyons said. "I can remember at least two or three days where he would
question the basic assumption. We'd go back over it again and again and again. Then he'd say, 'OK,
I see this and that.' It kept coming back ... Kavanagh would feel uncomfortable with it, so we would
go over it again."
Kavanagh's lawyer, Paul LeVay, said Friday the discussions are being judged with the benefit of
hindsight and, "at the time, John Felderhof was the geologist with expertise in that part of the world.
"There were, according to Mr. Felderhof and the explanations he gave, as I understand it, some
geological differences or variations or things that were particular to this part of the world, which was
a part of the world geologically Dr. Kavanagh wasn't familiar with," LeVay said.
Felderhof is the only principal not interviewed by Bre-X's private investigators and has not
responded to the information included in Friday's court filing.
But the lawyers behind the Texas-based suit said in their filing that evidence directors were aware of
the rounded gold is revealing.
"The presence of river-bed rounded gold in the hard-rock Busang samples was among the most
fundamental red flags recognized by Strathcona [Minerals Services Ltd.] in compiling its May 1997
report confirming the fraud." See Page 10
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