Fool's gold and other goodies from Canada
Bre-X is the latest stock scam from up north
BY KEVIN WHITELAW
One company claimed to be cultivating the world's largest pearls. Another firm described itself as the proud inventor of the Ad-Zapper, a device that deleted commercials from VCR recordings of TV programs. Still another said it had concocted a nose spray that cures AIDS. In addition to their almost comically false claims, these companies had something else in common: They all sold shares on the Vancouver or Alberta stock markets in Canada.
Veteran traders recall these ventures as among the more colorful scandals in recent years on the fraud-ridden, but seldom dull, Vancouver Stock Exchange and its smaller cousin, the Alberta Stock Exchange. But none matches the scope of the latest horror tale produced by Canada's woolly markets: the Bre-X Minerals affair, in which a gold find said to be worth billions turned out to be practically worthless.
Some prospects. Bre-X was launched on the Alberta Stock Exchange in 1989 and traded for pennies--until the firm announced a large gold find in Indonesia. In Bre-X's press releases, the find kept growing: from 30 million ounces to 40 million to 57 million to 71 million. Finally, Bre-X's vice chairman suggested the real figure might be 200 million ounces, making it the largest find in recent history. When the company was listed on the Toronto market and Nasdaq, its market capitalization soared to $4.5 billion after blue-chip mutual funds bought in.
But one of the company's partners recently reported discovering "insignificant" quantities of gold at the Indonesian "find." Last week, after an independent review concluded that the original tests had been falsified, Bre-X's stock collapsed. Responsibility for the fraud is under investigation.
Will the Bre-X affair force Canadian markets to clean up their acts? Although the president of Toronto's stock market called last week for creating a national securities commission (provinces are in charge of regulating markets), monumental changes would be necessary for such an agency to have an impact. Canadians have always had a more relaxed view of how much protection investors need from scammers, preferring instead to pursue a buyer-beware approach. This made sense, particularly in Vancouver and Alberta, the homes of most of Canada's start-up mining companies. It enabled these companies to raise capital, stay alive, and have a better chance of striking it rich.
That's not to say the more heavily regulated U.S. markets are scandal free. Nasdaq, for example, has come under heavy scrutiny recently for price fixing and mob ties. But it's widely believed that the regulatory bar is much higher here.
Real finds. It's also true that most firms trading on the Vancouver and Alberta markets are legitimate. Last year, some $8.8 billion (U.S.) in shares was traded in 1,500 companies on the VSE, which some consider the best market in North America for raising capital for mineral exploration. Indeed, many U.S. mining firms also look to the VSE for financing. "If you're a small, legitimate mining concern, the [non-Canadian] options have disappeared," says University of Michigan finance professor Paul Seguin. "That leaves the VSE as the only game in town."
Still, putting money in VSE or ASE stocks is not for the fainthearted. "If you're into gambling, this is a good market for you," says John Woods, who runs Canada Stockwatch, the premier Canadian stock-market-data and analysis firm. "But don't confuse it with investing."
One of the biggest problems is an especially insidious form of insider trading. Promoters sometimes form shell companies and sell shares to insiders at cheap, but steadily increasing, prices. As the purchasing builds the stock price higher, regular investors buy into it and the insiders bail--making a tidy profit. In other words, insiders make money whether or not the company has a real product. (With Bre-X, the pattern held: International investors got bilked while many insiders made a killing.)
Adrian du Plessis, a freelance financial-market investigator, argues that British Columbia regulators may have less incentive to crack down. "As long as Howe Street [Vancouver's Wall Street] players are stealing from Americans, Europeans, and Asians, there will be no will to act," says du Plessis.
Bre-X Minerals' Busang project in Indonesia went from being "the world's largest gold deposit" to the biggest gold swindle in world mining history.
Bre-X: Gold Today, Gone Tomorrow examines Bre-X's rise up the credibility curve, the red flags that were raised along the way, and how the scam was engineered to deceive both analysts and investors. It reveals when the salting swindle began, how it was executed and how it all unraveled.
The authors have had access to documents from Busang's earliest days, have interviewed more than just the usual suspects, and have filtered the material through more than two decades of experience working in, and covering the mining industry.
A gripping, detailed chronology by The Northern Miner's editor Vivian Danielson and staff reporter James Whyte.
From the steaming jungles of Indonesia to the money markets of the world this is the incredible but true story of the world's greatest stock swindle. The saga of Bre-X Minerals and its Busang "gold" project in Indonesia is about greed and gullibility, about broken dreams and bitterness, about corporate power and backroom intrigue, about deception and disillusionment, about lessons hard-learned and about how good judgement can be swept away by mass euphoria. It is another cautionary tale of gold's power to seduce and blind not only sinners, but saints and scientists as well.
MM
|
