Bre-X Minerals Drill Core Sample
A Genuine Bre-X Drill Core Sample (salt not included)
On the anniversary of the Bre-X Minerals Ltd., incorporating - May 30, 1988, it's appropriate to share the most fraudulent story in mining history and a drill core sample that is still shrouded in mystery to this day. Fortunes may await intrepid prospectors and adventurous junior exploration companies in the jungles of the world, but none more so than the fabulous discovery of gold in the Busang area of East Kalimantan, Indonesia. Busang local Dayak tribes are known for their earlobe stretching and tatoos. In the mid-1990s, the world was a-buzz with news of the richest gold deposit ever found, a landmark discovery by Bre-X Minerals of Calgary. With a story that grew by the week, 30 million ounces, then 50 million and maybe as much as 200 million ounces of gold, the rush to Indonesia was on. Lehman Brothers Inc. called it "the discovery of the century" and a “political minefield” at the same time. If it all seemed too good to be true; it was. On March 12, 1997, news of the scandal broke, and the story unravelled. An exploration company's senior geologist and the country manager was a natural skeptic even though having an exploration project was only 50 km of Busang. In the days that followed the breaking news, he used his local contact network to secure samples of Busang drill core for research purposes. This specimen of the "host" diorite is one of those ten samples.
David Walsh and his wife, Jennette, were the only employees when they worked out of their home in Calgary, Alberta. Later that year, Bre-X went public on the Alberta Stock Exchange for 30 cents a share. Their original focus was on diamond mining in the Northwest Territories.
In the spring of 1993, David Walsh, running out of cash, wrote to John Felderhof, a Canadian geologist, to inquire about Indonesia. Walsh wrote, "I want to put some romance into both companies." Those two companies were Bre-X and a related company Bresea Resources Ltd. About a month later, Felderhof acquires Bre-X's first stake in the Busang property in Indonesian, on the world's third-largest island called Kalimantan for USD$ 80,000. Kalimatan is known as the land of hope in a poor an undeveloped nation for its vast oil, gas, coal, timber and gold. Bre-X reports to its investors that the site could have 1 million ounces of gold on-site when the price of gold was USD$380/oz. Felderhof and former colleague, Michael de Guzman formed a crew to drill for samples.
In the autumn of 1995, the on-site drilling reports uncovered a gold deposit valued at about USD$2.7 million oz. Analysts assess the deposit at USD$ 30 million ounces. Felderhof, then states the site could be USD$45 million and says that the site "has the potential of becoming one of the world's great gold ore bodies." The share price of Bre-X soars to $59. At the annual shareholder meeting in Toronto in the spring of 1996, Felderhof informs shareholders, "I think it's 30 million, plus, plus, plus." De Guzman hints at 100 million ounces, and the share price rises to CAD$286.50. The company moves to the Toronto Stock Exchange and splits shares ten to one, with a new share price of CAD$28.65.
Later on that summer, the Indonesian government cancels Bre-X's Busang permits for exploration, citing an ownership dispute. Yusuf Merukh, a local businessman, claims he has a 40% interest in the site. This causes Indonesia's President Suharto to refuse a renewal of the license until the dispute is settled. By the autumn, Bre-X signs an agreement, creating a strategic alliance with an Indonesian company controlled by President Suharto's eldest son, Sigit Harjojudanto, who has interests in banking, petrochemicals, transportation and telecommunications. The son's company gets a 10% stake in the property plus USD$1 million/month for the next 40 months, plus supply contracts to provide the mine with utilities, petroleum products and limestone.
About a month later, the Indonesian has Bre-X agree to a deal with Barrick Gold Corp. to develop Busang. Barrick receives majority control of the development, while the government states it "would appreciate if the parties could consider a 10% participation being given to the Indonesian government." Placer Dome Inc. pushed for a joint venture, but Barrick outmanoeuvres them for control. By late winter of 1997, Barrick's deal falls through. President Suharto's close friend Bob Hansen advises Bre-X and negotiates a new agreement with Freeport McMoRan Copper and Gold Inc. of New Orleans. Bre-X receives 45%, Hasan gets 30%, the Indonesian government and Freeport split the remaining 25%. At the same time, Busang's administration office and geology records are destroyed in a mysterious fire in the middle of the jungle.
Nearly three weeks later, Freeport reports discrepancies between its due diligence sampling and Bre-X's. De Guzman was attending PDAC, the world's largest mining conference in Toronto at the time, and is asked to provide some answers, while Felderhof is awarded "Prospector of the Year."
A week later, on March 19, 1997, de Guzman mysteriously disappears from a helicopter at 800 feet above the jungle floor, while on his way to the Busang mine site. Four days later, his body is found eaten by animals in the jungle. By the end of March, Freeport states it has found "insignificant" amounts of gold at Busang. Estimates by Bre-X are acknowledged to be overstated. The Toronto Stock Exchange computers overload twice in one day, as investors sell their shares of mining companies. Bre-X's share price drops to CAD$2.50, with roughly CAD$3 billion in market cap disappearing in a few minutes. It eventually falls to CAD$0.80 and is delisted from the Toronto Stock Exchange.
In May of 1997, Strathcona Minerals Services Ltd. hired by Bre-X to investigate what happened, concludes widespread tampering occurred at the Busang mine site. The core samples had been faked by salting them with outside gold, include shavings from gold jewellery to elevate the test results. The most significant fraud in mining history creates lawsuits and RCMP investigation, but no criminal charges.
A year later, Walsh dies of a brain aneurysm in the Bahamas. A year later, the Ontario Securities Commission files eight counts of illegal insider trading against the only Bre-X official, Felderhof. The OSC alleges he took CAS$84 million by using non-disclosed information. Felderhof's trial begins in October 2000 but is stopped by the OSC in April 2001, when they move to remove the judge. The move fails, and the trial concluded with the judge acquitting Felderhof on July 31, 2007. After the Bre-X scandal, the National Instrument 43-101 was created to protect investors from false mineral project disclosures.
The story inspires the making of the movie Gold with Matthew McConaughey, Locals at the Busang site still believe there is gold there, and they continue to mine the site illegally.
The Bre-X Minerals scandal highlights the value of due diligence as it investigates all the potential assets and liabilities. The scandal showcases the importance of completing due diligence before investing in any business. To learn more about IN-D-TEL International's due diligence services, please visit here.
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