The story of Bre-X begins with a small Canadian start up company that burst into the limelight with a claim to have discovered a mother lode of gold in Indonesia. At the time, this discovery was said to represent 8% of the world’s total gold reserves.
The so-called “discovery” proved to be a sham. The public announcement of the gold discovery catapulted the value of Bre-X stock in a short period of time, only to drop so rapidly, after the truth emerged, that the Toronto Stock Exchange computer system crashed as a result. Shareholders wound up losing over $3 billion, and the case precipitated a realignment of Canadian stock exchanges. Bre-X is the story of the gold discovery that never was. In 1989, David Walsh, a stockbroker, started Bre-X Minerals Ltd. in his Calgary, Canada, basement as a subsidiary of Bresea Resources Ltd. Walsh had a checkered professional life up to that point, having being sued for $40,000 for retrading stocks that he had already sold. He declared personal bankruptcy in 1992 as a result of acquiring significant credit card debt. The company did not make any profit before 1993. But it was in that year that Walsh followed the advice of prospector John Felderhof and bought land in the headwaters of the Busang River in the steaming jungle of Borneo.
Prior to his involvement with Bre-X, Felderhof had codiscovered the Ok Tedi copper-gold mine in Papua New Guinea. He had, however, also held $19 million in options in an Australian mining company that went bankrupt before he was able to cash in the options. Several other of his projects in Indonesia had failed, leaving him penniless. Walsh and Felderhoff teamed with Filipino geological expert Michael de Guzman to assess the site. De Guzman was charged with drilling to map the ore. Busang had undergone prior exploration by other mining companies with pessimistic results. The Bre-X team reported different results: most surprisingly, an early estimate of 17 million ounces of gold. Bre-X estimated that the amount of gold found would yield an annual after-tax cash flow of $10 million.
Bre-X issued over 150 press releases, presenting an ever rosier picture of core drilling results and portraying the Busang property as containing one of the largest gold deposits ever discovered. The per-share price of Bre-X stock rocketed from 50 cents in 1993 to over $200 in 1997. Bre-X developed a “gold-plated” Web site in which the great rise of Bre-X stock could be charted. Several larger mineral companies made takeover offers, as did Indonesia's President Suharto. On February 17, 1997, Bre-X announced a deal in which the company agreed to share ownership with Suharto and other Indonesian interests and hire the U.S. firm Freeport-McMoRan Copper & Gold to operate the mine. Prior to signing the contract, Freeport traveled to Busang to conduct its due-diligence drilling. What they found would uncover one of the most devastating frauds of the 1990s.
The Bre-X Fraud Exposed
The first bad omen came days before the announcement of Freeport's results. On March 19, 1997, de Guzman fell to his death from his helicopter over the jungles of Borneo. He left behind ten pages of suicide notes-as well as four wives (concurrent). Two days later, Freeport revealed that due-diligence cores drilled next to the locations of Bre-X's reported drillings found no significant amounts of gold. More samples were collected and recommended by Freeport, under protest by Bre-X. Bre-X backed away from its position, however, when details of Bre-X's past methods of assaying its samples came to light. Freeport reported that there were visual differences between the gold particles taken from its samples and those in the samples submitted by Bre-X, suggesting that the Bre-X samples were deceptively “salted” with gold. Freeport withdrew from its planned partnership with Bre-X, leaving a second company hired by Bre-X to analyze the site, Strathcona Mineral Services, to report the fraud.
Ultimately, two evidence areas showed “red flags” of massive fraud. The first red flag was that the Bre-X core samples had been pulverized and prepared for assay at a testing laboratory in the jungle. Samples that normally would be sliced lengthwise, with half preserved for reference and verification, were crushed, leaving behind no verification sample. In addition, normal protocol for transport of such samples typically required the samples to be sealed to prevent tampering and, also, to be heavily guarded. Bre-X samples, however, were found to have been bagged and then shipped on a 30-hour barge trip. To assure that “all was well,” the bags were subsequently opened and stored in an unguarded courtyard until the laboratory became available. A second red flag was that the Dayak people, the local inhabitants, had persistently panned for gold in the Busang River for an extended period of two years before Bre-X's discovery and had found nothing, despite Bre-X's claim that gold was visible.
Fallout and Aftermath
On May 7, 1997, three days after Strathcona Minerals publicly announced that the Bre-X claims of a great gold discovery were false, 69.3 million shares of Bre-X were traded. This was the last day of trading before Bre-X stock was removed from three stock market exchanges. The value of a share of Bre-X had gone from 30 cents in the early days of the firm, to $285.60 at its peak after the gold discovery announcement, to a mere 9 cents in the aftermath of the Strathcona report. Bre-X was forced into bankruptcy after its gold assay results were exposed as fraudulent, leaving $3 billion in shareholder losses in its wake.
Of the two remaining key players, David Walsh cashed in over $34 million worth of shares a year before Bre-X's collapse, laying the blame for the fraud on Felderhof and de Guzman. He apologized to investors, moved to the Bahamas, and died of a hemorrhage on June 4, 1998, two weeks after his assets were frozen by the Bahamas Supreme Court. Felderhof made over $87 million by selling off his Bre-X shares in 1996 and 1997, with many of the transactions occurring during the time he was also “hyping” the magnitude of the discovery of gold in Busang.
The financial fallout from this fraud was immense. Many lawsuits were filed against Bre-X. Three of the largest losses belonged to Canadian public organizations, including the Ontario Municipal Employees Retirement Board, the Quebec Public Sector Pension fund, and the Ontario Teachers Pension Plan. The Ontario Securities Commission (OSC) charged John Felderhof with four counts of insider trading and four counts of issuing misleading press conferences. The trial began in October 2000 and experienced many delays, the most noteworthy of which was an effort of the OSC to have the presiding judge removed on the grounds of suspected bias in favor of the defense. After three and a half years of appeals, the judge was retained and the trial resumed in December of 2004. After several additional delays, the trial was resumed again in February 2005. As of the summer of 2006, the trial of John Felderhof continues, as does the story of Canada's biggest gold discovery hoax ever.
