Bre-X saga shows wild side of Canadian mining

Bre-X saga shows wild side of Canadian mining

By David Crary

TORONTO (AP): The Borneo jungle on Indonesia's East Kalimantan province where Bre-X Minerals claimed to have found a gold mother lode of epic size, might seem tame to those on the hunt for windfalls in the wild world of Canadian mining stocks.

Scams and spectacular failures are part of the landscape in an industry that leads the world in financing mineral exploration. But pressure for change is likely to mount if tests bear out the stunning possibility that the Bre-X find -- purportedly the biggest of the century -- is mostly an illusion.

The small, rags-to-riches company suffered one of the biggest stock collapses in Canadian history after its prospective U.S. partner, Freeport-McMoRan Copper and Gold, announced that attempts to corroborate Bre-X's claims had uncovered only "insignificant amounts" of gold.

In less than 30 minutes of trading on March 27, Bre-X stock plunged by 84 percent, a loss of more than US$ 2 billion. The intense volume knocked out the computer system at the Toronto Stock Exchange.

Bre-X has fought back, insisting that further tests over the next several weeks will validate its claim that the Busang site on the Indonesian portion of Borneo contains 71 million ounces of gold. It has hired a respected independent firm to conduct the tests, something it and other exploration firms had balked at doing in the past.

Some experts say the Bre-X debacle may force a change in past practices because investors will be more skeptical of small companies' often-euphoric discovery claims.

"If they want people to believe good results, they are going to have to bring in verification experts -- outside, independent consultants," said California gold analyst John Kaiser.

The affair may also change the way brokerage firms and mutual fund managers hype mining prospects. Few outside analysts actually inspected Busang, yet Bre-X's steadily escalating claims about the size of the deposit were widely accepted by brokers and investors.

Canadian investors and underwriters accounted for about 40 percent of the world's mine exploration financing in 1996. Much of it was raised by so-called junior companies like Bre-X, which conduct exploration, then bring in a big company to take over production.

The shares of many junior companies -- including some with no ties to Indonesia -- have been battered by the Bre-X affair.

"It's probably set back the industry for years in terms of a smaller company's ability to attract the financing needed to get a property into production." said Ned Goodman, chairman of Toronto-based money management firm Goodman and Co.

Beth Kirkwood, whose TNK Resources owns an exploration site near Busang, said her Toronto-based company explicitly tried to ride the Bre-X wave and was able to obtain financing because of that connection. Now it's paid the price.

"I lost $12 million on paper," she said of the March 27 selling binge.

Regulators from the Ontario Securities Commission have been investigating the events that led to the Bre-X stock plunge, and U.S. investigators are likely to follow because the stock also is traded on the Nasdaq market.

But it may be months, if ever, before some of the mystery surrounding the Busang project is resolved.

Did the protracted battle for stakes in Busang project, involving friends and children of Indonesian President Soeharto, have any influence on Bre-X's constantly increasing claims about the find's magnitude?

Was there something suspicious about a fire in January that destroyed records in the geologists' work room at Busang? Why did Bre-X geologist Mike de Guzman, credited with the Busang discovery, plunge to his death from a helicopter March 19 en route to a meeting with Freeport-McMoRan geologists?

Bre-X said de Guzman committed suicide because he had just learned he was suffering from a fatal illness. His family disputes this theory, and questions abound about possible links between his death and the disclosures a week later about doubts over Busang's value.

To some analysts, the most damaging aspect of Freeport -- McMoRan's statement was that its experts, using microscopes, detected differences in gold particles from samples it tested compared to samples tested by Bre-X. That prompted speculation about possible tampering.

Bre-X president David Walsh said he doesn't believe anyone could have inflated test results by adding gold to the thousands of samples.

"There's nothing impossible, but I'd say impossible," he said Tuesday.

There have been tampering scams in Canada in the past, most recently last year. Alberta Stock Exchange authorities halted trading of Timbuktu Gold Corp. shares for several months while investigators determined that samples taken from a mine site in Mali had been spiked with gold from other sources to make them look promising.

Another debacle involved Cartaway Resources Corp., an Ontario firm that branched out of the garbage business in 1995 and began exploring a property in Labrador. It lost 90 percent of its value in a panic selloff after disclosure a year ago that its claims of a big copper find had been grossly overstated.

Bre-X has its defenders -- analysts and mining experts who say it would have been almost impossible to carry out a tampering scheme over the three years that Busang has been explored.

"That would have to require very clever people," said Glenn Brown, a University of Toronto geology professor.

Walsh said the company used top-notch consultants throughout the project and obtained consistent positive results through exhaustive testing.

"Like all the other trials and tribulations that we've gone through since discovering the project, we'll be exonerated and the property will stand as we've indicated," he told reporters outside his Calgary headquarters.

Walsh also insisted his company used proper testing techniques for its Busang samples, although its current plight illustrates how the industry still struggles to come up with accurate, effective ways of sampling for gold.

The uncertainty of the process makes it important to conduct as much testing as possible before going public with results, said Hugh Leggatt, a spokesman for Placer Dome, Canada's second- biggest gold company.

"You need to do a lot of work - you can't just announce things because the market is hungry for more news," Leggatt said.

"You've got to have the discipline to do the work and be quite sure of what it is that you're announcing."

Bre-X's newly hired independent mining consultant, Strathcona Mineral Services Ltd., is now drilling its own holes at Busang to audit the work done by Bre-X and Freeport.

The audit is expected to take about four weeks, but some disgruntled investors aren't willing to wait. They have filed class-action lawsuits against Bre-X in the United States, claiming company officials misled them about Busang's potential while selling off some of their own shares at a huge profit.

In Canada, such shareholder suits are almost unheard of. But the Bre-X saga may prompt serious consideration of proposals to give investors the right to sue companies that misstate or withhold information that could affect the stock price.

A lot of companies have opposed opening the door for shareholder lawsuits.

"Their major argument has been: The system's working just fine now, show us some evidence of bad continuous disclosure," said Ed Waitzer, former chairman of the Ontario Securities Commission. "Well, you don't have to look too far."