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."