Canadian companies get black eye from Bre-X fraud
Canadian companies get black eye from Bre-X fraud
TORONTO (Reuter): Canada's reputation as a hotbed for international mining finance got hammered on Monday after a report revealed that Bre-X Minerals Ltd.'s celebrated Indonesian gold find was a spectacular fraud.
The Busang discovery -- touted by Calgary, Alberta-based Bre-X as the richest find of the century -- was falsified on a scale "without precedent in the history of mining," according to a report released late on Sunday by consultant Strathcona Mineral Services Ltd.
But Canadian analysts and regulators said the scandal, which is being called the biggest mining fraud in history, would not permanently damage the country's position as one of the biggest sources of mining venture capital in the world.
"I think we probably have a black eye but we're not down for the count. You can't stop fraud -- that's the reality," said John Ing, president of Maison Placements Canada Inc., a Toronto-based brokerage that specializes in mining stocks.
Analysts admitted the environment for small exploration firms would be bleak for some time as investors shocked by the worthlessness of the once multi-billion-dollar deposit shied away from more speculative issues.
Some planned small-cap offerings have already been pulled because of an inhospitable market for high-risk issues.
Although market watchers said more rigorous rules might not have averted the Busang scandal, the drama sparked renewed calls for a national securities regulator.
"I just think there ought to be uniform applications of requirements across the country," said one senior trader.
"Those uniform applications of requirements are more likely than not to be brought about by a national securities commission in this country," he added.
University of Toronto management professor Dan Ondrack said even a national regulator would be dependent on company-supplied information because it would be prohibitively expensive to make independent checks.
"If the information is coming from very remote areas and appears to be valid from the sources at the time, it's going a bit far to expect securities regulation bodies to double check or try to verify them," Ondrack said.
In early April, after the first hints that the Busang find might not be the motherlode many believed it to be, the Ontario Securities Commission and the Toronto Stock Exchange unveiled plans for a joint task force to examine whether further reform of mining regulation was necessary.
"I don't know of any way to keep people from committing criminal offenses. You can make it tougher, but you can't prevent it," Ontario Securities Commission Chairman Jack Geller said in a telephone interview.
"But we're open on that. If as the result of the task force considerations, more regulatory changes are necessary, then we will look at them," he added.
Australian analysts, government officials and mining companies were quick to take swipes at Canada's securities regulators and stock markets on Monday.
"It's been a pretty big kick in the guts (of the) Canadian mining, geoscientific and financing industries. They can't sweep it under the carpet anymore," said Norman Miskelly, chairman of Australia's Joint Ore Reserves Committee.
New York
In New York, mining and investment analysts Monday said the Busang gold hoax had at least one clear lesson: let the buyer beware.
They said it was up to investors to make checks before plowing cash into obscure mining projects that promise big returns such as Bre-X Minerals Ltd.'s Busang deposit in Indonesia.
"If you are going to buy stock in small exploratory mining companies, it's speculative almost by definition," said Christopher Rocker, Chase Manhattan Bank's director of global commodity finance.
"You cannot legislate for the elimination of fraud. You have to do your best to look at the quality of the reporting that you are relying on. It's a mistake to rely on secondhand information," Rocker said.
James Whitecross, mining director of brokerage HSBC James Capel, said the way some big investors operate will inevitably change after being left with egg on their face.
"I think more due diligence will be necessary, or less exposure to emerging mining stocks," Whitecross said. "That's why the whole sector is going to be hurt for the foreseeable future. People were getting too greedy."
Mining analysts noted that although high-profile investment analysts and consultants had visited the Busang deposit to inspect the site, they had still been fooled.
"It's the advisers in some of these funds that will be taken to task for not investigating carefully what they are getting into," said John Thoms, a consultant geologist.
Mining experts said that only with hindsight could analysts spot that Bre-X did not follow usual exploration practice, such as keeping half the samples of ore sent to independent laboratories for testing.
But Rocker said even consultants can find it difficult to obtain firsthand data from a company, let alone a small individual investor who seeks to make an evaluation.