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.