Hoax of the century

What Canada's Bre-X Minerals Ltd. has claimed over the past year to be the largest gold find of the century could turn into the hoax of the century. International investors, including many major mutual funds, and the Indonesian government, were obviously stunned by Bre-X's admission Wednesday that the potential gold resources at its Busang mine might be much smaller than the 71 million ounces it claimed. Bre-X's market capitalization tumbled from US$4.3 billion on March 25 to a mere $420 million on March 27.

Though a complete audit of the Busang mine, including the drilling of more core samples, will take four more weeks to complete, the preliminary results of the audit and tests by Freeport-McMoRan Copper & Gold Inc. and independent Canadian mining consultant Strathcona Mineral Services Ltd. have seriously damaged the credibility of the Busang gold find.

Bre-X's shareholders, including such major mutual funds as Fidelity, Prudential Insurance, London Life Insurance and Mutual Asset could lose what could have been a US$10 billion slice of the treasure. What is even more devastating is that international confidence in Indonesia's mineral resource prospects might be adversely affected.

It is hard to understand why the calculations for Bre-X's Busang gold discovery done by independent analysts SNC-Lavalin Group.Inc. of Canada, through its Indonesian subsidiary PT Kilborn Pakar Rekayasa, differed widely from those made by Strathcona and Freeport. SNC-Lavalin insisted Wednesday its calculations of Busang's gold resources were prudent and reasonable. But it conceded the calculations were dependent on the validity of samples and the assaying of those samples. This raised the question as to whether the samples tested by SNC- Lavalin could had been tampered with because SNC-Lavalin itself did not drill or take samples as Freeport and Strathcona have done.

Since many international stock exchanges have been listing small mineral prospecting companies which have yet to produce, there must have been established and accepted sample preparations and fire assay procedures which should have been followed. Otherwise the prospectors have a carte blanche to swindle capital market investors.

It also looked strange that two of the world's largest gold mining companies -- Barrick Gold Corp. and Placer Dome Inc. -- which had until early February scrambled to get the Busang gold mine from Bre-X, simply forgot to verify the findings. It might now be a blessing in disguise that Placer Dome's US$5 billion merger offer to Bre-X was turned down.

The Ontario Securities Commission and the Toronto Stock Exchange, which have traded Bre-X shares since last April, had apparently always been satisfied with the information Bre-X fed to them.

Freeport, which owns 15 percent of the joint venture which will develop the Busang gold mine, and Strathcona Mineral Services need to work harder to complete their final audits. The sooner the controversy over the Busang gold find is clarified the better for all parties concerned -- the investors, the Toronto Stock Exchange, which has been a major source of funding for small gold prospectors around the world, and especially for Indonesia.

The longer doubt lingers the more damaging it will be for Indonesia's reputation as a country known for its immense geological potential. Hundreds of other mining companies which are exploring and preparing to prospect for gold in Indonesia may also be penalized by the market. The Busang scandal could make it harder for them to raise funds from financial and capital markets.