Panning for truth on the slag heap of tarnished gold

BRE-X -- The Inside Story; By Diane Francis; Seal Books, McClelland-Bantam Inc, July 1998; 326 pp, S $15.90.

JAKARTA (JP): If, as Mark Twain said, "A gold mine is a hole in the ground with a liar on top", then Bre-X turned out to be this century's biggest liar.

On May 6, 1993, Bre-X acquired its Busang Indonesian property for US$80,000 on the basis of a geological report prepared for Australian-listed Montague Gold, its previous owner, by John Felderhof, that company's geologist hired to evaluate its Busang results. The news was announced on the company's new website, together with a wildly exaggerated reserve estimate "of one million ounces of gold, inferred by 19 drill holes" conducted by the previous owner. The author of this claim was Bre-X's new chief geologist, John Felderhof.

Less than four year later, on March 10, 1997, Felderhof was presented with Canada mining industry's Explorationist of the Year award for codiscovery of the world's largest gold find, Busang, East Kalimantan. Bre-X's share of the discovery had, three weeks earlier, been cut in half to 45 percent as Soeharto's Nusamba acquired a 30 percent stake, Freeport 15 percent and the Indonesian government 10 percent for free. On a teleconference with selected Canadian stock analysts two days later, Felderhof, keen to sustain the stock price, had raised his latest estimate to 200 million ounces, equivalent to 4 percent of the world's gold supply, worth $70 billion.

But the truth was catching up with Bre-X. That same day, as Felderhof was receiving his award at the miner's convention in Toronto, the head of Freeport-McMoRan, Jim Moffett, called David Walsh, Bre-X's president, and Felderhof to tell them the preliminary results of their due diligence drilling: there was no gold whatsoever in the three holes they had drilled at Busang. Two days on, Michael de Guzman, Bre-X's chief field geologist, was dispatched from the Toronto base to meet the Freeport team at the Busang site.

One week later, wire services around the world carried the story that Michael de Guzman, codiscoverer of the biggest gold find this century, had committed suicide by jumping out of a helicopter over Kalimantan on his way to meet Freeport's geologist team at Busang.

Seven weeks later, on May 4 , the world discovered that there was no gold at Busang. Bre-X's shares collapsed, wiping $4.5 billion off its stock market value and making the swindle the biggest in history. Bre-X -- The Inside Story, is the tale of what happened.

While many in Indonesia will be aware of aspects of this story, the full details will still amaze you.

From using the Internet to hype the stock, by apparent insiders giving prescient predictions of the next increase in reserve estimates and so stock prices a couple of months ahead of company announcements to that very effect, to reputable stock brokers tip sheets competing to give ever higher forecasts of reserves and stock values. Prudence was dispatched to the wind.

The story of the largest private investors, Greg and Kathy Chorny, a lawyer and accountant couple in their mid-50s, who advised Walsh to forego a proposed joint venture in favor of continuing to drill to "prove up" exactly what gold there was, is a classic in small investor relations. For that is what Bre-X did. At the time, this middle-class couple's stock had jumped 60 fold over the previous six months, to be worth $30 million plus. Being inside the loop, they had mostly sold out before the crash, making $46 million.

In this gold rush, Bre-X was cavalier, breaking nearly every rule in the book. Perhaps the most foolhardy was the attempt to ditch one of their local partners and the flouting of their survey license to map and sample to a depth of one foot, not a license to carry out 375 exploration drill holes to an average depth of 450 meters. They had two local partners, the so-called 10 percenters, for the Busang property. They tried to cheat the more influential, Jusuf Merukh, out of his company's 10 percent when they applied to explore Busang II, which turned out to contain 80 percent of the find. He later claimed 30 percent of Busang II and filed a $2 billion claim against Bre-X in Canada.

But this high-handed approach toward the government and Bre- X's own well-connected and influential local partner opened the door to a host of hostile bidders who were determined to wrestle this property, or a substantial part of it, from Bre-X.

Diane Francis charts the five-month-long hostile plays and myriad maneuvers involving two of Canada's top three gold mining majors, Barrick Gold and Placer Dome, that culminated in mid- February 1997 in the Busang property being split 45 percent to Bre-X, 15 percent to Freeport-McMoRan, who would invest $1.6 billion to develop the mine, 30 percent to Nusamba and 10 percent to the Indonesian government. Insiders doubted, if the gold was there, that Bre-X could hold onto even this reduced stake, as the government went ahead with default proceedings against Bre-X a week after this agreement was imposed upon them.

Shortly after, a Contract of Work was issued to start development of the mine. But before going ahead with the sizable investment, Freeport would carry out its own due diligence to assure itself that what was being claimed was actually there.

Once it was shown to have been a giant hoax, the lawsuits started to fly. "The lawyers have not yet been born who will end up winning or losing these cases," quipped one Toronto litigant.

Bre-X's only remaining asset is a $5 million indemnity fund set up to offset potential directors' liabilities. Felderhof faces a $3 billion lawsuit filed in the Cayman Islands where he lives, which also freezes his assets. Walsh is also subject to litigation, as are six brokerage firms and two investment banks for widely promoting wild, unsubstantiated reserve claims.

So, how much did each of the principals make from this scam? Felderhof made $46 million, the Walshes $34 million, McAnulty in charge of investor relations $16 million, and Mike de Guzman $5 million by the end of 1996. By contrast, the former head of exploration at Barrick Gold, Paul Kavanagh, who gave Bre-X the needed credibility and weight when he came on board as a director in early 1994, made $9,000 from share sales.

The results of a year-long investigation into the fraud initiated by Bre-X after de Guzman's death concluded that de Guzman and some other Filipino geologists were the culprits. But de Guzman, the fall guy, was dead. The report found all the other officers and directors -- who commissioned the report in the first place -- completely innocent, with the involvement of only Felderhof remaining an "open question".

The most intriguing questions in this whole saga relate to de Guzman.

He tried to quit his job in January 1997 and was told he would be killed if he did so. Then he was apparently kidnapped for several days from outside a girlfriend's apartment in Bogor in early February 1997. From that point on he had a bodyguard. He started to become paranoid. He may have tried to commit suicide the night before he died. During the fateful 45-minute chopper ride, the questions are: Was he on board at all? Did he jump? Or was he pushed? Certainly, Bre-X's own investigators believe it was suicide. But there remains some doubt. For de Guzman was something of a master at leading a double life. He had a wife and six children in Manila, and two or three other current wives in Indonesia, in Samarinda, Manado and reportedly Bogor.

-- Seamus McElroy