The Busang gold hoax
Independent consultant Strathcona Mineral Services Ltd has proven without a doubt that what had been claimed by Canadian Bre-X Minerals Ltd as the richest gold find of the century turns out to be the biggest hoax in the history of mining anywhere in the world. It was even the fraud of the century, due to the evidence of Bre-X's tampering with samples and falsification of assay values. The stunning report on Sunday from Strathcona to Bre-X's president David Walsh virtually spells the end of Bre-X with billions of dollars in losses to its shareholders.
Strathcona's conclusions from the assay results from 175 core samples sum up the almost mythic proportion of fraud, by stating "the magnitude of the tampering with core samples that we believe has occurred and resulting falsification of assay values at Busang is of a scale and over period of time and with a precision that, to our knowledge, is without precedent in the history of mining anywhere in the world."
The possibility of tampering with samples (salting the samples with foreign gold) had been hinted immediately after Freeport- McMoran Copper & Gold Inc revealed, after preliminary tests in late March, that it found insignificant amounts of gold in the Busang area in East Kalimantan. But analysts still found it hard to believe that a hoax of such proportions could have been kept up for three years without word leaking out. The tampering, as discovered by Strathcona, was indeed mind-boggling, as it involved roughly 100,000 samples from 100 miles worth of core digging.
Apart from Bre-X shareholders, the are many other parties who are directly or indirectly burnt by the Busang saga, which was spiked by the suicide of Bre-X geologist Michael de Guzman who plunged to his death from a helicopter into the jungles of Kalimantan on March 19.
The Busang debacle tells stories of greed, political pressures and suspected insider trading practices. Scams and spectacular failures use to be part of the landscape of financing mineral explorations but the Busang hoax should be the biggest of all. Greed, we think, played the main part behind the battle for stakes in the Busang property, involving the Indonesian government, Indonesian politically well-connected businesspeople, and two of the world's largest gold mining companies. So blinded had been these aggressive suitors by Bre-X's claim that they had never thought of making due diligence.
The Busang fraud did not cause any significant material loss, especially to the Nusamba business group, which is controlled by President Soeharto-chaired foundations, and Freeport. Both were mandated by the government in February to be Bre-X shareholding partners in the joint venture to develop the Busang mine. After all, Nusamba and its Indonesian partners obtained their 30 percent of the Busang property almost for free. But the hoax certainly came as a big embarrassment to them.
American J.P. Morgan & Co, which made a great exemption from its business practice of upholding an image of substance and integrity by accepting Bre-X as a client last September, now has to lick the wounds of its image. The Ontario Securities Commission, which approved the Bre-X listing on the Toronto stock exchange, should work harder to improve its credibility. So does Kilborn Engineering, a unit of SNV-Lavalin consulting group which verified the Bre-X Busang find.
But the biggest losers, besides Bre-X shareholders, are the hundreds of small foreign prospectors now seeking gold in various areas in Indonesia. The Busang fraud not only would affect foreign investors' confidence in the prospects of Indonesia's great mineral potentials but also would make it much more difficult for small prospectors to raise financing. This in turn may slow down gold exploration in the country. Even though the great lesson has been taught and the mystery around the Busang gold hoax has been unraveled, the story will not end here. Court battles will follow in class-action lawsuits by investors against the Bre-X management and the Busang saga may soon be scripted for Hollywood.