Bre x info

IMPACT
The Vancouver Composite Index fell by over 25% in less than six weeks during
spring 1997
as the junior mining sector collapsed. We argue that this market collapse was
triggered by
the failure of Bre-X Minerals when that companys Indonesian claims, previously
believed
to contain the worlds largest gold deposit, were shown to be pure fraud
Bre-X was a mammoth embarrassment, well-publicized failure of a mining
company known as
Bre-X Bre-X scandal triggered a collapse in confidence in the whole mining
sector,.not only because it overshadowed the good work carried out byhonest
geologists and engineers, but because it had become one scam too many. Mining,
particularly junior mining, is an industry that needs public support to survive. The
trust built
up over decades by honest mining men had been undermined too often ... Enough
had
become enough. the impact of the Bre-X factor on a sample of 59 gold mining
companies. A detailed review of the Bre-X scandal of 1996-97 will also be given
to record the elements that
made up the "Scam of the Century". Bre-X stock knowing full-well the false,
misleading, incomplete and unreliable nature of the purported goldresources. Bre-
X was the ultimate mother of all mining stock scams,
The Bre-X scandal was easily the biggest mining fraud in Canadian history.
INTRO

At one time, Bre-X claimed to have found the
largest known gold deposit in the world. The company had been followed and
recommended by some of the best known gold analysts in both Canada and the United
States. At its peak, the market capitalization of Bre-X reached over C$6 billion, all from
a company that had been a penny stock with a market capitalization measured in the
thousands just four years earlier. Bre-X was created in 1988 by David Walsh to search for
diamonds in the
Northwest Territories of Canada. The company was unsuccessful at finding any
significant deposits and its stock, listed on the Alberta Stock Exchange, averaged a price
of 27 cents between 1989 and 1992. On July 19, 1993 Bre-X closed the deal on the site; a project
encompassing
57,571 hectares in Samarinda, East Kalimantan, Indonesia, also known as Busang. By
September 1993, drilling had begun on the site and Felderhof claimed soon after that they
had found up to 2 moz of recoverable gold. As the drilling continued, Bre-X needed
more capital to fund exploration and initiated its first private placement, with Loewen
On daatje McCutcheon, Ltd., for C$4.5 million in March 1994. The company spent the
rest of 1994 drilling on the property, slowly improving the estimates of recoverable gold
to 3 moz by October 1994. During this time, Bre-X had extended its claim to a site southeast of
their initial claim. As it began to explore the new site, the estimates of recoverable gold rose to 6-
8 moz by November 1994. By March 1995, the stock price had increased to C$2.05 and
Walsh began making presentations to potential investors. In May 1995, Bre-X initiated
its second private placement: this time Nesbitt Burns, Scotia McLeod, and McLean
Mc Carthy Ltd. joined Loewen in the placement of C$7.5 million of Bre-X common
shares. The proceeds from the offering were designated for continued exploration and
working capital.
But it was not until October 17, 1995 that Bre-X shares began their steep climb.
The stock shot up to C$14.87 that day when the company announced that while exploring
a deep ore body in the southeast site, it had found a large gold deposit that raised their
estimate of recoverable gold to 30 moz. By November, the company had gained the
attention of gold analysts in both Canada and the United States. As analysts began to
recommend the stock, and drilling results released by the company continued to confirm
the large deposit, the stock price of Bre-X continued to climb dramatically. Even the
Bre-X Minerals Ltd.
4
Indonesian Mines and Energy Ministry touted the Bre-X site, stating that the deposit
could be as large as 40 moz, an estimate not disputed by the company. A deposit of that
size would be worth a potential US$12 billion, comparable to the worlds largest deposit,
the 40 moz Freeport McMoRan find, also in Indonesia.


Busang was not Bre-X's discovery. The land beside the Busang Creek on the Kalimantan
Island (Borneo) was investigated by several companies long before Bre-X came along.
Westralian Atan Minerals (PT WAM) acquired the claim, originally called Maura Atan,
in 1987 and received a SIPP permit which allowed preliminary land exploration. Initial
results ranged from 4 grams to 27.3 grams of gold per tonne. Since any concentration
over 2 grams is significant, it seemed to be a lucrative claim.7 Maura Atan was renamed Busang.



While 1997 was a very good year for most major Canadian and US stock market
indices, it was a
disastrous year for investors in Canadian junior mining stocks. Bre-X Minerals
first announced it had discovered the largest gold deposit in the world at Busang on
the
island of Borneo in Indonesia in 1994. A lot of people showed immediate interest
geologists, mining
companies, stockbrokers and investors. Initially blinded by the glitter, only later
did they realize they had
been taken by one of the oldest scams in mining "salting" of samples with gold.
When an independent
study of the samples finally occurred, the faking hadn't even been done well
when examined under a
microscope some samples contained shavings from gold jewelry. In two days, Bre-
X stock dropped 85%,
losing $3 billion in market value. At the same time, two Bre-X executives moved
to the Caribbean, and a
key geologist apparently committed suicide.
HISTORY
Bre-X prior to its claims of a massive gold deposit at Busang in Indonesia

Bre-X rose from a minor penny stock to a company with a market cap of more than
6 billion
Canadian dollars on the strength of a reputedly-enormous gold deposit in Indonesia
It is hardly surprising that, when it became clear that the companys claims were
fraudulent, Bre-X stock plunged in value
What ismore remarkable is the way that Bre-X seemed to carry the whole junior
mining market with it. On March 20, 1997, just prior to the first reports that
independent tests did not confirm Bre-X company claims. In late 1992, Felderhof sent
DeGuzman to Busang to find a deposit worth selling.
DeGuzman did exactly that. After spending four days at the Busang site, he was able to
write a more persuasive report than those who had previously investigated the site. Using
the same core samples, he estimated a resource of "20 million tonnes with a gold content
of more than two grams from the surface to a depth of fifty meters".11 It also estimated
the underground mine to be up to 60 million tons with a gold content exceeding 3.5
grams per tonne to a depth of 150 meters. The only explanation for this report is that he
hoped the "deposit" would keep him employed.

The Bre-X Fraud, the Gold Price and Mining Stock Prices

only reason that the stock had a positive value in the pre-Busang days was the hope
that the company wouldbe able to find gold or other valuable mineral deposits
before it ran out of money.
Before the Bre-X fraud was unearthed, Bre-X stock rose from pennies per share in
1994 to 201.75
Canadian dollars on May 10, 1996 when shareholders approved a 10-for-1 stock
split. Fraud and misinformation in one instance leads investors to re-evaluate the
quality of the
information provided by similar firms. The goal of legitimate exploration companies is to raise
capital to perform exploration work it is a risky business but with tenacity, patience and luck, an orebody
will be found. Investors know exploration stocks are high-risk, but in the case of a scam, they have no
chance of winning. A review of several research reports
on Bre-X from 1995 to 1997 reveal a strong sense of confidence in the ever-increasing
estimates of gold reserves. 2 The ultimate basis for the valuation of Bre-X was based on testing of
samples
provided by Bre-X that were not independently confirmed. However, the participants
were convinced that Bre-X was a once in a life time opportunity that couldnt be passed
up; no-one wanted to miss the fabulous opportunity for wealth that Bre-X represented.

RESULT
By May 1997, however, Bre-X stock reverted to pennies and ceased trading when
these drill samples were found to have been salted by gold added to the rock
samples after they had been taken out of the ground.
let alone an enormous
deposit that Bre-X officials had claimed might run to 200 hundred million ounces
of gold -- the salting fraudwas uncovered, the deal was null and void, and Bre-X
and their remaining shareholders were left with 100% of nothing. On March 21, an
Indonesian
paper announced that Freeport-McMorans tests appeared to contradict Bre-Xs
assay results. On March 26,
Bre-X announced that the potential reserves at Busang may have been overstated
During the spring of 1997, Bre-Xs failure destroyed nearly 6 billion Canadian
dollars in paper
wealth. After much wrangling and "too-ing and fro-ing", Freeport
McMoRan of New Orleans, already doing
considerable business in Indonesia and operating the world's largest gold
mine in the highlands at Grasberg,
won the right to develop Busang. Freeport began by conducting some
independent drilling, but holes drilled
right beside ones by Bre-X showed no significant amount of gold. The
results were discouraging. Although 17 of the 19 holes found gold, the
results were
very poor, showing 1 to 3 grams of gold per tonne. The samples showed
a narrow,
shallow resource without any pattern. It seemed Busang could not be
developed into a
productive mine. The property sat dormant while Montague attempted to
get rid of it. John Felderhof and Michale DeGuzman were the Bre-X
geologists. Felderhof proved to be a good
geologist".Farquharson presented his report to the Bre-X board on May
3, 1997. He barely got two
sentences out before those present scrambled for the reports. Walsh then
asked him to
leave for a short time to give the board some privacy to digest the
results. No one
anticipated the first sentence, "We very much regret having to express
the firm opinion
that an economic gold deposit has not been identified in the South East
Zone of the
Busang property, and is unlikely to be."49
Farquharson returned to find board members in shock. "The scene was emotional and
there were many outbursts." Strathcona released the results later that night, and they were
immediately posted on the Internet. The stock was delisted on the NASDAQ on May 6,
1997 closing at 60 cents. The TSE and ASE delisted the stock on May 7, 1997. What was
once a $6 billion company had vanished into disgrace.50. Bre-X admitted that the test results
from the Busang site
may had been overstated because of invalid samples. In a separate statement, Freeport
announced that its drilling results had uncovered insignificant amounts of gold.

EVENTS
on March 19, 1997, when Michael De Guzman, Bre-Xs chief geologist at the
Busang site,
7 was reported to have fallen from a helicopter en route to the Busang property
On the same day of this
announcement, Freeport McMoRan Gold & Copper, Inc., which had recently been selected as Bre-X's
major partner, reported its own due-diligence analyses of seven core samples that "indicate insignificant
amounts of gold." That news came exactly one week after the death of Bre-X's chief geologist Michael de
Guzman, who supposedly jumped to his death from a helicopter while traveling to Busang to meet with
representatives of Freeport to discuss the assay results. A rambling suicide note was left behind.

STORY

Bre-X was founded by David Walsh in 1988, after leaving his position as a
stockbroker. He operated the
firm out of the basement of his home. Bre-X began trading on the Alberta Stock
Exchange in July 1989 but
it soon began to waste away as Walsh was unable to secure sufficient funding to
explore their mineral
claims. He spent most of 1992 and 1993 in personal bankruptcy, but then using his
last $10,000, he flew to
Indonesia and met with John Felderhof, a graduate from Dalhousie University and
one of the geologists
who had discovered the giant Ok Tedi deposit in Papua-New Guinea in 1968.
Felderhof talked Walsh into
buying some jungle property near Busang, a rainforest and rugged mountain area
on the Island of Borneo
located in the East Kalimantan province of Indonesia.
Felderhof hired a geologist friend named Michael de Guzman from The
Philippines and soon after, the
company began drilling for gold. The first few holes showed nothing, and Walsh
was ready to pull the pin
when suddenly things began to pick up. Felderhof claimed the previous companies
had looked in the wrong
places, or drilled too shallow, or used the wrong drilling techniques. But with his
knowledge of the region
he would find the "mother-lode". Little did he know apparently, that it would be a
"manufactured-load
of" perpetrated by de Guzman and his scamming buddies.
Within about 18 months, Bre-X claimed to have "proven" the existence of 71
million ounces of gold, worth
about $25 billion. Felderhof in fact, began touting that there were at least 200
million ounces in the ground.
Egizio Bianchini, a stockbroker for Nesbitt-Burns and reputedly at the time, one of
Canada's top gold
analysts, was quoted as follows "What most people are now realizing is that Bre-X
has made one of the
great gold discoveries of our generation." Another broker, Kerry Smith a mining
engineering graduate
from Queen's University, who worked for First Marathon, also became a major
advocate of the stock.
The actions of Bre-X essentially conditioned the market to believe that Busang was
one of the richest
goldfields ever discovered and that the profits from this discovery would be
enormous. The company
published ever-increasing amounts of gold in the deposit on a weekly and
sometimes, daily basis. The price
of Bre-X shares rapidly rose from a few pennies to a high of $250 Canadian per
share (before a 10 for 1
split). Bre-X became the star of the gold investment community and many
members of the general public
became convinced that the company owned a massive and uniquely profitable gold
deposit the largest
one ever discovered. The company's descriptions of gold-laden drill samples were
accepted as proof of the
Company's claims until independent drilling and analysis revealed that a the
massive deception had been
committed by certain company employees. The Bre-X saga is now known as the
gold fraud of the century. "DeGuzman was a keen observer ... he could
observe things that most geologists could not." He said that riches10 was to be the world's
best geologist. Worley depicted DeGuzman as his "star employee."
have beenoverstated because of invalid samples Association of Canada Convention in Toronto a meeting at which
Felderhof was named Prospector of theYear and Walsh received the Developer of the Year award

conclusion
So who was to blame for the salting of the samples?
Walsh moved to the Bahamas and later died of a brain aneurysm. Felderhof also moved to the Caribbean
to the Cayman islands where he still resides today. The real culprit appears to have been Michael de
Guzman who died by jumping 800 feet into the jungle from a helicopter maybe! The key word is
"maybe" since when the body was found 4 days later, the face had been eaten away by jungle parasites.
Also missing were his internal organs, brain, and genitalia. A partial thumbprint from mushy, decayed flesh
together with a couple of molars are the sole basis for identification. With Walsh and de Guzman dead and Bre-X
officers such as Felderhof, refusing to cooperate, the RCMP ran into a dead end. No one has ever been
arrested or imprisoned. In the old gold-rush days, someone would have been strung up
It concludes that the Busang fraud was primarily the product of human greed. Critiques claim,
there were three Bre-Xs. First, the high profile Canadian entity headed
by Paul Kavanagh and Rolly Francisco; second, the Indonesian Bre-X headed by John
Felderhof and Michael DeGuzman; and third, the Canadian promotion arm headed by
David Walsh and Steve McAnulty.1 Incompetence and blind eyes prevailed at all levels.
It is our conclusion that, while a prudent investor should have seen what was coming, the
lust for quick and easy wealth proved irresistible for many. Bre-X began drilling in October
1993. The first two holes produced insignificant amounts
of gold, which prompted Felderhof to consider shutting down the project. "We almost
shut down the project ... then we made a hit," recounts DeGuzman. The third hole
reported significant gold. However, both Strathcona and Freeport later confirmed the
gold in Bre-X hole 3 was foreign. The gold was a man-made copper and gold alloy,
which does not occur in nature. It was also in the shape of tiny spiral shavings.
The fourth hole showed equally impressive grades of gold. However, it, too, was salted
with alluvial gold acquired locally. Alluvial gold is found in river beds. It is seldom
found in primary deposits.18 This should have been a red flag to the various metallurgists
who studied Bre-X gold. The two independent directors of Bre-X,
Hugh Lyons and Paul Kavanagh resigned from the board.
Bre-X then fired Felderhof, who had moved into his home on Grand Cayman
island on April 22.

RECOMEMNDATION
With Walsh and de Guzman dead and Bre-X
officers such as Felderhof, refusing to cooperate, the RCMP ran into a dead end. No one has ever been
arrested or imprisoned. In the old gold-rush days, someone would have been strung up


Stock exchange GOIZUETA BUSINESS SCHOOL
The most important pieces of information they supply are earnings forecasts, company growth
rates, and stock price forecasts. All of these go toward determining the value of the
companys stock. The analysts gather this information by analyzing company financial
statements, interviewing corporate executives, and making on-site inspections. The analyst
compiles this information in a written report published by their
investment firm that recommends what action investors should take regarding the stock.
Usually those recommendations include buying, selling, or holding the security. There
are two types of analysts: buy-side and sell-side. A buy-side analyst works for a money
management or other type of investment management firm and makes recommendations
to their firms portfolio managers. Sell-side analysts typically work for brokerage firms
and recommend stocks to the brokers customers. On February 20, 1996, Bre-X announced its
third private placement. This time it
was an over-subscribed C$30 million offered by Nesbitt, ScotiaMcLeod, Levesque
Beaubien Geoffrion, and First Marathon Securities. The following day, after the
company raised its estimate of recoverable gold to 42.6 moz, Bre-X stock rose C$13.875
to C$153 per share, giving it a market capitalization of C$3.2 billion. By March, almost
50 mining companies, mostly Canadian, were digging in the vicinity of the Bre-X site.
Egizio Bianchi, Canadas top-ranked gold analyst from Nesbitt Burns, declared the site
in the elite class of deposits around the world. Bre-X continued to raise its estimates of
recoverable gold. It joined the Toronto
Stock Exchange on April 23, 1996 at C$187.50 a share. Exchange regulators only asked
that the company supply a prospectus and a listing statement. Yet Bre-X was allowed to
submit a prospectus prepared in 1989, when the company was still a penny stock. The
Bre-X listing statement claimed that the site held large gold reserves and provided a
report by their consultant PT Kilborn in support of this claim. The listing statement did
not state, however, that PT Kilborn had relied on data supplied by Bre-X data in its
analysis. Nevertheless, Bre-X continued to collect endorsements from some of the most
recognized brokerage firms in Canada, including Nesbitt Burns, Levesque Beaubien,
CIBC Wood Gundy, First Marathon, and Gordon Capital. By May 1996, Bre-X had a market
capitalization of over C$4 billion, largely due
to Canadian pension fund managers adding the company to their portfolios. Late in May,
Bre-X completed a 10 for 1 stock split, deemed necessary because the capitalization of
the firm had peaked at $6.2 billion, or $286.50 per share, on a pre-split basis. In July, the
share price of Bre-X continued strong and reserve estimates continued to increase.
Nesbitt Burns and Levesque Beaubien estimated the reserves of the site at 60 moz and
increased their projected value of the stock accordingly.
Ivestigtn abt site
Analysts visited the site in Indonesia, talked with the geologists, and toured the
assay labs where the ore samples were tested. Gold analyst Chris Bradbrook of Loewen
stated I continue to be really impressed by the (gold) deposit. It keeps getting bigger
and bigger. The upside is substantial.4 Gold analysts continued to recommend the stock
despite the fact that Bre-X kept information to a minimum. Felderhof refused to have the
site independently assessed, even though junior mining companies are usually eager to
have their gold strikes confirmed so that mining rights can be sold. No senior mining
companies were permitted to view the site, which would be a necessary step before
prospective purchasers could bid for the right to mine and develop the project. Concerns were
also raised in the minds of some analysts regarding the companys
treatment of drill cores, which involved crushing the entire core instead of the usual
practice of dividing them, saving half for subsequent tests. This practice is considered an
essential safeguard against disputes arising from questionable assay results. The
company countered these concerns by stating that the samples had to be crushed because
the gold fell off the brittle cores. Thus, according to Bre-X, core samples were not
halved and stored because too much gold would be wasted.
Bre-Xs preliminary license to build a
site at Busang had been quietly cancelled back in August. Bre-X did not report the loss
of the license until October. The Indonesian government also refused to renew the firms
contract of work, a necessary requirement for further exploration and development, due
to allegations that the company had drilled illegally, violated foreign ownership laws, and
had unfairly treated PT Krueng Gasui. The Indonesian government stated that it would
not sign a contract of work until these outstanding issues were resolved.
MANIPULATION
A theory that has resulted from current investigations indicates that de Guzman
and several handpicked Filipino geologists appear to have been part of a salting operation
that added alluvial, or river source, gold to the sample rock cores. The salting operation
was based in Loa Duri and later in Samarinda, downstream from Busang. The altered
rock cores were sent to the warehouse for storage before being forwarded by truck to PT
Indo Assay Laboratories for crushing and testing. When the samples were barged or sent
by speedboat down the river, Cesar Puspos, the nominal project manager at Busang,
would often accompany them. Both de Guzman and Puspos appear to have been buying
alluvial gold from a local tribesman as far back as December 1993, when the first major
gold sample was taken.
By December of 1996, it is reported that the salting increased so much that Bre-X
metallurgists Rudy Vega and Jerry Alo hired laborers from a construction project to help
with the mixing. The processing went on day and night, with the proportions carefully
measured by the Bre-X supervisors. While there does not appear to have been any direct
contact between the salting operation and Felderhof, it has been alleged that he should
have at least confirmed the increasing reserves and the reports of alluvial gold in the
samples. Both Walsh and Felderhof were aware of, and failed to disclose, the fact that
three separate consulting firms cited serious irregularities with the rock samples from the
Busang site.
The reports discovered mineralization that showed characteristics unusual or even
unprecedented for bedrock deposits. It appears that Bre-X executives and PT Kilborn
were aware of reports by Normet Pty of Australia, Hazen Research Inc., and PetraScience
Consultants of Vancouver showing alluvial gold and unusual characteristics in the Bre-X
samples from Busang.15 These results would seem to indicate that the gold came from a
different site; yet PT Kilborn verified Bre-Xs reserves without taking its own samples.
In fact, PT Kilborn created the engineering model and compiled the resource calculations
for Busang based on Bre-Xs data. Two reports in particular noted that the gold was
alluvial, or came from a river, and was recoverable at a rate of more than 90% through
gravity alone. That level of recovery without further processing is at least twice the rate
expected from bedrock gold and more consistent with the addition of outside gold.
A possible motive behind the salting was that Felderhof and de Guzman truly
believed that the Busang site contained gold and wanted to ensure the capital necessary to
find it. However, the salting operation had to grow to keep pace with the expectations of
Bre-X shareholders. These high expectations also raised the stakes to find actual gold on
the site. Nevertheless, the financial rewards the principals received from the fraud cannot
be ignored. Walsh invested an estimated C$35 million of his Bre-X stock proceeds in his
tax-exempt home of the Bahamas and John Felderhof sold C$42 million of Bre-X stock.
Involment of copmny n personel
Another threat to Bre-Xs claim on the site came in the form of Barrick Gold Inc.,
a Canadian-based gold mining and development company. In 1994, Barrick had tried to
buy a minority stake in Bre-X but had been rejected. In a renewed attempt, Barrick
enlisted the help of Indonesian President Suhartos eldest daughter, Siti, by promising her
the contract to build roads into Busang. Bre-X countered Barrick by hiring Suhartos
eldest son, Sigit, promising him US$40 million and 10% ownership of the southeast site
in return for his assistance in ensuring that Bre-X received approval to control the Busang
project. However, in November Bre-X, outmaneuvered in the intricate world of
Indonesian politics, was told by the Indonesian government to give Barrick 75% control
of the site.6 The Indonesian government also stated that they would appreciate a 10%
stake in the site.

a fire destroyed the Busang office that held de
Guzmans geological records of the site and almost all of the drill results
Bre-X continued to collect endorsements from some of the most
recognized brokerage firms in Canada, including Nesbitt Burns, Levesque Beaubien,
CIBC Wood Gundy, First Marathon, and Gordon Capital. Bre-X was loath to reveal
uncomfortable information.
LESSON Perhaps the most enduring lessons from the Bre-X
fraud are lessons about expectations of wealth. Everyone wanted to believe in the wealth
of Busang. Investors relied on others beliefs rather than sound evidence that Bre-X was
worth a fortune.

The lessons here are the old ones. No matter how tough the securities regulations or laws,
perpetrators of deceit and there now seems no doubt that deceit massive and unprecedented fraud
were at play those people will find a way to break the rules. - Rowland W. Fleming, CEO and president
of the Toronto Stock Exchange.

Info abt personel bre x