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The Bre-X Gold Scandal

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First there is a gold mountain, then there is no mountain

Start with the biggest deposit of gold ever reported, in the headwaters of the Busang River in the steaming jungle of Borneo. The Canadian company Bre-X Minerals Ltd. didn't know about that when it bought rights to the site in 1993. But after Bre-X hired a high-living geologist to map the ore body, the deposit, along with the fever dreams that accompany gold, grew to monster size—by March 1997 that geologist was talking about a 200-million-ounce resource. You do the math at, say US$500 per ounce.

Bre-X prepared for big times ahead by building a gold-plated Web site, where you could generate your own Bre-X stock chart to follow its meteoric rise. It also had a chart showing the equally meteoric rise of the estimated gold resource: together, those two pages could infect anyone with gold fever.

Bigger mineral companies took notice. Some made takeover offers. So did the Indonesian government, in the person of president Suharto and his powerful family. Bre-X owned more of this lode than seemed prudent for such a small, inexperienced foreign firm. Suharto suggested that Bre-X share its fortunate surplus with the people of Indonesia and with Barrick, a firm tied to Suharto's ambitious daughter Siti Rukmana. (Barrick's advisors, among them George H. W. Bush and ex-prime minister of Canada Brian Mulroney, also favored this scheme.) Bre-X responded by enlisting Suharto's son Sigit Hardjojudanto on its side. An impasse loomed.

To end the contretemps, family friend Mohamad "Bob" Hasan stepped in to offer all sides a deal. The American firm Freeport-McMoRan Copper & Gold (led by another old Suharto friend) would run the mine, Indonesian interests would share the wealth, Bre-X would keep 45 percent of the ownership, and Hasan for his pains would accept a share possibly worth, oh, a billion or so. Asked what he was paying for this stake, Hasan said, "There is no payment, no nothing. It is a very clean deal." (You may hear a voice saying "Forget it, Jake. It's Indonesia-town.")

Trouble Arises

The deal was announced on 17 February 1997. Freeport went to Borneo to start its own due-diligence drilling. Suharto was ready to sign a contract after this step, locking in Bre-X's land rights for 30 years and starting the flood of gold.

But just four weeks later, Bre-X's geologist at Busang, Michael de Guzman, exited his helicopter (250 meters in the air at the time), an evident suicide. On March 26 Freeport reported that its due-diligence cores, drilled only a meter and a half from Bre-X's, showed "insignificant amounts of gold." The next day Bre-X stock lost almost all of its value.

Freeport brought more rock samples to its American headquarters under armed guard. Bre-X commissioned a review of Freeport's drilling; the review recommended more drilling. Another review focusing on the chemical assays caused Bre-X to clam up completely on 1 April, and Suharto's signature was postponed.

Bre-X blamed the Web. CEO David Walsh told a fawning Calgary Herald reporter that the meltdown began when scurrilous local rumors in Indonesia were "picked up by one of the ghost writers on the Internet on the chat page or whatever."

Further reviews took the rest of April. Meanwhile, disquieting details began to arise. Industry journalists soon found evidence that the Busang ore samples had been "salted" with gold dust.

Salting of the Earth

On Friday 11 April, Northern Miner magazine put a "news flash" on its Web site laying out three lines of evidence that Bre-X had been duped.

First, contrary to company statements, Busang core samples had been prepared for assay in the jungle, not in the testing lab. Videotape made by a visitor to the field site showed the humble machines common in assay labs—hammer mills, crushers, and sample splitters. Well-labeled sample bags clearly had finely crushed ore in them. Security was lax enough that samples could easily have been spiked with gold.

Second, the local inhabitants had begun panning for gold in the Busang River, but in two years they never found any. Yet Bre-X claimed that gold was visible, a sign of unusually rich ore. And de Guzman's technical report, confusingly, called the gold submicroscopic, which is typical of hard-rock gold ore.

Third, the assayer that tested the samples said the gold was predominantly in visible-sized grains. Also, the grains showed signs consistent with being typical river-panned gold dust, such as rounded outlines and rims depleted in silver. The assayer dodged the 64-billion-dollar question, saying that there were indeed ways for hard-rock gold grains to acquire rounded edges—but that argument was a fig leaf.

The Curtain Falls

Meanwhile a storm of securities lawsuits arose around Bre-X, which vigorously protested the whole unfortunate series of misunderstandings. But it was too late. The collapse of Bre-X cast a cloud over the gold mining industry that lasted into the next century.

David Walsh decamped to the Bahamas, where he died of an aneurysm in 1998. Bre-X's chief geologist, John Felderhof, eventually went on trial in Canada but was acquitted of securities fraud in July 2007. Apparently in selling part of his stock holdings for $84 million in the months before the scandal hit he had not been criminal, just too stupid to catch the fraud.

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