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All That Glitters ... Bre-X Mystery Deepens

World's biggest gold mine becomes world's biggest stock fraud for Canadian miner.

Once hailed as the world's biggest gold strike, a Canadian company's widely touted mother lode has turned to fool's gold, possibly the greatest gold-mining stock fraud of all time.

Bre-X, a tiny Calgary mining company, stunned the investment community two years ago when it announced discovery of 30 million ounces of gold in the dense jungle of Busang, Indonesia, on the island of Borneo.

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Bre-X stunned investors again May 4 when it announced a bust in Busang. There was no mother lode, and millions of dollars of investors' money had turned to dust.

In between, the story reads like a dime novel - a mysterious death in the exotic jungles of Borneo, fortunes made and lost, and no one yet sure where to point the finger.

Leading up to the recent announcement, mine estimates had grown to 200 million ounces. Bre-X stock had shot up from pennies a share to more than $200, helping the company raise $6 billion (Canadian; $4.4 billion US).

But independent test results May 4 confirmed the worst: only "trace" amounts of gold at the end of the Bre-X rainbow.

Mining experts and Bre-X's own hired testing company say there can be only one conclusion. Someone sprinkled or "salted" gold flecks into original drill core samples before they were tested.

"The magnitude of the tampering with core samples we believe has occurred ... is of a scale and over a period of time and with a precision that, to our knowledge, is without precedent in the history of mining anywhere in the world," stated Graham Farquharson, president of Strathcona Mineral Services Ltd., in a release by Bre-X, which had hired the company to investigate.

The same report also speaks of the "falsification and misrepresentations of many thousands of samples with consequent and subsequent erroneous estimates of gold resources."

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David Walsh, Bre-X's chairman and chief executive, appeared surprised, saying: "We share the shock and dismay of our shareholders and others that the gold we thought we had at Busang now appears not to be there."

Trading in Bre-X stock was halted May 5 on the Toronto Stock Exchange, three other Canadian exchanges, and in the US on the Nasdaq system. At least eight class-action suits have been filed by investors.

Trading was expected to resume May 6 on the Toronto exchange.

Despite growing concerns around February that the Bre-X find might be exaggerated, many of Canada's best mining analysts, top investment firms, and thousands of investors still backed Bre-X as recently as March.

So high was Bre-X that its fall has thrown a cloud over the entire Canadian securities market, analysts say, especially the Canadian "junior" mining industry. Last year, Canada's stock markets supplied 60 percent of the total world mining exploration dollars, the world's biggest source of cash for small exploration companies.

Canada's provincial stock regulators are being called upon to tighten disclosure and reporting requirements for Canada's freewheeling junior mining companies.

And the affair has renewed concerns about Canada's lack of a national regulatory agency for securities.

"The Bre-X fiasco has ruined the confidence of investors, so that even respectable junior mining companies will have a hard time raising money," says Stuart Averill, president of Overburden Drilling Management, an Ottawa exploration firm.

A number of points remain a mystery. On March 18, Bre-X geologist Michael de Guzman fell from a helicopter flying 800 feet over the Indonesian jungle. His death came a few days before release of the first independent test results.

Mr. de Guzman allegedly left behind a suicide note claiming a fatal illness. But that illness is undocumented, and his family has cast doubt on the note's veracity.

Concerns grew when a Jakarta newspaper reported three days later that the Busang find might be smaller than expected, citing flawed assay tests.

There have also been reports that the family of Indonesia's strongman president, Mohamed Suharto, muscled its way into a partnership in the Busang mine.

Bre-X's chairman Walsh responded unequivocally: "The company's board of directors has absolute confidence in the integrity and accuracy of assay results and resource calculations reported by the company for the Busang gold deposit."

But on March 26, New Orleans-based mining giant Freeport-McMoRan, a new partner in the Bre-X find, released its own test results showing no significant gold at Busang.

Bre-X stock instantly plunged from C$15.7 a share to C$2.50 three days later. Trading volume was so heavy it crashed the computers at the Toronto Stock Exchange several times.

Despite the evidence of fraud, it is unclear who benefited and who exactly defrauded whom.

Walsh declares himself injured and innocent. But he and some other Bre-X principals have reportedly gained through ownership of Bre-X stock.

And The Wall Street Journal published a report questioning the integrity, transparency, and unusual levels of secrecy surrounding Bre-X's methods of testing samples.

"There's no question," Mr. Averill says, "that this is the biggest gold scam of all time."

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