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TABLE OF CONTENTS Nov 10 - 16, 1997 Volume 83 Number 37 - 0 comments

A few desperate men and a salt shaker -- An excerpt from The Northern Miner's Bre-X: Gold Today, Gone Tomorrow

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By: Vivian Danielson and James Whyte
In March 1993, David Walsh picked up the phone, tracked down John Felderhof and said he wanted to come to Indonesia to look at mineral properties for his latest junior company, Bre-X Minerals.

Walsh later told others, including Peter Howe, that it all started with a "dream". Walsh's nocturnal reverie told him he could recoup his fortune by going back to Indonesia, so he called the only person he knew there, John Felderhof.

"I never heard that," chuckled Barry Tannock, Bre-X's first manager of investor relations. "The company needed a new story. It was as simple as that."

Walsh was told that because the Australians had packed up and gone home after the market crash, some good properties were available. Several sources say Walsh agreed to pay Felderhof $10,000 for the month or so it would take to beat the bushes and find properties for him to review in Jakarta. Whether this ever happened is questionable, as Walsh was not exactly rolling in dough at the time. He did manage to scrape together the necessary money to make the trip to Indonesia, thanks to credit-card advances and a loan to Bre-X from Bresea Resources (Walsh's first publicly listed company), which still had a few dollars in its till.

After allowing Felderhof some time to compile a property portfolio, Walsh flew to Jakarta for his eagerly awaited meeting with a man he was then describing as "the best geologist in the business." He was accompanied by his son Sean, newly graduated from high school, and geologist Kevin Waddell, who was to review the properties Felderhof had assembled.

The trip to Indonesia was a "this-is-it sort of deal," Waddell said, adding that Walsh's bankruptcy proceedings were already in progress when they flew to Jakarta via Hong Kong. "He had to find something. I was at his house on at least one occasion when the bailiff came. He was under severe financial duress."

The group arrived on April 24 and met Felderhof that evening at the Sari Pan Pacific, a posh hotel in Jakarta. They also met Mike Bird in the hotel lobby, the only member of A.C.A. Howe's Jakarta office to have found permanent employment since the exploration team disbanded after the market crash. At the time, Bird was managing the Tewah alluvial project in Kalimantan for Suharto's half-brother, Probosutedjo. He spoke Bahasa, the national language, and had integrated well into local society (helped, no doubt, by his marriage to the daughter of an army general).

"It was quite funny, actually," said Peter Howe, who heard a recap of the dinner meeting from friend Bird. "They were expecting a rich promoter and in walked David Walsh. They were quite shocked to find out that he actually had to borrow money for his fare to get there."

Waddell said a few Indonesians were present for the dinner at the Sari, though he was not sure why. Also present was a prosperous-looking businessman named Adam Tobin. "He had a lot of different businesses and was supposedly very influential," he said. "We were told he was negotiating with the government for cellular phone rights in Indonesia. We also were told that he was connected to the government somehow or another. I got the impression he was a partner on some of the properties."

Peter Howe said Tobin had been involved in various mineral properties during the 1980s. "He had been one of our partners. Later, when John was broke, he stayed with Tobin. I think John felt an obligation to get Adam's properties placed with people."

Waddell said Tobin hosted the dinner, which was a catered affair in one of the hotel's private banquet rooms. "It was a ritzy affair, with several courses. I remember sushi was involved. I had been told that it was rude not to eat everything put in front of you in Indonesia, but I had to apologize. I don't do raw fish."

Waddell said some of the dinner conversation focused on North American stock markets. Tobin was "a keen listener," Waddell said, and was particularly interested in how stock markets worked in that part of the world. "Adam was fairly quiet -- total observation, uncanny observation, like looking through souls. Bird didn't say much and stayed in the background, but he was keen on what was going on."

Waddell did not meet either Michael de Guzman or Jonathan Nassey at the dinner, though he said Walsh later had several private meetings with Felderhof, in which one or the other might have been present.

"David met privately with John, and I think Adam, a few times in the three or four days that we were in Jakarta. I'm sure that is where the discussions got a little more nitty-gritty. I wasn't asked to attend. My job was to review the various properties Felderhof had put in the portfolio."

Felderhof gave Walsh and Waddell a copy of de Guzman's resume, saying he intended to hire the Filipino geologist, who was then completing a short-term work assignment. "Michael de Guzman was not involved whatsoever and I don't think I met Jonathan Nassey either," Waddell said. "Umar Olii was John's man at that time."

Olii, a geologist and the nephew of a former mines official, had worked with Felderhof and Peter Howe in the past. The Indonesian squired Waddell around town to look at data on various properties.

"He was very up-front and seemed like a good guy," Waddell said. "John [Felderhof] seemed a bit too on edge, pushy, for my tastes. He was on hard times then too."

Waddell read a geological report on the Busang project written by John Felderhof, which included results of Montague's drill program. While he thought the project looked "interesting," he was surprised that the report contained only numbers, with no assay sheets as appendices to verify that they were true as stated. "I thought, maybe they do things differently here," he said. Waddell was allowed to make copies of the reports for all the other projects under review, except Busang.

Walsh and his group left Jakarta on April 28. "It was a short trip, though we did get to see the city a bit. When I went out with Umar one afternoon, all these little girls were following us down the street. I was a real novelty. I guess they don't have too many green-eyed, six-foot-four guys in Indonesia." According to Peter Howe, Felderhof then phoned McLucas and told him that he had a buyer for Busang. David Hedderwick of Waverley Finance and David Walsh negotiated the deal, which granted Bre-X an option to buy 80% of the outstanding shares of PT Westralian Atan Minerals for US$80,000, at an exercise price of US$100.

After some discussion, it was agreed that Felderhof would become Bre-X's Indonesian manager. Barry Tannock does not recall how the deal was structured, or how it came about. "I'm not sure how they persuaded each other, but they cut some sort of deal."

Felderhof then hired de Guzman as chief geologist. Also joining Bre-X's Indonesian team were Jonathan Nassey as senior geologist and Cesar Puspos as geologist and project manager.

Walsh went back to Canada with an Indonesian property and an exploration team, but not much else. He still had to raise money to explore the property, which was not an easy task as the market was still as weak on his return as it was when he left.

"Ten years of patience involved while following events in Indonesia appears to be ready to bear fruit," David Walsh told Bre-X shareholders in late April of 1993. "It would take an enormous amount of time and money for others to set up and achieve our level of properties and expertise."

Walsh also told shareholders that it was important to have an Indonesian partner to conduct business in the country. "Mr. Adam Tobin, a prominent businessman in Jakarta, has agreed to be our domestic partner. This association will greatly assist in dealing with the government and acquiring mineral properties."

Whatever Tobin did, he must have done quickly, because Bre-X never mentioned his name again. "I thought they were going to give him options and all the rest of it," Waddell said. "What happened there, I have no idea, but it is intriguing." Olii, meanwhile, bowed out of the venture because of a personality conflict with de Guzman.

John Felderhof, Michael de Guzman and Cesar Puspos had much at stake when the first rig began turning at the Busang property in October 1994. Everyone knew David Walsh was operating on a shoestring and that there was no potful of money to be squandered on wildcat drilling. To play it safe, the drill was set up in an area known to contain at least some gold mineralization -- the Central zone, previously drilled by Montague.

Bre-X later reported that the first hole hit "weak mineralization," which usually means anomalous, or slightly higher than trace, values. The second hole also was a dud.

After the third hole was pulled, one or more persons on site decided to add gold to the core to keep the project going and the paycheques coming. It was a humble beginning for what was to become the world's largest, most daring and the best engineered salting scam. The salting might have had another rationale, however. The Muara Atan CoW was aging fast. The CoW could only be kept alive if it was moved to the feasibility stage from exploration. A resource had to be proved up on the Central zone, or the CoW would have to be relinquished.

Results from the first three holes at Busang were not released until December 12. Why the samples took this long to assay is not known. Perhaps there were problems with reproducibility of results (good labs regularly split samples and assay the duplicate as an internal check). Perhaps the lab was simply busy. Or perhaps the samples took an unusually long time to get to the lab.

Hole 3 was impressive, by any standard, though not consistent with the results previously obtained by Westralian. The drill hole cut three mineralized zones, one of which was 40 metres long. Subsequent reports show the third hole was crudely salted. Some man-made copper-gold shavings were found in one portion, while placer gold had been added to another.

The risks of early detection were enormously high at this point. The salting methodology had to be refined. It was about this time that the metallurgical skills of Jerome Alo were brought to bear on Busang.

Normally, exploration projects do not have metallurgists working on site. But Alo had special skills that were badly needed at this juncture. He had previously worked in the mill at Benguet, where Guzman knew him.

In mid-January of 1994, Cesar Puspos returned to the jungle to begin upgrading the field camp in preparation for more drilling. According to Puspos's internal company report, which covered the period up to April 1, 1994, Alo was on site before drilling began. Soon, the camp housed Puspos, Alo, a surveying crew, two samplers, an eight-man drill crew, and sundry camp help.

Puspos busied himself with core logging and with some reconnaissance mapping around the Central zone of mineralization. In a foreshadowing of things to come, he took some rock samples near the southeastern corner of the property, where he reported "very impressive assays."

His drill holes, BRH 4 through 9, all had encountered mineralization, as had hole BRH-2A, a re-drilling of the second hole in the program. Hole 4 encountered a single intersection measuring 6 metres long and grading 10.8 grams of gold per tonne. Hole 7 caught 5 metres grading 16 grams per tonne.

BRH-8 intersected 26 metres grading 12.9 grams, and BRH-9 found 21 metres that averaged 8.1 grams. The Central zone was on its way, with a little help from its friends.

There were signs, even then, that the project staff was unusually interested in the sampling and assaying side of the project. An internal memo from de Guzman to Felderhof, dated March 19, 1994, was copied to Puspos and Alo. It dealt with the preparation and analysis of check samples that held coarse gold. De Guzman was concerned about the reproducibility of the assays.

De Guzman, apparently wishing to ensure that the assays he was getting from Indo Assay were accurate, selected "14 coarse-gold-bearing drill core samples" from the bags of coarsely crushed rock and finely ground rock pulp that Indo Assay had returned to Busang. From each bag, he split off 200 grams of coarse material and 100 grams of pulp, and sent the samples to another commercial lab, PT Geoservices in Jakarta, for analysis.

The results came back from Geoservices, and de Guzman drew up a table with one column showing the grades Indo Assay had reported, and two adjacent columns with the grades Geoservices had reported on Guzman's duplicates.

Geoservices showed slightly higher gold assays than Indo Assay, possibly because the samples it received had been homogenized more thoroughly during handling.

There were too few samples to render these "check assays" conclusive, but de Guzman, who evidently knew just enough sampling theory to jump to conclusions, felt a modification to the sampling procedure was going to be needed. Jerry Alo would complete a study of the sample preparation procedure and recommend a way to achieve reproducible results.

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