The creatures appear around the top of any market cycle: they’re the scam artists who take advantage of market enthusiasm, novices who haven’t seen it all and experienced market players with memory lapses.
Flim-flam men were everywhere in 1997, from Kalimantan to Nevada, and it’s likely that they are as much to blame for the destruction of the bullish junior exploration market as interest rates, Asian currency failures and the low price of gold.
The year’s highest-profile scam was perpetrated, of course, by Bre-X Minerals. The Calgary-based junior dominated business headlines and industry gossip for the first half of the year. Bre-X’s credentials as the Cinderella of Canadian mining were intact for the first two months of 1997, its pumpkin coach hauled by a team of Bay Street analysts. Princes of the mining industry nervously fingered glass slippers as they awaited their fitting session with the maiden; bystanders sized up the contenders, making book on the prospects for each suitor.
Freeport-McMoRan Copper & Gold (FCX-N) won Bre-X’s hand in early February, and soon began a drill program to confirm the company’s claim that it had a monstrous gold resource at its Busang property in Kalimantan, Indonesia. But it wasn’t long before Freeport geologists discovered, based on drill holes twinned with those Bre-X had sunk, insignificant gold grades. Freeport confronted Bre-X in the middle of March; the honeymoon was over.
Bre-X chairman David Walsh kept his cool when Freeport honcho James Moffett called to say that his people had “real problems with the initial results.” Walsh, insisting he was “not a technical guy,” referred the steaming Moffett to vice-chairman John Felderhof. Moffett was “confused,” said Felderhof, telling him that Freeport crews probably “mixed up the samples.” Moffett, whose self-confidence was not so fragile that Felderhof could easily poke holes in it, insisted that a senior Bre-X official head to Busang to explain the discrepancy between the companies’ results.
Bre-X geologist Michael de Guzman set off for Kalimantan, but not before a stopover in Singapore to stash some money in a local bank and fly in one of his many girlfriends.
But de Guzman didn’t make it to Busang. Following a boisterous evening in the karaoke bars of Balikpapan, he boarded a helicopter that was to fly him into the remote site. He is said to have jumped to his death from the airborne chopper shortly after a refueling stop in Samarinda.
Behind the scenes, Bre-X executives in Toronto had engaged Strathcona Mineral Services as consultants to review the work that had been done up to that point. Strathcona’s senior staff reviewed the prefeasibility report that had been assembled by Bre-X’s main consultants, Kilborn SNC Lavalin, and suspected sample tampering almost immediately.
On March 26, Bre-X engaged Strathcona to run a technical audit of the project, and soon announced that “there appears to be a strong possibility that the potential gold resources on the Busang project . . . have been overstated.”
The roof fell in. Bre-X shares on the Toronto Stock Exchange (tse) fell from a price of more than $15 to just $3, taking many honest junior mining stocks with it as investors bolted from the entire sector.
The next month was a circus of rumor, speculation and spin-doctoring, often cleverly orchestrated by Walsh and Felderhof. Freeport, the duo insisted, failed to analyze the core properly; or it drilled in the wrong direction; or someone stole the company’s core, substituting barren material; or Bre-X was the victim of a systematic misinformation campaign designed to depress its share price to make it an easier takeover target.
The days of doubt ended only on May 4, when Strathcona’s principal, Graham Farquharson, reported that his investigation showed that holes drilled under tight security encountered only trace amounts of gold, no matter how those samples were assayed. The Busang samples had, unquestionably, been salted.
Felderhof, disgraced, was forced to resign, whereas Walsh played the innocent dupe and told anyone who would listen that he would soon get to the bottom of the fraud. (The irony of this poor deluded promoter transforming overnight into Sherlock Holmes appeared to escape some people.) In the wake of the Bre-X scandal, legions of regulators and brokers promised to pay better attention. Calls went out for geologists to be registered professionally. The Ontario government, which, until the Bre-X scandal, was doing a passable imitation of a glacier in its approach to professional registration, promised early revisions to the province’s Engineers Act.
An investment community that had been assiduous in its search for “the next Bre-X” didn’t have long
to wait for another. Golden Rule Resources (GNU-T) and partner Hixon Gold Resources (HXG-V) announced on May 15 that samples from their Stenpad gold project in Ghana might have been salted; a subsequent investigation by consulting firm Associated Mining Consultants confirmed that actual grades were much lower than reported by Golden Rule and Hixon. Shares of both companies had flirted with the $14 level, but the announcement provoked a price collapse.
It’s interesting to note that, in the aftermath, the Vancouver Stock Exchange (VSE) obliged Hixon to release large parts of the Associated Mining Consultants report, whereas the TSE made no such demand of Golden Rule.
The next to fall was Delgratia Mining, which had recently abandoned its VSE listing for the National Association of Securities Dealers Automated Quotation (NASDAQ) board in the U.S. It was no coincidence that the company surrendered its VSE listing, which would have subjected it to rules designed to prevent assaying scams. To wit, samples from the property, in the Nevada desert, southwest of Las Vegas, were being assayed by an unregistered lab in Arizona.
The company solemnly informed its shareholders that Josh had complex gold mineralization that had to be coaxed out of the desert sand by non-standard analytical techniques. But the company claimed the property had plenty of the yellow metal, reporting uniform grades over long drill intervals.
Those who didn’t find that news a little difficult to swallow bid Delgratia’s stock past US$34. On May 19, however, Delgratia president Charles Ager dealt out the bad news: the company had been “the victim of data falsification.” Consulting engineers Morris Beattie and Brian Mountford, who had earlier verified — and then defended — results from the Josh property, changed their minds after being confronted by a newspaper reporter who learned that the company had been getting its analyses from unlicensed assayer and convicted felon Robert Harlan Gunnison.
Ager continued to maintain that Delgratia had been victimized; he argued that nasdaq should not delist the company’s shares simply because someone had pulled a fast one on management. Ager, however, lacked a corpse to pin the crime on.
Ager later resigned and, in December, Delgratia released a statement announcing, somewhat belatedly, that Josh “is not a property of merit.” It’s a year we might like to forget, but, if we’re smart, we’ll remember it forever.