Monday, September 21, 2009

A Stroll Down Memory Lane with Bre-X

My mind wanders back past out 21st century corporate/financial scadals to one from the final years of the last century -- and the alleged bounty of gold that Canadian company Bre-X claimed it had discovered in Busang, Indonesia.

I re-read recently an article that appeared in FORTUNE in June 1997, by Richard Behar. Behar had visited Busang in the weeks before the fraud was exposed, but as a matter of his good fortune he didn't end up writing a credulous piece about the wonders of the place, the benefits Bre-X and a boom were bringing to the natives, etc. For a variety of reasons he held off on writing, and the scam was exposed in the interim.

Here is the story that resulted from Behar's fortunate procrastination. Writing such a story is rather like taking an exam after peeking at the answers in the back of the teachers' edition of the textbook.

The opening is amusing. Behar tells us how Bre-X vice chairman John Felderhof explained the geology of the (fictitious) deposit to him, that a volcano had essentially "collapsed back onto itself" three million years before, which had created a massive buildup of pressure, which had created the wonderful deposit.

"He drew a diagram. It made sense. After all, he was on his eighth beer of the evening; I was on my fourth."

Wouldn't that make more sense as an explanation of a diamond deposit that as an explanation of a gold deposit? After all, gold is an element (like carbon). Gold is still gold whether it has been under pressure over geological ages or not -- carbon only becomes a diamond under pressure. I think I would have needed more than four beers to make that story plausible. Still, I have proven gullible in my own way, so I can't sit in judgment of Behar.

Although I don't know how it is with volcanoes, I'm sure that salted-mine frauds are bound to collapse into themselves sooner or later. The timing of that event is important, though, and the sooner the better. The longer a fraud goes on, the more it intertwines itself with legitimate businesses, and the more innocent victims there are when everything implodes. In the case of Bre-X, the government of Indonesia has to take a bow (I say this despite being an avowed anarchist) -- for Indonesia insisted that it would not leave the site to be exploited solely by Bre-X. It insisted on a partner, involving Freeport-McMoran Copper & Gold, which then had to do its own tests.

This led to another awkward moment that Behar relates in his story. During his visit to Indonesia, he heard that Freeport was coming into the picture. He naively thought it was quite a coup for Bre-X -- that they'd be thrilled.

"In one of my last meetings in Jakarta with Felderhof, de Guzman walked in. I rose and slapped him on the back, congratulating him on Freeport's emerging as Bre-X's new partner. He should have been thrilled. Instead, he was stone cold. Grim. Icy. He didn't even look at me. It was clear he wanted to talk to Felderhof alone."

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