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."

Mining frauds

I'm just thinking today, through a wayward stream of associations, of a couple of recent awe-inspiring mining frauds, both with a Canada connection.

Bre-X was the most spectacular mining swindle in history, bursting upon the world as it did during the 1990s bubble, and possessing before the furor died down the added drama of a fatal fall from a helicopter.

At one point, indeed, Bre-X was claiming the rights to 8% of the world's gold at a site in Busang, Indonesia. How much would you pay to own a share in a company with 8% of the planet's gold? That was the question they had investors asking themselves. And it was the wrong question. There was no gold at the site at all.

The moral of the story: ask the right questions!

Another story comes to mind today. CMKM Diamonds. As it happens, CMKM isn't a Canadian company, just as Bre-X was never an Indonesian company. CMKM is a US company, that over a four year period (2003-07) sold $200 million in stock to the public in the expectation that their capital would help exploit diamond wealth of Saskatchewan, Canada.

By the spring of 2007, CMKM was a penny stock company with, in essence, no assets and $558 in the cash drawer.

CMKM still exists, but it exists chiefly for the purpose of pursuing a lawsuit against its former insiders in the hope of acquiring some assets to distribute to those too trusting shareholders.

As to that fall from a helicopter I mentioned above. In May 1997, Michael de Guzman, a field geologist with Bre-X and someone who would have to have been in the thick of any salting of the rock cores, jumped to his death from a helicopter. Or maybe he fell. Or maybe he was pushed.

Or maybe he didn't die after all. A body was recovered, but never positively identified. In June 2005, one of his widows [there are four widows in all!] told reporters that he is still alive and living in Brazil, and had sent her a money order for $25,000.

The moral? who the heck knows!