Wall Street History

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Wall Street History

09/16/2005

Bre-X, Part I

A little over three weeks ago, I read a story from Asia concerning
a geologist by the name of Michael de Guzman. I had forgotten
him, but certainly not his former employer, Bre-X Minerals Ltd.

Mr. de Guzman, you see, had reportedly committed suicide back
on March 19, 1997. Around that time it had been determined
that a gigantic gold mine in Borneo that Bre-X owned with
others really didn’t contain 200 million ounces as the company
had been reporting. Instead, it would prove to be closer to zero.
Bre-X ended up being one of the largest stock swindles in
history.

Well, this past August, Genie de Guzman, one of Michael’s four
wives, as it turned out, spoke to Singapore’s Straits Times
newspaper in her first interview since her husband’s
disappearance. Michael, she said, is still alive. In fact, he
phoned her back in April 1997, just weeks after he supposedly
leaped to death from a helicopter at 600 feet. Leaving word with
their maid, he said Genie would find $200,000 in a Citibank
account, which sure enough was there.

“I realized that although he was still alive, I had to live my own
life,” Genie told the paper. She never heard from him again all
these years until this past February, when she received a fax from
Brazil informing her that another $25,000 had been deposited in
the account.

Back in 1996, Genie recalled, Michael de Guzman had been
summoned to a meeting with then Indonesian President Suharto.
Genie says her husband “realized he had a big problem on his
hands. Essentially, they wanted to take over the mine. He had
the impression they wanted it for free.”

Genie then claims a female Indonesian military officer visited
her after Michael’s 1997 disappearance and told Genie to shun
the press “for the good of the country” and her family. Mrs. de
Guzman now believes Michael will reemerge. “The longest any
secret should be kept is eight years,” she said.

And so by now you should be wondering, just what was Bre-X?
And why did de Guzman, as long suspected, perhaps fake his
death? Pull up a chair.

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The following early company history is from the archives of the
Canadian Broadcasting Corporation.

Bre-X was a small Calgary-based mining company. The “X”
stands for exploration. The “Bre” is derived from Bresea
Resources Ltd., Bre-X’s sister company, which had existed since
1984. The name Bresea was an amalgamation of Brett and Sean,
the names of founder David Walsh’s sons.

Walsh incorporated Bre-X Minerals Ltd. in 1989 and listed it on
the Alberta Stock Exchange. Shares opened at 30 cents (U.S.)
and generally fluctuated between 10 and 30 cents for four years.

Initially, Walsh operated Bre-X out of his basement, with wife
Jeannette helping out. The company suffered financially early
on and Walsh started his shareholder letter in 1991 with, “Yes,
we are still in business.” By 1992, Walsh had declared personal
bankruptcy, having wracked up debts of $60,000 on his credit
cards.

Then in 1993, Walsh hooked up with an old acquaintance,
Dutch-born geologist John Felderhof who was well known in the
mining community. Walsh asked for Felderhof’s help in
selecting some land in Indonesia that might be worth exploring
for minerals and Felderhof suggested Bre-X acquire the rights to
part of Busang (in Kalimantan, Borneo) for $80,000. Felderhof
joined the company and focused on the search for all things
precious, while Walsh promoted the stock.

Busang spans 850,000 acres and Bre-X held the rights to over
half of that, 475,000 acres. It’s basically jungle.

In 1994, Felderhof and chief geologist Michael de Guzman, who
had a rather checkered past in the industry, began to uncover
gold deposits in Busang. Walsh issued press releases to this
effect and by the end of the year, Bre-X shares were trading at
US$2.80. Word was spreading and on Nov. 24, 1994, Dow
Jones reported, “Bre-X Minerals Ltd. says recent drilling at its
properties in Indonesia will soon lead to gold reserves of more
than 2 million ounces.” This sizable estimate was about to grow
exponentially.

In a May 1997 story for Maclean’s, Jennifer Wells reports on a
conversation she had had with Felderhof in February of ‘97.

“When did you know you had hit the motherlode?” I asked.

“When we drilled line 59, three holes 150 meters apart,” he said.
“That’s when I called David (Walsh) up and said, ‘We’ve got a
monster by the tail.’”

Wells:

“Drill line 59. That was back in 1995, when work was gearing
up at Busang. Through the fall of that year, Bre-X’s crew of
Filipino geologists was working flat out. Bobby Ramirez was
logging core samples as fast as he could. Under chief geologist

Michael de Guzman’s orders, there was a mad rush to get the
core downriver to Samarinda. Overseeing operations, Cesar
Puspos would spend weeks at a time there, staying up late into
the night, working on his personal computer, which he never let
anyone borrow. ‘There were bags and bags of core there,’ recalls
a Canadian geologist who worked for a time at Busang. He
accepted the explanation that there was a sampling backup 100
km away at the assay lab in Balikpapan. There wasn’t.”

[The above proved to be a key to the story. As Wells writes,
Felderhof opted to “have pieces of whole core crushed for
sampling. It is common practice in the mining industry to split
the core, crush half, and retain the other half. An acquiring
company, a Barrick Gold or a Placer Dome, would then have
crushed and assayed the rest of the core, to be checked against
the initial results. Felderhof’s explanation, that splitting the core
meant losing too much of the gold, seems not to have alarmed
any of the analysts.”]

1995 proved to be the year that shares in Bre-X first took off in
earnest. Financial advisors, brokers, and journalists all jumped
on the story as estimates of the Busang find grew from the initial
2 million ounces to 50 million and later 200 million. By October
‘95, that little 30 cent stock from 1993 had soared to $39.50.
And it would keep going up from there.

At the Prospectors and Developers convention in March, 1996,
de Guzman gave a speech to an anxious Toronto mining crowd.
In discussing the potential for Busang, he said, “The resource
calculation there shows our internal estimate as against drill-
based calculations by Kilborn.”

Ah yes, Kilborn Engineering, a highly respected outfit that had
been retained by Bre-X. Michael de Guzman’s presentation and
others that followed led investors and analysts to believe that
Kilborn was independently auditing Bre-X’s results. “The
Kilborn figures come up to be, this time, better than we were,”
said de Guzman to that Toronto audience. “Looks like I’m
sleeping a little bit on this one.” [Laughter]

A few weeks later, CEO David Walsh issued a release following
a Financial Post story that raised technical questions about the
validity of Bre-X’s assay methods. In it Walsh quoted Felderhof:

“Metallurgical test work conducted by internationally recognized
Kilborn Engineering, as part of their recently completed pre-
feasibility study on Busang, resulted in their determining that
Bre-X’s current and previously reported gold assay results are in
fact understated by as much as 12.9 percent.”

Phew. The investment community relaxed. Kilborn later
acknowledged, however, that its job was only to use Bre-X’s
data in providing calculations. It did not drill its own samples.

On April 23, 1996, Bre-X listed on the prestigious Toronto Stock
Exchange and opened at a staggering $184 per share. By the end
of the month it was $200. It would peak in Sept. 1996 at $280.
[The $280 is a pre-split calculation 10-for-one in mid-’96.
Thus $28, post-split, is the high.] Countless shareholders, many
from the small towns surrounding company headquarters in
Calgary, had become millionaires “Bre-X millionaires.” It
only took an astute broker or two to get the word out and if you
heard your neighbor had just made a killing, well, you sure as
heck had to get your piece of the pie as well.

Lehman Brothers analyst Daniel McConvey wrote in a report
following a site visit in the summer of 1996, “If our aggressive
development assumptions come close to future reality, in five
years Busang may be the largest-producing gold mine in the
world. Only uncertainty over tenure disputes, concern over
politics and the reaction of the major mining companies to the
current project and investment risks put a lid on our target price.
(Busang) was not only a geologist’s dream but a metallurgical
dream.”

McConvey and others simply accepted Felderhof and de
Guzman’s methods of sampling.

The story intensified. From the Wall Street Journal, Nov. 25,
1996:

“Bre-X Minerals Ltd. said it could face more disputes over the
ownership of its large gold deposit in Indonesia, amid
speculation that a major mining company will soon offer to
acquire all or part of Bre-X in a multi-billion dollar transaction.

“Bre-X announced an alliance a few weeks ago with a
company associated with Panutan Group, an Indonesian
conglomerate controlled by the eldest son of Indonesian
President Suharto. That announcement triggered a run-up of
Bre-X’s share price, as investors concluded that the alliance
would fend off claims by corporate partners of Bre-X that they
own a larger piece of the deposit than was expected, and pave the
way for required Indonesian mining permits .

“Lehman Brothers Inc. mining analyst Daniel McConvey said
last Thursday in a note to clients that an offer by a major mining
company for Bre-X ‘may happen in the very near future with the
support of the Indonesian government.’”

Wall Street Journal, Dec. 4, 1996:

“Bre-X Minterals Ltd. said its Busang gold discovery in
Indonesia is bigger than previously thought, adding to concerns
that a possible sale of control of the deposit will be unfavorable
to Bre-X shareholders.

“Last week, Bre-X said it’s in talks to sell control of the deposit
to Toronto gold producer Barrick Gold Corp., under the direction
of the Indonesian government .

“Placer Dome Inc. said it’s seeking permission from the
Indonesian government to make a competing offer for Busang .

“Barrick maintains the Indonesian government wants Barrick to
develop Busang for its experience in developing mines. Barrick
hasn’t disclosed details about what it calls its ‘relationship’ with
a company controlled by a daughter of Indonesian President
Suharto. Analysts last month expected Bre-X to win the required
mining permits in Indonesia, after announcing a financial pact
with a son of President Suharto. But that deal has fallen apart,
and Bre-X still hasn’t won the permits .

“Bre-X shares have fallen sharply in the last few days, but
rebounded Tuesday to $13.78.” [Reminder, post-split.]

“Derek Webb, who manages shares of Bre-X and Barrick in a
few Chancellor LGT funds, said he’s concerned Barrick is using
its ‘musclepower and political connections’ to ‘steal’ control of
Busang. Barrick employs former U.S. President George Bush
and former Canadian Prime Minister Brian Mulroney as
advisers.”

We’re just heating up. The Bre-X story continues next week.

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Sources:

Agence France-Presse
South China Morning Post
The Straits Times
Canadian Broadcasting Corporation
Maclean’s
Wall Street Journal

Brian Trumbore

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