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Wall Street History
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09/23/2005
Bre-X, Part II
We pick up our story on Bre-X, early 1997. Recall that at the
end of ’96, Bre-X was in discussions with Barrick Gold Corp.,
while Placer Dome was seeking permission from the Indonesian
government to make a competing offer for Bre-X’s Busang
property; what one Wall Street analyst said had the potential to
be the world’s largest gold deposit. Complicating matters was
the fact that under Indonesian law, while foreigners could drill
and develop mines, the actual permit could only be held by an
Indonesian citizen. So partnerships were the name of the game
and the government normally took 10 percent of the earnings.
President Suharto signed off on every deal.
From the Wall Street Journal, Jan. 15, 1997:
“Placer Dome Inc. offered to acquire Bre-X Minerals Ltd. in a
stock swap valued at $4.5 billion, in an attempt to thwart Barrick
Gold Corp.’s bid to buy control of Bre-X’s big Busang gold
discovery in Indonesia.
“The latest offer pits two of the world’s biggest gold producers in
a battle for control of what many describe as the biggest gold
discovery of the century. The winner would rival South Africa’s
gold-mining titans in terms of production.
“Placer Dome said it’s currently offering one share for every
share of Bre-X, subject to minor variations. Placer Dome
Tuesday closed at $20.625, off 75 cents, in New York Stock
Exchange composite trading, while Bre-X jumped $1.50, or
9.5%, to $17.25 on the Nasdaq. [Bre-X’s all-time high was $28,
post-split, Sept. ’96.]
“Bre-X said it will respond to Placer’s offer ‘in due course,’
and that its ‘highest priority remains providing the best return for
our shareholders, the Republic of Indonesia and the Indonesian
people.’”
Meanwhile, Barrick said Placer’s offer didn’t impact their joint-
agreement with Bre-X; one they continued to keep under wraps
while the parties worked out details with the Indonesian
government.
“Barrick had apparently locked up control of the Busang
property with behind-the-scenes maneuvering that won the
support of the Indonesian government. For example, former U.S.
President George Bush, acting as an adviser to Barrick, wrote
Indonesian President Suharto expressing ‘respect’ for Barrick,
Mr. Bush’s chief of staff confirms .
“(Placer’s) move underscores the high value that mining
companies attach to Busang, a high-grade gold deposit that
Placer Dome estimated would cost $1.7 billion to develop and
could produce three or four million ounces of gold a year. At
that rate, a mine at Busang would single-handedly produce more
than all but a few gold companies in the world.”
[Ed. Consolidation in the gold mining business was in full
bloom, back then. Newmont and Homestake were fighting for
control of Santa Fe Pacific Gold, to cite one notable example.]
Placer was rumored to be offering the Indonesian government a
40% interest.
Wall Street Journal, Feb. 18, 1997
“The brawl over who will develop Indonesia’s giant Busang gold
find has ended, with Bre-X Minerals Ltd. confirming it has
teamed up with Freeport McMoran Copper & Gold Inc. of the
U.S. and powerful Indonesian businessman Mohamad ‘Bob’
Hasan.
“A Bre-X statement Monday confirmed that the parties had
agreed to form a joint venture that will be 45%-owned by Bre-X,
15%-owned by Freeport, which will operate the new mine, and
40% by Indonesian interests, including 10% for the government
and 30% for two companies controlled by Mr. Hasan ‘and their
partners.’
“Bre-X said Freeport will provide $400 million, or 25%, of the
construction costs and $1.2 billion in additional funding.
“Also on Monday, Bre-X increased its estimate of Busang’s gold
reserves to nearly 71 million ounces from the 57-million-ounce
figure it announced in November. Many mining analysts believe
Busang, on the island of Borneo may hold more than 100
million ounces, which would make it one of the greatest gold
deposits ever found.
“With the starting lineup set for developing Busang, the next step
is formal Indonesian government endorsement, expected
Tuesday, of the deal that Mr. Hasan, President Suharto’s
confidant, has struck. Next will be due diligence on the planned
project by partners and bankers . [uh oh!]
“Although there is no immediate sign of any obstacles to the deal
as announced Monday, one mining analyst suggested that ‘we
haven’t heard the last’ from Busang’s two failed Canadian
suitors: Barrick Gold Corp. and Placer Dome Inc .
“In a statement Monday, Bre-X Chairman David G. Walsh paid
homage to Mr. Hasan for his role in setting up what Mr. Walsh
called a ‘great day for both Bre-X shareholders and the people of
Indonesia.’”
The following relies on Jennifer Wells’s report for the May 19,
1997 issue of Maclean’s.
On February 19, 1997, chairman Walsh and Bre-X geologist
John Felderhof, along with their two investment advisers from
J.P. Morgan in New York, held a conference call with analysts to
sell them on the Freeport deal.
“Morgan’s Doug McIntosh reviewed the economics of Busang,
the milling rate, the cash costs, the capital costs, all based on
Kilborn [Engineering’s] intermediate feasibility study. Felderhof
allowed as to how he was ‘comfortable’ with 200 million ounces
as a resource estimate for Busang. There was, he said, ‘lots of
blue sky.’ Felderhof went on to say that early discussions with
Freeport had gone smoothly. ‘The more they look into this, the
more pleased they are by the excellency of the data.’ The
company’s due diligence, he said, might take as little as 10
days.”
Well, this is kind of like watching a train wreck, isn’t it? And
the situation is about to change, drastically. Jennifer Wells
continues:
“Rather than being thrilled with the excellence of Bre-X’s
results, Freeport had become very nervous very early. ‘It was
clear to me after asking questions for two days that no one had
ever done an independent analysis of this project, and the Bre-X
people had controlled this project for three years and nobody had
been allowed to do independent drilling,’ [Freeport chairman
James] Moffett said There was no gold at the surface, no
‘geochem halos,’ no surface anomalies. When Freeport drilled
seven holes in the sweet spot of the southeast zone, there was
simply no gold at all.”
“On March 12, Moffett phoned Toronto, where Walsh and
Felderhof and [chief geologist Michael] de Guzman were
moving like royalty among the crowd at the Prospectors and
Developers convention. ‘I hated to interrupt their joy,’ said
Moffett ‘But I informed them that they needed to get somebody
back to the job site because we had run into difficulties.’ Walsh
was the first to take the call. ‘He started out by telling me that he
was a financial person and he didn’t understand all that stuff.’
Walsh put Felderhof on the line. Felderhof said there must be
some mistake, a mix-up. De Guzman was dispatched to the site.
‘It was almost a four-day wait,’ said Moffett. ‘Then, he didn’t
arrive at all.’”
We’ll finish the story of one of the greatest stock swindles in
history next week.
Sources for part II:
Wall Street Journal
Maclean’s
Canadian Broadcasting Corporation
Brian Trumbore
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