Our first case this week is the Bre-X Minerals case.
In April 1997, Bre-X Minerals, a Canadian company, was supposedly one of the most valuable companies in the world. Bre-X had reported the largest gold deposits ever discovered. It was hailed as the mining find of the century. The gold mine, located on a remote island in the East Kalimantan Province of Indonesia, supposedly had so much gold that the actual price of gold on the open market dropped significantly due to the anticipation of an increased gold supply. Within a few months, thousands of Canadians – big-time investors, pension and mutual funds, and many small investors, including hardware store owners and factory workers – got caught up in Bre-X fever. The company’s stock price shot from pennies to more than $250 per share before a 10-for-1 stock split was announced. Thousands of investors believed they were on the verge of becoming millionaires. The story took a sudden turn for the worse when Michael de Guzman, Bre-X’s chief geologist and one of only a handful of company insiders entrusted with the mine’s core samples, apparently committed suicide by jumping out the back of a helicopter.
The following is a description of the Bre-X Gold Scandal,
The search for a jungle ElDorado is over; the search for culprits in an astounding gold mine fraud has begun. Investigators opened investigations into how Bre-X Minerals, a tiny exploration company from Alberta, Canada, managed to convince countless experts and investors that a tract of land in Borneo contained the biggest gold find of the century.
After two years as a stock market superstar, Bre-X was suddenly a pariah after an independent consulting company reported that the Busang site was worthless. It said the sands of seemingly promising crushed rock core samples collected by Bre-X had been doctored with gold from elsewhere in a scam “without precedent in the history of mining.”
Partners in the Indonesian project promptly jumped ship The Indonesian government, which held a 10 percent stake vowed to punish whoever was responsible. New Orleans- based Freeport-McMoRan Copper & Gold—which first cast doubts on Busang’s value—said it was withdrawing from its planned partnership with Bre-X. The company that reported the fraud, Strathcona Mineral Services, did not attempt to fix blame for the tampering but offered to assist in subsequent investigations. Industryanalysts said it seemed clear that some senior Bre-X personnel were involved, but there was no consensus whether the culprits were Canadian-based executives, geologist in the field, or both. Mining analysts say only a small amount of gold—perhaps a few pounds—would have been enough to doctor the Bre-X samples to make them appear that the Busang’ mine was a world-class gold deposit. Bre-X’s president, David Walsh, who launched the Busang project from his Calgary basement while bankrupt in 1993, expressed shock at the evidence of tampering and said his company would conduct its own investigation. Walsh, 51, sold off some of his Bre-X shares last year, along with other senior company officials, who together reaped more than $56 million in profits. They have been targeted by at least eight class-action lawsuits in Canada and the United States, alleging that Bre-X executives misled share holders about Busang’s potential while selling off some their own shares.
We have a lot of questions we can discuss for this case. Let’s start with the questions below. Pick one or two of the questions below to respond to.
- Assume you are a financial analyst who works for a major brokerage company that is heavily invested in Bre-X Minerals.
In what ways would investigating management and directors help determine the value of Bre-X’s gold prospects?
In what ways would investigating the company’s relationships with other entities help determine the value of Bre-X’s gold prospects?
In what ways would investigating the organizations and its industry help determine the value of Bre-X’s gold prospects?
In what ways would investigating the financial results and operating characteristics help determine the value of Bre-X’s gold prospects?
- How were the gold industry and Canadian stock markets affected by this fraud?