December 01, 2010
In the afternoon of March 26th, 1997, I was sitting in my office in Dowgate Hill watching the Bloomberg reports flash up when one announcement caught my eye. It read, “Freeport”McMoran report no significant traces of gold at Busang.” Across the desk from me, the famously impassive trader Brian Cope”who had seen many financial shenanigans in his long and illustrious city career”displayed the only trace of emotion I ever saw in the man.
“F”off. You”re “avin” a laugh!” he growled.
Bre-X immediately demanded fresh reviews and hired Strathcona Mineral Services to look at the project. By now, however, a frenzied sell-off of shares was underway. The company was heading for meltdown. Within 30 minutes it was finished.
In its audit, Strathcona concluded: “The magnitude of the tampering with core samples that we believe has occurred and resulting falsification of assay values at Busang is of a scale and over a period of time and with a precision that, to our knowledge, is without precedent in the history of mining anywhere in the world.”
Tampering with the samples or salting the hole are terms that turn gold company investors into gibbering wrecks. When you look at a gold mine, all you see is a patch of ground with an adit running into it. Everything else depends on faith, trust, professional advice, and what you believe exists hundreds of feet below you. The Bre-X debacle raised a multitude of questions, dragged famous names into disrepute, and caused others to be rebuked. Many junior miners who had looked to the Canadian markets to finance high-risk exploration found that the mechanism for such financing was damaged beyond immediate repair. Thousands were tangled in the Bre-X web’s sticky strands. As late as December 1996 Lehman Brothers were strongly recommending a buy on the “gold discovery of the century.” Some of the world’s biggest mining companies, such as Barrick Gold, Placer Dome, and Freeport-McMoran, were fighting for a piece of the action, as was Indonesian President Suharto and his family. Following Fidelity and Invesco Funds” examples, mutual fund investment managers were falling over themselves to buy the stock. Bre-X’s key financial advisor J.P. Morgan was still predicting up to 200 million ounces in February 1997 (a capitalization of $70 billion).
The incredible thing is that the Great and the Good were prepared to put their faith in drill results provided by a minuscule Calgary-based company that had never mined an ounce of gold in its life.
I bring up the Bre-X story now because the market for natural resources has recently been running fast and furious. I believe there is still strength in the market, but remember: “Be wary of Greeks bearing gifts,” and when your taxi driver starts telling you what to invest in, it is time to sell everything you own!
Daily updates with TM’s latest