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, “€œFreeport”€”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.

“€œF”€™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: “€œThe 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 “€œgold 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: “€œBe 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!



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