Falsification and misrepresentation taint Bre-X

The only gold at the Busang property in Kalimantan, Indonesia, was the gold someone put there.

With that conclusion, a technical audit on the exploration program at Busang administered the coup de grce to a project once touted as the largest gold find of the century. Bre-X Minerals (BXM-T) was found to have no mineral resource, and in short order Bre-X’s potential partners, Freeport McMoRan Copper & Gold (FCX-N) and Indonesian investment fund Nusantara Ampera Bhakti, announced they would withdraw from the Busang project.

Strathcona Mineral Services, the consulting firm hired by Bre-X for technical auditing of the Calgary company’s drill program, concluded that Busang’s Southeast zone was not a gold deposit at all, and that gold had been added to the samples whose assays formed the basis for previous estimates of the Busang resource.

Strathcona said it drew its conclusions “without reservation,” and that the assay results were “quite conclusive.”

When Bre-X shares opened on the Toronto Stock Exchange on May 6, the initial trade was at 6 cents. The stock closed at 8.5 cents after more than 50 million shares were traded. Volumes were also high on the Montreal and Alberta exchanges, though the National Association of Securities Dealers Automated Quotation (NASDAQ) in the U.S. maintained its halt on Bre-X.

In a stinging indictment of the Bre-X operation, Strathcona concluded that “the gold recovered in samples submitted by Bre-X has originated from a source other than the Southeast zone of the Busang property.” It went on to say that “falsification and misrepresentation of many thousands of samples” had been behind earlier estimates of the gold resource at Busang.

In the Busang cores, Strathcona found “only trace amounts of gold . . . there were no samples that gave gold values of economic interest.” The report’s summary said there was “virtually no possibility of an economic gold deposit in the Southeast Zone I.”

The report cleared Bre-X’s assayer, Indo Assay Laboratories of Balikpapan, Indonesia, of any suspicion of misconduct or incompetence. It said Indo Assay’s analytical work “has been of a good standard, and the gold values reported have reflected the gold in the samples delivered to the laboratory.” Strathcona also described Freeport’s work on the site as “very thorough and of a high professional standard.”

Strathcona recommended that exploration on the Busang property should stop, that cores, samples and documents from Busang should be placed under tight security, and that an investigation should be lauched to determine who salted the samples, and how it was done.

For the audit, Strathcona drilled six new test holes at Busang, all twins of earlier Bre-X holes. The consultant took samples using stringent measures to prevent tampering with the samples and took considerable pains to duplicate the drilling and sampling procedures Bre-X and Freeport had used. It did, however, cut cores in half with a diamond saw.

The interim report examined fire assay and cyanide-leach analyses from three laboratories, on a set of 175 core samples which Strathcona, using Bre-X’s own results, had selected “so as to provide the best chance of confirming the presence of gold.” Another 1,120 metres of core from Strathcona’s drill holes have yet to be assayed.

The highest gold assays that came from Strathcona’s cores were a fire-Assay figure of 0.3 gram gold per tonne and a cyanide-leach analysis of 0.16 gram.

Assays from the three laboratories (Indo Assay, Analabs of Perth, Australia, and Lakefield Research of Lakefield, Ont.) all matched well.

Strathcona said it would ensure that the analytical program is completed but added that it saw no reason to send the remaining samples to all three laboratories. The firm was also sure that assays of the rest of the core would yield the same results as the initial phase.

The firm’s principal, Graham Farquharson, even delivered an unintentional compliment to Busang’s salters. In the report’s covering letter, he said “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.” The Strathcona report blew away earlier speculation that the truth might lie in the “grey” area between Bre-X’s resource estimate (last pegged at 889 million tonnes grading 2.5 grams gold per tonne) and Freeport’s finding of “insignificant” gold values in the seven holes it drilled during its due diligence investigation. The grey-Area theory kept some investors in the stock because it offered promise of at least some recovery in Bre-X’s share price, which collapsed on March 27 when Freeport announced its results.

Bre-X’s chairman, David Walsh, said the company was “devastated” by Strathcona’s findings and that management shared “the shock and dismay [experienced by] our shareholders and others that the gold we thought we had at Busang now appears not to be there.” The company has retained accounting firm Price Waterhouse, investigators Forensic Investigative Associates, and an unidentified law firm to begin an inquiry into the salting fraud.

Strathcona has already said it would co-operate with the investigation.

In public statements, Walsh painted the company as a victim of the salting scam, telling the Calgary Sun that “the company and the shareholders have been victimized, and I have been victimized, and we have taken steps to ferret out the perpetrators.” He did not say why such steps were not taken last month, when Freeport first advised Bre-X that all was not well at Busang.

There was also no comment about why the company released “new” drilling results shortly before Strathcona’s report was due. Previous comments by Bre-X Vice-president Steven McAnulty had suggested that the company was waiting for Strathcona’s results before pronouncing on the project.

Now that Strathcona’s audit has concluded that gold was added to the samples before they reached the lab, much of the suspicion fastens on Bre-X’s sample preparation procedure, which bypassed core-splitting in favor of crushing the whole core. The procedure robbed investigators of the opportunity to confirm Bre-X’s assay results on uncrushed core.

Strathcona noted that the samples were held in a warehouse in Samarinda, down the Mahakam River from Busang. It was apparently usual practice for samples to be held for weeks, or even months, before sending them by truck to Indo Assay in Balikpapan. “We can only suggest,” says the report, “that somewhere en route, probably Samarinda, there has been a `laboratory’ or facilities established that have allowed very precise additions of the foreign gold that we and others before us have identified in the Bre-X samples delivered for assaying.”

Vice-chairman John Felderhof assisted in designing the procedure, and also insisted on continuing to use it in later discussions with Paul Kavanagh, a Bre-X director.

But in a statement sent to The Northern Miner through heavyweight law firm Heenan Blaikie, Felderhof said, “I personally believe that there are significant amounts of gold at Busang. I know I was not involved in a fraud.

I also find it very hard to believe that anyone on my staff was involved . .

. I believe that eventually our work and our deposit at Busang will be confirmed.”

Felderhof is currently at his home in the Cayman Islands. Extraditions from the British colony are an internal matter, and the Islands have no extradition treaty with Canada. An act permits the government, at its own discretion, to extradite persons wanted in Commonwealth countries.

The Sun also printed an accusation from an anonymous Bre-X employee that Busang project manager Michael de Guzman had directed the salting operation without Felderhof’s or Walsh’s knowledge. De Guzman disappeared after apparently leaping from a chartered helicopter on the way to the property March 19. A body was later recovered from the jungle and has been identified as de Guzman’s.

Jack Gell
er of the Ontario Securities Commission told The Miner that the OSC was continuing its investigation of possible disclousre and trading violations but that any evidence of fraud would be turned over to police. The Commercial Crime Unit of the Royal Canadian Mounted Police is investigating; William Hess of the Alberta Securities Commission said that ASC staff “have made sure they were aware of the Strathcona report.”

In Indonesia, the Minister of Mines and Energy, Ida Bagus Sudjana, told Reuters that the Indonesian government would also be reviewing the report and would “take action” against any breaches of Indonesian law. The Ministry also revoked contracts of work held by Bre-X affiliates Bresea Resources (BSR-M) and Bro-X Minerals (BXO-A).

The Nusantara Ampera Bhakti investment fund, which had agreed to hold a 25% interest in the Busang project, announced it would follow Freeport out of the agreement. There was no immediate comment from Bre-X’s other Indonesian partners, mineral exploration companies Askatindo Karya Mineral and Amsya Lyna.