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It was just after 3 p.m. on a slow, muggy Friday afternoon in late August, 1996. In the vast and largely deserted Globe and Mail newsroom in Toronto, Douglas Goold's phone rang, and the newspaper's financial markets columnist picked it up, to hear a conspiratorial voice. "Bre-X now has a market capitalization of more than $5-billion and is up for the renewal of its exploration permit," the caller whispered. "The company already knows it hasn't got the permit, because it has been canceled by the corrupt Indonesian government." The caller then offered the phone number of one of the most prominent members of Canada's business community, who had agreed to provide details first thing Monday morning.
This was devastating news. Cinderella, it seemed, was not going to the ball after all. And the fairy tale of Bre-X was not going to have a happy ending. Could this be possible? If so, it defied the traditional plot line. From the start, the Bre-X story had been the perfect fairy tale. Although the tiny Calgary exploration company had no revenues or profits, it had become one of the most successful stock market plays in Canadian history. Shares had skyrocketed to $240 (on a pre-split basis) by that summer from pennies in 1994, creating overnight millionaires out of ordinary investors and gold rush fever reminiscent of the Klondike of the 1890s. Thanks to the investment research of a single loans officer at the local credit union, one in every fifty residents in St. Paul, Alberta, a remote town of 5,000 people, owned shares in Bre-X. Many of them became millionaires, but some families were feuding because some family members had been let in on the hot tip and others had not. Although no one in Indonesia, Canada, or elsewhere doubted that the gold was in the ground, Bre-X still had to navigate the treacherous shoals of the Indonesian bureaucracy. On July 25, the company's exploration permit was set to expire, and would have to be renewed. But the big prize, which had so far proved elusive, was the final signing of Contracts of Works that would give the company clear title to the properties.
The Monday morning phone call to the well-placed source shattered Cinderella's glass slipper. "Here is my understanding," the source began almost inaudibly. "Bre-X is real, as far as the gold reserves and quantity is concerned. But what isn't real is what it will cost the company to get its interest retained. Walsh was told by the government that he has to give up a very significant interest in order to get the work permit. And the work permit is not something symbolic; it gives you the right to the property. Without the work permit, you own nothing... They are putting pressure on the company now, and one of the pressures is that they did not renew their exploration permit for the southeastern zone, the prolific zone where all the gold is.
"You have to understand how the government is looking at it. Here is a bunch of guys who put up very little money and their company has a market capitalization of $5- billion. . . . When the government told them [Bre-X executives] about the cancellation [of the permit], they got drunk and were pretty nasty. So why does the government have to give Bre-X a $5-billion gift, for the little money it put up? Bre-X has to give up a good chunk of it. That means major partnerships or joint ventures, or the government telling them who should be their partner, and the terms.
"But the government can't do this outright," the informant continued. "And it can't do it in a very brutal form, because it doesn't want to alienate foreign investors. But my feeling is the company is not coming out [with the news]. There were nine analysts in Busang last week and they all wrote reports. They all basically say what a great ore body it is -- and it is. But it does not explain what it takes to convert that into ownership.
"This is the most corrupt entity in the world. ... But when you are talking at this scale, then Suharto wants to be involved."
These were stunning revelations. What the source said about Bre-X and its problems turned out to be uncannily accurate, apart from the view -- which was then shared by everyone -- that the gold was real. If anyone at this stage had taken a step back from the story, he or she would have realized that it indeed was too good to be true.
It was difficult for Goold and his Globe colleagues to know how to proceed with the tantalizing revelations the source had provided. Phoning the company without any hard evidence would give Bre-X the chance to deny anything was amiss, or to downplay the cancellation of the permit. It would also be difficult to get information out of an authoritarian government on the other side of the planet. Just when the trail had been getting cold, a second key source had faxed critical documents, in Indonesian and English, to The Globe and Mail's veteran mining reporter, Allan Robinson. The document that turned an intriguing lead into hard evidence, and framed the story for months to come, was only three brief paragraphs long. It was a letter dated Aug. 15 "for the attention of" the director of PT Askatindo Karya Mineral, Bre-X's local partner in the southeast zone of the Busang property -- the zone thought to contain most of the gold. The bland, bureaucratic text that appeared above the signature and seal of Kuntoro Mangkusubroto, the dapper, Stanford-educated director general for mines, disguised the letter's formidable punch. The letter read:
"1. Due to a pending administrative problem with your partner (Bre-X), we with regret would like to inform you that we have to cancel your SIPP (preliminary approval letter for exploration).
2. Your deposit of $100,000 (U.S.) will be returned to your account and also your fee of $1,135.59.
3. With issuance of this letter we declared that our letter number 1911/2012/DJP/96 (extending the exploration approval) dated July 25, 1996 has never been issued."
What was effectively a death sentence ended, rather ludicrously, "Thank you for your co-operation."
After an initial telephone conversation with Jean Anes, Indonesia's vice-consul for investments in Toronto, The Globe faxed a series of questions to him, enclosing copies of the documents to prove that the paper had access to secret information. "We plan to publish a story on this subject within the next day or so," the fax warned, in order to force a quick response. Surprisingly, two days later Anes faxed full, written answers from the mines ministry in Jakarta, basically confirming what the paper had learned.
The government said it canceled the exploration permit because of a complaint against Bre-X by PT Kreung Gasui, one of its two Indonesian partners. Furthermore, Bre- X "had broken the Indonesian rules," Anes explained, by failing to get the government's permission before acquiring Busang's central zone from its previous offshore owner in 1993.
Not mentioned in the fax was the fact that Bre-X had also broken the rules by aggressively drilling on its properties before it had full title. The Calgary company had also upset Indonesian mining officials by relentlessly promoting its drill results in Canada before the ministry in Jakarta even knew about them.
"I feel sorry for Bre-X shareholders," the affable Jean Anes offered as he dispatched the documents at 3:33 on the afternoon of Oct. 3. As indeed he should have. The story that appeared the next day across the top of the front page of the Report on Business revealed for the first time the formidable roadblocks that Bre-X faced. The story contained a chipper comment from Walsh that "positive discussions" with the Indonesian government were continuing.
The news led to a four-hour halt in trading of Bre-X shares on the Toronto Stock Exchange. At 11:39 that morning, Bre-X issued a press release in response to the story, which it complained contained "incomplete" information. But it did not say the story was inaccurate.
When the stock reopened, a million shares changed hands in the first five frantic minutes of trading, as spooked investors erased $510-million from the value of the company. By the end of the day, they had traded a whopping 5.8 million shares. Though more money would be lost over the following weeks, the company's legions of true believers remained just that -- true believers.
The news was no big deal, analysts argued. And lawsuits were to be expected, given the size of the find. After all, that is what had happened with Diamond Fields Resources Inc. of Vancouver, the company run by free-wheeling entrepreneur Robert Friedland that had discovered the largest nickel deposit in history at Voisey's Bay in Labrador. Bre-X's many supporters loved to compare their story to that of Diamond Fields, whose stock had skyrocketed on the basis of the massive find, once investors had overcome their skepticism about its size. Friedland himself realized that the success of Diamond Fields helped to make the Bre-X story believable. As he explained in a March, 1997, interview in his spacious office overlooking the skyline in Singapore, "Once having willingly suspended disbelief, it became a lot easier for people to believe that lightning could strike twice."
Throughout 1996, the mining community and analysts had been reassuring about Bre-X at every twist and turn. Few came close, however, to the gloss the company put on its own discoveries. "It's possible that the Alberta Stock exchange should build a statue to David Walsh and put it in front of its front door," director Paul Kavanagh said in February. More disarming was the sensible-shoes advice to investors from David Walsh in an interview with the Calgary Herald that same month: "You've got to do your due diligence checking. You've got to look for a company with management, a technical team, money in the bank and a decent property."
Walsh was, of course, right. The problem was, Bre-X was not one of those companies.
Graham Farquharson practically grew up underground. His father was a mining engineer in Timmins and he took his son down into the mines when the boy was only a few years old. By age nineteen, Farquharson was working in a gold mine; at twenty-four, he had a mining engineering degree from the University of Alberta. Five years later, in 1969, he added an MBA from Queen's University in Kingston, Ont. Over the next three decades, he worked as a consultant for mines around the globe, including pioneering work on mines in the high Arctic.
Like many specialized professions, the upper ranks of mining executives in Canada make a relatively small club, in which everyone important knows everyone else. So it was no surprise for Farquharson to get a call at 3:30 on Wednesday, March 19, 1997, from Bryan Coates, Bre-X's corporate controller.
Coates's request was something of a surprise. The Bre-X executive phoned from the Toronto office of Bre-X's law firm, Bennett Jones Verchere. "Bryan asked if I could come over and see them, soon," Farquharson said. Curious, he grabbed a blazer and headed out the door. A few minutes later he was in First Canadian Place, sitting with Coates in the law firm's main meeting room, along with two lawyers, John Sabine and Mike Melanson, and Rollie Francisco, Bre-X's executive vice-president and chief financial officer.
Francisco took control of the meeting. Results from Freeport McMoRan's initial Busang tests had just come in. An angry Jim Bob Moffett had shouted the news over the long-distance lines and his geologists had also given their prospective partners at Bre-X an earful. In four holes, each drilled just 1.5 metres from holes where Bre-X struck it rich, Freeport had come up empty. No gold. And, oh yes, Bre-X geologist Michael de Guzman was dead in what looked like a suicide. Was Strathcona free to figure out what was going on?
Yes, said Farquharson, Strathcona was free. "What we had in mind was a short visit, two or three days, that would see us talk to a few people, visit the site and write up a report," said Farquharson. He would be away for almost a month.
In that first meeting, it was Coates who raised the possibility of fraud. He asked Farquharson if tampering with core samples could explain the discrepancy between the Freeport and Bre-X results. "I told Bryan I didn't believe it was possible," Farquharson remembers. The reply drew on thirty-eight years of mining experience in which he had seen a half-dozen examples of salting. The frauds were always small scale and relatively easy to detect. Bre-X was a big company with a huge following in mining and financial circles and it had tested thousands of core samples over three years of drilling. How could it be a scam?
The first stop in Jakarta was Bre-X's offices, run by Greg MacDonald, a young Canadian geologist. It was here that Farquharson got his first taste of John Felderhof. Bre-X's chief geologist phoned from Jakarta's Shangri-La hotel. He was angry at being questioned by Freeport, furious at the arrival of the Strathcona team, and annoyed at head office in Calgary for imposing all these outsiders on him. It was not an endearing first impression.
Farquharson and his team went to the Regent Hotel, intentionally steering clear of Felderhof and other Bre-X executives who might influence their investigation. At the Bre- X office, Farquharson had met with local officials from the geological consulting firm Kilborn, which had verified Bre-X's drilling results and signed off on estimates of a 71- million-ounce reserve. Doug MacIntosh, an investment banker with J.P. Morgan who was working for Bre-X, also gave the Strathcona team something to read.
MacIntosh had the assay results from the four Freeport holes tucked in his briefcase. He handed them over. "It was the first hard numbers we'd seen. We took everything back to the hotel and worked until after midnight," said Farquharson, who had finished a long and tiring flight the previous day. "We quickly picked up on a number of red flags. We started to become concerned that there was a real problem."
The next morning, Tuesday, March 25, Freeport's two top geologists in Indonesia -- David Potter and Steve Van Nort, who ran the tests at Busang -- arrived at Farquharson's hotel. More than any other briefing, this session signalled the end of Bre- X's fairy-tale run. "I admired the way Potter and Van Nort did it. We didn't know what to expect, they could have been quite hostile," Farquharson recalled. "They didn't imply there was any hanky-panky. They said there must be gold somewhere, but they couldn't find it.
After lunch and a long discussion with his colleagues, Farquharson sat down with Kavanagh and MacIntosh. His tone was grim. He explained that Strathcona suspected a major problem, most likely tampering, and that its findings should be made public. Until this point, there had been only rumours and an Indonesian newspaper article on March 21 that suggested Freeport hadn't found enough gold to justify a mine. Farquharson wanted to confirm that rumour and tell the world he was quite certain there was no gold.
If Strathcona dropped this bombshell, everyone in the room understood what would follow. Bre-X was Busang. If the deposit was worthless, so was the company. Kavanagh objected strenuously. He tried to argue that the consultant was jumping to conclusions and should visit Busang before making any concerns public. The Bre-X director was overruled. "We didn't want to have widows buying the stock while we were sitting on this kind of news," Farquharson said. "I explained that I thought we were going to give a very negative report, and we better shut down the stock." It was late afternoon in Jakarta, twelve time zones ahead of Toronto.
At 5:30 on the morning of March 26, Rollie Francisco got a multi-billion-dollar wake- up call. He'd told Farquharson to call any time, day or night, and was taken at his word. Now, lying in bed at his home in a Toronto suburb, a groggy Francisco was astounded by what he heard from the other side of the world. "I told him the initial indications were not good. I told him I didn't think there was any gold," Farquharson said. "He kept saying, 'I can't believe it, are you sure?' At one point, he said the company had been nothing but trouble since the day he'd joined.
Clearly shaken, Francisco told Farquharson to do whatever was necessary.
Farquharson then called Toronto and got his wife out of bed. For eighteen years, she had been his secretary at Strathcona. She knew how to take dictation and she could be counted on to keep Bre-X's dark secret in the family for a few hours. "I told her she was about to write the most significant letter of her career," Farquharson recalled. "I told my wife she might want to take careful notes. I knew this one phone call was going to cost the company billions."
Farquharson dictated a two-page memo that described what Strathcona had found and what they intended to do next in Indonesia. Half-way through the letter was the line that spelled Bre-X's doom. "Based on the work done by Freeport and our own review and observations to date," Farquharson dictated, "there appears to be a strong possibility that the potential gold resources of the Busang property have been overstated because of invalid samples and assaying."
Farquharson's wife drove to the Strathcona office, typed the letter, and faxed a copy to Jakarta, where her husband was standing over the fax machine at the Regent Hotel, waiting to check the spelling and contents of a note that would close down forever a company then valued at $3-billion. By 9:00 in the morning, Bre-X's lawyers in Toronto had a copy of the letter and had asked the TSE to halt trading in the stock. Strathcona's letter was sent to Calgary, where a stunned David Walsh and equally bewildered colleagues read it, then prepared a brief press release. At 10:30, the news went out.
David Walsh hit the stock market with a one-two punch. Early on March 26, he faxed the Ontario Securities Commission and the Toronto Stock Exchange a terse, three- paragraph note on what Bre-X was hearing from Indonesia. Shortly after, he made the note public. Walsh said Strathcona found that "there appears to be a strong possibility that the potential gold resources on the Busang project in East Kalimantan, Indonesia have been overstated because of invalid samples and assaying of those samples." He added that Bre-X had hired Strathcona to review its own drilling and the product of Freeport's due diligence.
The TSE kept Bre-X from trading right through Wednesday to give time for this devastating news to sink in. Walsh said the company would soon announce more details. The next day, he unleashed the second shot in the form of even more damning information. Bre-X detailed Freeport's drilling and explained the problems. Freeport's assays, Walsh stated, "have indicated insignificant amounts of gold" in samples drilled right next to Bre-X's holes. In addition, he said Freeport geologists "noticed visual differences in gold particles contained in samples from core holes drilled by Freeport and core holes drilled by Bre-X."
The reference to visual differences in the grains tipped off anyone who understood mining to the strong possibility of a salt job.
The CEO took to the steps in front of Bre-X's head office to explain his case to a throng of reporters. Not surprisingly, he looked dreadful; his face was puffed and pasty, and he slumped as he spoke. "Like all the other trials and tribulations that we've gone through since discovering this project, we'll be exonerated and the property will stand as we've indicated," Walsh announced. "I talked to John Felderhof in Jakarta this morning, who just came back from Busang, and he's of the same opinion. What's going on here is just inconceivable -- boggles the mind."
Walsh finished up by addressing the question that was on everyone's mind: was Busang a fraud? "It's physically impossible in our mind that the core could have been tampered with," Walsh asserted. "You would have to have an army of people involved."
Knowing the market would wreak havoc on his company's stock price, Walsh engaged in a frantic but ultimately fruitless phone campaign with TSE officials to keep the stock halted until Strathcona completed its work. He took the issue all the way to Rowland Fleming, the exchange's chief executive officer. It was a brief conversation. Fleming, who prides himself on being tough, told Walsh the matter was "not up for discussion."
On Thursday, March 27, at 3:00 p.m., the TSE opened the gates to a flood of orders to sell Bre-X. In the first trade, the stock dropped to $2.50: it last traded at $15.80 before the halt went into effect on Wednesday. By the end of the day, Bre-X had lost close to $3- billion in market value.
Late in the evening, Farquharson was alone in his hotel room with a chance to reflect on the news he had helped make that day. "I remember thinking, how can this be, could this really have happened, and how can so many other people not have seen this?" he said. "I don't want to give the impression we were that smart, though. We were armed with Freeport's results and we went in there looking for trouble." In the next few weeks, during twelve-hour shifts supervising drill rigs on Busang, Farquharson said he kept mulling over the same issue. How was the Busang fraud effected, and how did the whole world come to believe it?