Douglas Goold & Andrew Willis, The Bre-X fraud, McClelland & Stewart, 1997, ISBN 0771033346, Rrp Can$27.95.

Extracted from
THE GLOBE & MAIL

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.

Although no one in Indonesia, Canada, or elsewhere doubted that the gold was in the ground [at Busang, in Kalimantan], Bre-X still had to navigate the treacherous shoals of the Indonesian bureaucracy.

$5 billion gift

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. [Bre-X president] Walsh was told by the government that he has to give up a very significant interest in order to get the work permit....'

'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 capitalisation of $5-billion.... 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.'

'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 realised that it indeed was too good to be true....

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, [independent mineral consultants] 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.

Dark secret

At 5:30 on the morning of March 26, 1997, [Bre-X lawyer] 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.... 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.'

By 9:00 in the morning, Bre-X's lawyers in Toronto had a copy of the letter and had asked the Toronto Stock Exchange 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.

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.

This extract appeared in The Globe & Mail, 28 August 1997. Four other books are appearing on the Bre-X affair. A Price-Waterhouse study in October (commissioned by Bre-X) mostly blamed geologist Michael de Guzman for the fraud. Bre-X was expected to be declared bankrupt in November 1997.