Bre-X #1: the March 1997 P.D.A. Convention

In 1996, Bre-X, a speculative exploration company, claimed to have found the biggest gold discovery in the history of the world. At the 1997 Prospectors and Developers Association Convention held between March 10-16, 1997 in Toronto, John Felderhof, Vice President of Bre-X, received an Award as Man of the Year; I’m pretty sure that Michael de Guzman of Bre-X received an award as well. I attended the convention and, in retrospect, the most striking aspect of the award was the tremendous pride that both men took in this recognition by their peers. On March 19, 1997, de Guzman "jumped" from an airplane in Indonesia – a harsh form of peer review. Or maybe he arranged his disappearance. Felderhof had previously re-located to the Cayman Islands, which has no extradition treaties with Canada or the U.S. and is considered unlikely to appear at the various legal proceedings in which he is involved.

March 1997 Prospectors and Developers Convention

In 1997, Bre-X, a speculative mineral exploration company in Canada, seemed to have discovered the biggest gold mine in the history of the world in Indonesia. It became a fever. Some people mortgaged their houses to buy the stock. Housewives and taxi-drivers all wanted to own the stock. Usually that’s a time to sell stocks (regardless of the merits of the company). It fell apart in March 1997. Here’s a short synopsis of the unraveling (wikipedia):

The fraud began to unravel on March 19, 1997 when Filipino Bre-X geologist Michael de Guzman jumped to his death (or was pushed) from a helicopter in Indonesia. His body was found four days later in the jungle, mostly eaten by animals and identified from molars and a thumbprint.

On March 26 the American firm Freeport-McMoRan, a prospective partner in developing Busang, announced that its own due-diligence core samples showed "insignificant amounts of gold". A frenzied sell-off of shares ensued and Suharto postponed signing the mining deal.

Bre-X demanded more reviews and commissioned a review of the test drilling. Results were not favorable to them and on April 1 Bre-X refused to comment. David Walsh blamed the whole affair on web "ghost writers" who had spread rumors on the Internet and damaged the company’s reputation. Canadian gold analyst Egizio Bianchini considered the rumors "preposterous".

A third-party independent company, Strathcona Minerals, was brought in to make its own analysis. They published their results on May 4: the Busang ore samples had been salted with gold dust. The lab’s tests even showed that the gold had been shaved off gold jewelry. Trading in Bre-X was soon suspended on the TSX and the Nasdaq and the company filed for bankruptcy protection.

The collapse of Bre-X was like a tsunami for people in the gold exploration business. The frenzied sell-off didn’t just affect Bre-X: investors fled the sector and every exploration company was affected to one degree or another.

I have a little personal reminiscence about this, which I’ll tie into climate issues on another occasion.

It starts with a convention. I can’t say the word "convention" without a short digression. As someone with business experience, I am amazed at the number of conferences attended by climate scientists – which are usually not in places like Timmins or Kirkland Lake. For most of my career, I went to one convention a year – the Prospectors and Developers Association (PDA) convention in Toronto, the largest such convention for hard-rock mineral exploration companies, especially speculative ("junior") companies. It is nearly always held, by coincidence, during the March school break in Ontario. (Thus instead of the convention being an excuse to go somewhere sunny, it has been the opposite: it stopped us from going south in school break.) Enough digression.

The March 1997 PDA was held on March 10-16, 1997, when Bre-X was still so-to-speak flying high. John Felderhof was honored as Man of the Year at the convention: see this notice in the Northern Miner, a trade journal: PDAC honors Felderhof as Man of the Year. I’m pretty sure that Michael de Guzman received an award as well. Both were at the convention to receive their awards. They walked around as though they were kings of the world, inflated by the admiring recognition of their peers. Given that de Guzman had organized and directed the biggest salting operation in the history of mining, you would think that he would have been a little embarrassed by the public honors, but quite the opposite. Human nature is a funny thing.

Literally, a couple of days later, as noted above, de Guzman was reported to have "jumped" out of a military airplane in Indonesia. Subsequently, there has been much speculation about what happened to Guzman (if anything). Was his jump "assisted" by some of the people on the plane? After the fraud was proven, without de Guzman, no one seemed to be able to connect the operations at the salting laboratory to potentially interested parties. It never seemed to me that the Indonesian government took a great deal of interest in getting to the bottom of the story. Or did de Guzman simply pretend to disappear? Maybe he’s living somewhere under an assumed identity. In the aftermath, it turned out that de Guzman had 4 wives in different countries, all unknown to one another. Maybe he had an exit strategy after all.

Felderhof had re-located well in advance to the Cayman Islands, which had no extradition treaty with Canada. I think that there is still some process concerning him at the Ontario Securities Commission, but I haven’t checked up.

I’ll reflect a little more on Bre-X on another occasion.


  1. Louis Hissink
    Posted Feb 6, 2005 at 7:14 AM | Permalink

    SM has made a totally pertinent point here. Mann et all, in their methodoly, would fail in terms of the Australiajn JORC standards.

    Significantly, it took a miner to recognise the specious nature of the Hockey Stick Graph.

    Equally, I also looked at this Hockey Stick Graph, and wondered about its robustness.

  2. DavidC
    Posted Mar 28, 2005 at 4:03 AM | Permalink

    Correction is due here. Felderhof did appear in Toronto at the OSC court hearing in February 2005, saying he wanted to clear his name.

  3. TCO
    Posted Sep 11, 2005 at 4:03 PM | Permalink

    And you want the scientist to be more like Canadian mineral exploration securities? Sheesh. those things are noteworthy for booshwa. And the CA laws for not being that strict on disclosure.

  4. Steve McIntyre
    Posted Sep 11, 2005 at 5:10 PM | Permalink

    TCO, you’re missing the nuance. When I started into the climate field, I heard lots of people complaining and whining about IPCC disclosure and bias. So I thought – if there’s no objective standard of disclosure, then nobody has any real standards for complaint. Since IPCC scientific assessments are somewhat sui generis, how could you get traction for an accusaiton of bias?

    So my simple point was this: 1)there’s lots of experience in what is and isn’t proper disclsoure in mining prospectuses; 2) no one’s ever argued that disclosure applicable to mining promoters shouldn’t be at least a MINIMUM standard to appraise IPCC (they claim much better than that with their stadiums of reviewers); 3) does IPCC or the important underlying qualifying reports meet “full true and plain disclosure” standards – which require the disclosure of material adverse results.

    By this simple standard, the nondisclosure of the R2 and other failed statistics, the nondisclosure of the CENSORED results, the misrepresentation of robustness to presence/absence of dendro indicators and the misrepresentation of the Gaspe series would all raise eyebroes.

    Academics don’r seem to me to have a clue about the exact nature of “full true and plain disclosure” obligations as they apply in securites, but the Barton Committee understood exactly and asked these very questions.

    I’m not saying that promoters don’t play fast and loose and take things to the limit, but the existence of the requirement gives investors and regulatorss some traction.

    The Barton committee

  5. TCO
    Posted Sep 11, 2005 at 5:32 PM | Permalink

    Just like teasing you. You Canadian, you.

    Did you write any of those shaky prospectuses? 😉

    P.s. you’re still not going to get anywhere telling the scientists that they need to imitate capital raising prospectuses. And there are plenty of ideals in science to appeal to anyhow. no need to cite such a foreign thing to them…

  6. Steve McIntyre
    Posted Sep 11, 2005 at 6:02 PM | Permalink

    I’ve looked for similar rules within science and the rules regarding falsification are very similar to full, true and plain disclosure. “Falsification” within codes of scientific conduct uses the term as it is understood legally – which includes material omissions i.e. a failure to disclose adverse information. Can you explain to me why the MBH omissions of the R2 and omission of the calculations in the CENSORED directory are not “falsification” as understood in scientific codes of conduct?

  7. TCO
    Posted Sep 11, 2005 at 6:20 PM | Permalink

    sentence 1: agreed. that was my point.
    sentence 2: ok. I’d even say that science should be at a higher “spirit of the law” standard.
    sentence 3: why me? I think they’re scandalous. My point IS THAT they should be indicted on the basis of scientific ethics.


  8. Steve McIntyre
    Posted Sep 11, 2005 at 6:57 PM | Permalink

    You’d think that one of the learned societies that’s hectoring Barton might volunteer to report on this for Barton. If they want to be self-governing, then they have to self-govern. If they don’t self-govern, then someone will do it for them.

  9. TCO
    Posted Sep 15, 2005 at 9:32 PM | Permalink

    I got no problem with that. My point stands that you will get further with the Pope by appealing to Benedictine ideals than Lutheran ones (even if they are identical in content).

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  1. […] evidence of this ongoing interest, a reflection on Bre-X was one of the very first Climate Audit posts (Feb 6, 2005). I observed that Felderhof and de Guzman were lionized at the 1997 PDA convention […]

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