Fool’s Gold: The rise and fall of Bre-X, from a $6bn mining giant to bankruptcy

The Bre-X mine site in Busang, Indonesia. Source: Mining Archive

Throughout the ages, gold has been revered, used to store wealth and to trade for goods and services. It has been sought after by immeasurable prospectors, through deserts and jungles and frozen wilderness. And it has been dug out of the ground by a wide range of characters, from individuals with a pick and shovel in the days of the Gold Rush to the modern mining conglomerates that process tonnes of ore to extract mere ounces of the metal.

But with the wealth that gold represents, there’s also been plenty of controversies and scandals throughout history. Among those, one stands out among all others: Bre-X Minerals.

A Canadian mining firm, trading as a worthless penny stock, that suddenly hit the big time with the supposed discovery of a massive gold deposit in Indonesia. From a low of 30 cents before the find in the early 90s, the share price hit $250 at the peak of the hype in 1997 – a gain of over 80,000% and valuing Bre-X as a $6 billion company – among the world’s major gold miners.

By that point, however, the fraud that underpinned the excitement was quickly unravelling. It would end with the company going bankrupt, ruining the dreams of thousands of investors and prompting the chief geologist to take his own life by jumping from a helicopter. This is the story of Bre-X.

The company was founded in 1989 as a subsidiary of another Canadian mining firm, and didn’t turn a profit until 1993. In that same year, Bre-X announced to the market the discovery of gold in Busang, Indonesia, with an initial estimate of 2 million Troy ounces.

The estimated size of the Busang deposit would quickly expand through the years, and with it, the Bre-X share price. By 1995, the data from core samples skyrocketed up to suggest a resource of 30 million ounces – and this would further rise to a peak of 70 million in 1997 before the company came tumbling down.

Subsequent investigation revealed that a large part of the continued resource upgrades was due to the core samples being spiked by the chief geologist, a man named Michael de Guzman. At first, de Guzman turned to shaving gold off his own wedding ring and adding it to the samples before they were sent off to the lab. Presumably, once his ring had been shaved away to nothing, the company then authorized purchasing over $60,000 of alluvial gold from local small-scale mining operations for the sample spiking.

The laboratories assaying the samples raised some concerns: spiking drill cores with gold from other sources was hardly a new idea, and gold fragments added after drilling had a distinctive shape. However, de Guzman provided the lab technicians with some dubious geological reasons for why the Bre-X samples differed from conventional drill results, and they apparently bought the deception.

With the size of the prize growing after each drilling campaign, speculators flooded Canadian and US stock exchanges sending the Bre-X share price ever higher. Among those profiting the most from the company’s bonanza were senior directors and officials who off-loaded millions of dollars of shares during 1996 – shares that just a few years earlier would have been essentially worthless. One director sold a parcel of stock for $26.5 million that year which was worth just a tad over $100,000 twelve months earlier.

Meanwhile, the wheels were starting to fall off the Bre-X machine in Indonesia. As the story of the remarkable gold find kept growing, external parties wanted to cut their own slice of the pie. Indonesia’s government in particular, wanting to enjoy some benefit from what was being described as the ‘world’s largest gold deposit’, demanded that Bre-X partner with other firms that had links to the country’s President. By early 1997, with the deal about to close, the Indonesians brought in an American firm to conduct due diligence on the project.

Less than a month later, Bre-X geologist de Guzman would die in circumstances that remain unclear to this day. The official story is that he committed suicide by jumping out of a helicopter – but some have suggested it was just a tragic accident, while others believe there are signs of a conspiracy and that he was pushed to his death. Either way, the truth will never be known: his body was found deep in the Indonesian jungle days later, partially consumed by wild pigs.

After de Guzman’s death, it would be only one further week before the whole fraud was exposed. The American firm brought in by the Indonesians to investigate the project released an announcement of their own core sampling, which revealed insignificant amounts of gold. The Bre-X share price was smashed by panicking investors, desperate to get out even at a steep loss. The Indonesian government demanded further analysis – but this also showed no signs of gold. The stock crashed to record lows before being halted from trading pending bankruptcy proceedings.

Subsequent analysis of the earlier core samples by a third-party lab revealed de Guzman’s deception – the traces of his wedding ring shavings were identified. By now, the lawsuits were flooding in from investors who had lost millions on the stock. Among them, the biggest loser was a Canadian teacher’s pension fund which held $100 million of Bre-X stock which was now effectively worth nothing.

Over the following decades, numerous legal proceedings were filed against some of the former directors of Bre-X. One long-running insider trading case ended after six years with a non-guilty verdict. In one incident, gunmen even broke into the home of a former company founder and held him at gunpoint, demanding money. While he ultimately escaped from that situation, he ended up dying a few months later from a brain aneurysm.

The sorry saga of Bre-X claimed the life of de Guzman, robbed thousands of investors of substantial amounts of money, but also richly rewarded a handful of insiders who sold out before the inevitable crash when the game was up. The lasting legacy of the affair was that Canada would introduce new legislation designed to protect investors from a repeat of the fraud that was Bre-X minerals. For those who lost their life savings, though, it’s little comfort.