What Was Bre-X Minerals Ltd.?
From a peak valuation of over $6 billion Canadian dollars (CAD), Bre-X’s shares collapsed and the company soon filed for bankruptcy. Among the many victims of the Bre-X scandal were Canadian pension funds such as the Ontario Teachers Pension Plan and the Quebec Public Sector Pension Fund, which faced combined losses of over $150 million CAD.
- Bre-X Minerals was a major Canadian mining company that perpetrated one of the largest financial frauds in the industry’s history.
- The nature of the fraud involved deliberately contaminating core samples with gold derived from other sources.
- The collapse of Bre-X helped precipitate reforms to Canadian mining industry regulations.
Understanding Bre-X Minerals Ltd.
Bre-X was founded in 1988 by David Walsh, a Canadian businessman with a background in the finance and energy sectors. In 1993, at the behest of Walsh's business partner John Felderhof, the company commenced gold exploration near the Busang River in Indonesia, with geologist Michael de Guzman hired as the exploration manager.
Through a series of communications, the company proceeded to announce several large upward revisions to the estimated gold contents of their Indonesian site. These estimates climbed from 2 million ounces to a peak of 70 million ounces in 1997. Accordingly, market participants responded by bidding up the market value of Bre-X’s shares.
The scam unraveled rapidly in March 1997, after de Guzman reportedly fell to his death from a helicopter over the Indonesian jungle, shortly after potential Busang project partner, Freeport-McMoran (FCX), said that its due diligence had revealed only insignificant amounts of gold at the property. Bre-X plunged on the news and was delisted from major stock exchanges in May 1997. In the process, it wiped out billions of dollars for its hapless investors, which included major Canadian pension plans and other institutional investors.
The Rise of Bre-X
Today, Bre-X has the dubious distinction of having perpetrated the largest case of mining-related fraud in recent history. Yet at its peak, the company was a darling of the Canadian investment community. This was reflected in the substantial rise in the company’s share price prior to its collapse: growing from less than $1.00 CAD per share up to a peak of nearly $290 per share in May 1996.
The Aftermath of the Bre-X Minerals Ltd. Scandal
The Bre-X fraud was perpetrated by the simple act of contaminating core samples with gold dust taken from gold jewelry and other mining sites. With the highly suspicious death of Michael de Guzman in 1997, as well as the subsequent death by natural causes of David Walsh himself, John Felderhof remained the only surviving character from the Bre-X debacle. While charges of illegal insider trading were brought against Felderhof in 1999, he was acquitted of these charges in 2007.
One effect of the Bre-X scandal was to strengthen securities regulation in Canada. National Instrument (NI) 43-101 implemented Standards for Disclosure for Mineral Projects after Bre-X imploded in order to improve the transparency of mining projects. Since many companies in Canada are engaged in mining operations, it was considered imperative to establish a regulatory authority over the industry’s geological practices.