Defence attempts to re-cast Felderhof

The defence of Bre-X’s former and much-maligned chief geologist, John Felderhof, began in his absence in a cramped Toronto courtroom on Nov. 2.

Much of the first week’s testimony centred on challenging the accuracy of the Strathcona Mineral Services report — an account listing numerous “red flags” that the Crown says should have tipped Felderhof off to the “salting” of samples.

Felderhof faces eight criminal charges of insider trading and misleading investors. The Ontario Securities Commission has accused him of improperly selling $84 million in Bre-X shares between April and October 1996 — just months before another company released drill results from the property showing that Busang hosted no significant gold deposits.

The defence called upon Phillip Hellman, a geologist with 25 years’ experience, both to punch holes in the accuracy of Strathcona’s report, and extol the geological model that Felderhof was operating on — a model that Hellman defended as being legitimate and “based on Felderhof’s personal past experience.”

Hellman travelled to Indonesia to test Bre-X’s Busang samples and examine the legitimacy of Felderhof’s geological opinions shortly after the company’s robust gold deposit claims were called into question by drill results from Freeport McMoRan Copper & Gold (FCX-N).

Those results set into motion the chain of events that led to Bre-X’s $5-billion market value collapse and Felderhof losing face.

Hired by Bre-X on the advice of its attorneys following the release of the Freeport results, Strathcona provided the final nail in the Bre-X coffin.

Before pitting his assessment of events at Busang against Strathcona’s, Hellman offered a glimpse into the atmosphere surrounding Felderhof and Bre-X immediately after the Freeport results were made public.

“At the time, there was a lot of paranoia. People were just looking for some kind of guidance,” Hellman said, recalling a meeting at the Sheraton Hotel in Perth, Australia, called by Felderhof.

Hellman testified that he believed Felderhof to be a “true believer” in the gold deposits at Busang, a belief that led Felderhof to conclude Freeport’s — not Bre-X’s — results had been doctored.

“I couldn’t imagine why Freeport would tamper (with assays),” Hellman said, describing his reaction to Felderhof’s contention at the time. “The logical explanation was that there was tampering (with the Bre-X results).”

While Hellman’s journey to Busang as part of the Sheraton Project (a consultation team assembled by Felderhof to investigate the discrepancies between drill results) led Hellman to the same conclusion as that of Strathcona, the implications of those conclusions differed greatly.

“I never claimed that there were ‘red flags’ ignored by those associated with the project,” Hellman wrote in his court report, “because I do not believe that to be true.”

To back up that claim, defence attorney Joseph Groia asked Hellman if double-checking the validity of assays was common practice at the time.

Hellman said fraud was not on anyone’s mind before the Bre-X scandal, and that data was accepted on “good faith.”

“I did not encounter one colleague who re-sampled because they didn’t trust the results,” Hellman said.

As testimony moved on, Groia targeted specific contentions of the Strathcona report — namely its first red flag: that there was no gold geochemical anomaly over the southeast zone and that no “satisfactory explanation” was given as to why this geological inconsistency existed.

During testimony on Nov. 3, Groia asked Hellman if he would agree that there is no surface gold in the southeast zone at Busang.

“No I wouldn’t,” Hellman said.

Groia then asked if Hellman considered the geology in the southeast to be different than that of the central zone. Hellman concurred.

Groia concluded by asking Hellman if he believed the differences between the two zones were consistent with the geological model developed by Felderhof. Hellman replied, “Yes.”

Hellman added that Felderhof’s geological model explained smaller amounts of surface gold in the southeast zone by way of certain mechanisms, determined by differing geological circumstance, removing gold from the surface.

As two geologists from Strathcona looked on from behind the rows of tables occupied by the legal teams, Hellman continued to attack the Strathcona report.

“There are statements (Strathcona) seems to accept with their own clients but when it comes to Felderhof they’re red flags,” Hellman contended.

He used Placer Dome’s (PDG-T, PDG-N) South Deep project as an example. Hellman said that while Strathcona accepted the contention of its client, Placer Dome, that South Deep held roughly 98 million oz. gold, it labelled Bre-X’s claim that Busang held more than 70 million oz. gold a red flag. As the Strathcona report states of Busang: “(How) could one deposit contain as much as eight per cent of the gold resources of the world?”

Other witnesses to be called include Terry Leach, a geologist who also evaluated the Busang project as a consultant for the Sheraton Project; Redwan Mahumud, an Indonesian expert; Paul Semple, a geologist with Kilborn Engineering Pacific; and Barrick Gold (ABX-T, ABX-N) chairman Peter Munk, as well as other Barrick executives. Barrick once fought for a stake in Busang.

The defence would not say if Felderhof would be leaving his Cayman Islands estate to testify.