EDITORIAL AND OPINION — Better disclosure could have prevented fraud — The sting

Now that Strathcona Mineral Services has so stunningly discredited Bre-X Minerals and its Busang project, the fingers are pointing, and backs are being covered. We would do well to examine the logic of blame.

Consulting firm Kilborn Pakar Rekayasa must be wishing it had never seen Bre-X. Well-Aware of the company’s unconventional sampling practices, particularly the failure to split core, it still let Bre-X use the Kilborn name on news releases without insisting on the same disclaimer it put at the beginning of its reports: “Kilborn has not made any independent inquiry into the accuracy of this information.”

Except for its managing director’s comment that he would “hold on” to Bre-X shares, metallurgical consultant Normet has emerged from the affair in good repute. Strathcona credits Normet with raising one of the first red flags over Busang, by showing that most of the gold was coarse and recoverable by gravity. Normet recommended further testing on intact core — a recommendation Bre-X rebuffed. Now we know why.

And Normet’s sub-Consultant, mineralogist Roger Townend, deserves recognition as one of the few heroes of the Busang affair. His careful observations were instrumental in leading others to suspect tampering.

Criticism of regulators and exchanges has been sufficiently harsh that Rowland Fleming, president of the Toronto Stock Exchange, issued a letter defending the TSE’s decision to list Bre-X. He argued that more stringent disclosure rules would not have protected investors from the outright lies that surrounded Bre-X.

Not necessarily: no con man ever sold a bridge to someone who asked to see the deed. To make a liar spill the truth, press him for details.

A financial press that fell in love with Bre-X, a press that was all too ready to accept off-The-Cuff comments from then-director John Felderhof as resource calculations, can’t escape. The press becomes a fraud artist’s right-hand man when it lets its guard down and begins to believe.

The Northern Miner shares the blame: we were among the papers that reported Bre-X was not saving split core, and should have made more of the fact than we did. Still, we did point out, more than a year ago, that any potential partner would want to drill its own holes before closing a deal.

Exuberant investment analysts make an easy target, but their critics ignore a significant point. Analysts are alert for exaggerations, telescoped scheduling, and over-optimistic forecasts of grade, tonnage, production and costs, and are very good at picking up the little untruths.

But the analysts were blindsided — Busang was a big untruth, a site chosen for its plausibility as a gold target. They came back from Bre-X’s perfunctory and misleading site tours with a pretty picture of the geology, and can hardly have been expected to have brought their own drills just to make sure.

Investors in Bre-X were blamed for letting greed shoulder aside common sense.

This view pleases people who read the Bible just to find the parts about famine and pestilence, and comforts still others, such as those of us who didn’t buy Bre-X in early 1995. Mineral exploration is a gamble, the story goes, and if the investor bets money he cannot afford to lose, he gets what he deserves.

That rendering of the tale obscures an essential distinction between mineral exploration (rightly seen as a gamble on which ordinary investors should not bet their rent money) and Busang (which was less an exploration project than an exquisitely designed confidence game).

No doubt many people bought Bre-X rashly, not realizing that an exploration project can fail — after all, plenty of people buy lottery tickets imagining they can beat the laws of probability. But no private investor was given the slightest indication that Busang might be a bust.