EDITORIAL & OPINION — New rules would have exposed Busang — Nipped in the bud

If the key recommendations are implemented and enforced, the Mining Standards Task Force report, released by the Toronto Stock Exchange (TSE) and the Ontario Securities Commission, will certainly improve public and investor confidence in the mining industry and securities markets. Even so, some are wondering whether such guidelines for disclosure and industry best practices would have prevented the scandals of the past few years, particularly the Busang salting swindle in Indonesia

The authors of the report, as well as the TSE and the OSC, maintain that it is impossible to regulate against deliberate fraud. As the OSC’s Jack Geller told the media, crimes such as murder and burglary still happen, even though they are against the law and punishable. Still, it’s safe to say the Busang scandal would not have reached the scale it did had the new guidelines been in place when the junior took on the project in the early 1990s.

Alberta-listed Bre-X Minerals would have easily obtained approval to option the Busang project. After all, it was previously drilled and known to have some gold. And the initial results didn’t come under much scrutiny either, as a reputable lab was used, along with traditional fire-assays. But had the TSE’s new guidelines and tougher listing requirements been in place, the Bre-X story would have started to unravel in early 1996, when the junior sought its TSE listing, if not earlier.

At this stage, Bre-X would have required a Qualified Person — perhaps John Felderhof — to oversee its work programs and prepare technical reports (though responsibility for disclosure would remain with management). The QP would have had to take reasonable steps to verify the integrity of the data, provide an opinion on their quality, and disclose their source, including whether independent samples had been taken. He or she would come under scrutiny for straying from “best practices” guidelines, such as not splitting core. The new guidelines would cut short public arm-waving about “millions and millions of ounces” and expose, in greater detail, the uncertainties and disputes related to property ownership.

To obtain the TSE listing, Bre-X would need to have gone a step further and obtain a technical report prepared by an independent QP. The new guidelines call for such a report to be filed whenever a junior applies for a listing, becomes a reporting issuer, or discloses (or makes a 100% change in) estimates of reserves and resources. Again, the independent QP would have to take reasonable steps to verify the data, provide an opinion on their quality and disclose their source. He would also be required to report as to whether independent samples were taken.

At this point, with red flags popping up, investors, analysts and regulators would have demanded independent verification. All technical reports would be available to the public, allowing skeptics such as Dale Hendricks and others to produce proof that independent data verification was never done. This, in turn, would have made it impossible for Bre-X not to comply with requests to twin drill holes, or to place constraints on independent consultants preparing feasibility reports.

An independent QP now has the right to satisfy himself that things are as reported. This was not the case when the technical crew at Busang blindsided their own consultants. The Freeport audit showed that, over a period of time, Bre-X’s technical team concealed the presence of duplicated sample numbers for many drill holes. One set of results showed ore-grade assays, while the other set (from infill drilling) was mainly below detection limits. The number of assays duplicated in this manner was significant — 3,864 assays in 25 holes — yet they were neither made public nor turned over to independent consultants preparing resource and reserve estimates.

Under the new guidelines, a QP involved in this kind of duplicity would lose his license.