Book Of The Week

A mine is a hole with a crook on top

ON JOINING the venture capital business 20 years ago, my first boss advised me that each day two people enter the business world. One has a plausible idea for making a lot of money, an idea which is subtly but fatally flawed. The other has invented a new way to defraud you. "Your job is to avoid dealing with both," he said. With this resonating in my mind I plunged into Jennifer Wells' book with interest.

What I discovered was a ripping tale of the mining industry. The story is quite simple. In the early Nineties a tiny Canadian shell company called Bre-X started prospecting for gold deep in the heart of the Indonesian jungle at a place called Busang. Following a series of press releases which made ever-more optimistic, but clearly false, claims about the nature of the prospect, Bre-X claimed to have discovered the largest deposit of gold in the world. Support for this story was provided by several mining analysts at well-regarded investment banks.

Little more than a year later, Freeport McMoran, who had negotiated the right to buy into this "reserve" completed its review of Bre-X's drilling programme only to discover that the prospect was barren. It became clear that for the previous four years a small group of Bre-X employees had been "salting" the core samples, adding traces of gold to otherwise worthless rock before it went to be tested. Needless to say the share price of Bre- X crashed, many investors lost money and several reputations were tarnished.

What did I learn from this? More than I thought. First, it sheds some light on the world of mining. The behaviour of some of the world's largest mining houses, if Wells' account is in fact true, could never be described as proper.

The processes adopted by this junior mining company and, on face value, accepted by analysts and some of the larger industry players leave a lot to be desired. Obvious gaps in due diligence and the failure to sense warning signs are a constant feature.

We are also provided with a primer into how to do business in Indonesia. The name of the game here was to plug into the right areas, with the assistance of a local business magnate blind-siding government officials.

Turning back to the stock market and Toronto, the promoter David Walsh successfully pushed the stock through the stratosphere, avoiding all the filters that for normal companies prevent abuse of the market. In this case, a heady combination of untold riches (the "proven reserves") which were used to stimulate demand and a short supply of stock (cash needs were modest relative to market capitalisation) led to a gold fever.

Myth became reality, the final episode of this "Emperor's Clothes" tale of the capital markets is that Bre-X entered the Toronto Index and accordingly its shares were bought by "no-risk" tracker funds.

I found it sad that the personalities behind this scam were people who, in the main, had achieved little. In short, mediocre managers with scrappy track records succeeded in duping the industry and the markets.

One question that remains unanswered is who was in on this fraud. De Guzman, the ambitious Filipino who perpetuated the salting seam, was either killed or committed suicide. The promoter, David Walsh, died from a coronary shortly after the crash. Nobody knows whether Walsh and his colleagues in Canada had knowledge of de Guzman's activities. Only Felderhoff, the self-styled Indiana Jones of mining, survives.

This is a very intriguing yarn, which brought together both of the people my boss warned me not to deal with. Bre-X suggests that the definition of a mine is a hole in the ground with a crook on top.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003