Thursday, March 19, 2020

The Bre-X Gold Scandal, History and Resources

The Bre-X Gold Scandal, History and Resources Start with the biggest deposit of gold ever reported, in the headwaters of the Busang River in the steaming jungle of Borneo. The Canadian company Bre-X Minerals Ltd. didnt know about that when it bought rights to the site in 1993. But after Bre-X hired a high-living geologist to map the ore body, the deposit, along with the fever dreams that accompany gold, grew to monster size- by March 1997 that geologist was talking about a 200-million-ounce resource. You do the math at, say US$500 per ounce in mid-1990s dollars. Bre-X prepared for big times ahead by building a gold-plated website, where you could generate your own Bre-X stock chart to follow its meteoric rise. It also had a chart showing the equally meteoric rise of the estimated gold resource: together, those two pages could infect anyone with gold fever. The Sharks Arrive Bigger mineral companies took notice. Some made takeover offers. So did the Indonesian government, in the person of president Suharto and his powerful family. Bre-X owned more of this lode than seemed prudent for such a small, inexperienced foreign firm. Suharto suggested that Bre-X share its fortunate surplus with the people of Indonesia and with Barrick, a firm tied to Suhartos ambitious daughter Siti Rukmana. (Barricks advisors, among them George H. W. Bush and ex-prime minister of Canada Brian Mulroney, also favored this scheme.) Bre-X responded by enlisting Suhartos son Sigit Hardjojudanto on its side. An impasse loomed. To end the contretemps, family friend Mohamad Bob Hasan stepped in to offer all sides a deal. The American firm Freeport-McMoRan Copper Gold, led by another old Suharto friend, would run the mine and Indonesian interests would share the wealth. Bre-X would keep 45 percent of the ownership and Hasan for his pains would accept a share possibly worth a billion or so. Asked what he was paying for this stake, Hasan said, There is no payment, no nothing. It is a very clean deal. Trouble Arises The deal was announced on 17 February 1997. Freeport went to Borneo to start its own due-diligence drilling. Suharto was ready to sign a contract after this step, locking in Bre-Xs land rights for 30 years and starting the flood of gold. But just four weeks later, Bre-Xs geologist at Busang, Michael de Guzman, exited his helicopter that was 250 meters in the air at the time- an evident suicide. On March 26 Freeport reported that its due-diligence cores, drilled only a meter and a half from Bre-Xs, showed insignificant amounts of gold. The next day Bre-X stock lost almost all of its value. Freeport brought more rock samples to its American headquarters under armed guard. Bre-X commissioned a review of Freeports drilling; the review recommended more drilling. Another review focusing on the chemical assays caused Bre-X to clam up completely on 1 April, and Suhartos signature was postponed. Bre-X, in a novel strategy for the time, blamed the Web. CEO David Walsh told a fawning Calgary Herald reporter that the meltdown began when scurrilous local rumors in Indonesia were picked up by one of the ghostwriters on the Internet on the chat page or whatever. Further reviews took the rest of April. Meanwhile, disquieting details began to arise. Industry journalists soon found evidence that the Busang ore samples had been salted with gold dust. Salting of the Earth On Friday 11 April, Northern Miner magazine put a news flash on its site laying out three lines of evidence that Bre-X had been duped. First, contrary to company statements, the Busang core samples had been prepared for assay in the jungle, not in the testing lab. A videotape made by a visitor to the field site showed the humble machines common in assay labs- hammer mills, crushers, and sample splitters. Well-labeled sample bags clearly had finely crushed ore in them. Security was lax enough that samples could easily have been spiked with gold.Second, the local inhabitants had begun panning for gold in the Busang River, but in two years they never found any. Yet Bre-X claimed that gold was visible, a sign of unusually rich ore. And de Guzmans technical report, confusingly, called the gold submicroscopic, which is typical of hard-rock gold ore.Third, the assayer that tested the samples said the gold was predominantly in visible-sized grains. Also, the grains showed signs consistent with being typical river-panned gold dust, such as rounded outlines and rims depleted in silver. The assayer dodged the 64-billion-dollar question, saying that there were indeed ways for hard-rock gold grains to acquire rounded edges- but that argument was a fig leaf. The Curtain Falls Meanwhile, a storm of securities lawsuits arose around Bre-X, which vigorously protested that this was just an unfortunate series of misunderstandings. But it was too late. The collapse of Bre-X cast a cloud over the gold mining industry that lasted into the next century. David Walsh decamped to the Bahamas, where he died of an aneurysm in 1998. Bre-Xs chief geologist, John Felderhof, eventually went on trial in Canada but was acquitted of securities fraud in July 2007. Apparently in selling part of his stock holdings for $84 million in the months before the scandal hit he had not been criminal, just too stupid to catch the fraud. And I have been told that Michael de Guzman has been seen in Canada, years after the scandal. The explanation would be that, as was rumored at the time, an anonymous corpse was thrown from the helicopter. You could say the very jungle had been salted as well as the ore bags.

Tuesday, March 3, 2020

Globalization, Unemployment, and Recession Links

Globalization, Unemployment, and Recession Links A reader recently sent me this e-mail: It seems to me that we are now engaged in an economy that may look different from any we have experienced. The Globalization of the economy has created huge firm closures in America expecially in manufacturing and forced lower wages on those employed by this sector. Typically and historically manufacturing jobs have created higher wages in this country but now we see all the rules are changing. Do you believe globalization will bring new trends to the relationship between rececession/depression and firm closures? I believe it already has begun. - Before we begin, Id like to thank the e-mailer for her very thoughtful question! I dont think globalization will change the relationship between recessions and firm closures, since the relationship between the two was fairly weak to begin with. In Are recessions good for the economy? we saw that: We do not see great differences in firm closures between periods of high growth and periods of low growth. While 1995 was the beginning of a period of exceptional growth, almost 500,000 firms closed shop. The year 2001 saw almost no growth in the economy, but we only had 14% more business closures than in 1995 and fewer businesses filed for bankruptcy in 2001 than 1995. Competition between firms in periods of growth: During a period of high economic growth, some firms still perform better than others. Those high performing ones can often squeeze weaker performing ones out of the marketplace, causing firm closures. Structural changes: High economic growth is often caused by technological improvements. More powerful and useful computers can drive economic growth, but they also spell disaster for companies that manufacture or sell typewriters. Would 0% Unemployment Be a Good Thing? Cyclical Unemployment is defined as occuring when the unemployment rate moves in the opposite direction as the GDP growth rate. So when GDP growth is small (or negative) unemployment is high. When the economy goes into recession and workers are laid off, we have cyclical unemployment. Frictional Unemployment: The Economics Glossary defines frictional unemployment as unemployment that comes from people moving between jobs, careers, and locations. If a person quits his job as an economics researcher to try and find a job in the music industry, we would consider this to be frictional unemployment. Structural Unemployment: The glossary defines structural unemployment as unemployment that comes from there being an absence of demand for the workers that are available. Structural unemployment is often due to technological change. If the introduction of DVD players cause the sales of VCRs to plummet, many of the people who manufacture VCRs will suddenly be out of work. Thats my take on the question - Id love to hear yours! You can contact me by using the feedback form.