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Saturday, May 30, 1998

Bre-X's Busang site full of red flags: expert

By SANDRA RUBIN
The Financial Post
 Analysts and consultants from Bay Street and Wall Street who toured Bre-X Minerals Ltd.'s Indonesian gold strike should have seen at least 20 warning signs that something was wrong, said one of Canada's most prominent mining experts.
 Graham Farquharson, president of Strathcona Mineral Services Ltd., told Bre-X chairman David Walsh in a letter that his staff noticed several things that didn't add up "during the first few days of our visit to Busang" in March 1997. THE COMPLETE BRE-X SAGA
 "Some of the red flags are more significant and more obvious than others. Some of them, on their own, might not create any doubt or questions to the casual observer but, collectively, they all point in the same direction."
 The letter was dated Oct. 20, 1997 -- after the salting scam had been exposed. Farquharson said it was requested following a meeting with one of Bre-X's Calgary lawyers and company controller Bryan Coates.
 He said the warning signs were not that hard to read.
 "All of the red flags require the observer to have some experience in the mining industry and more particularly in gold. However, the observer need not be a highly specialized scientist, as the red flags do not involve any sophisticated technology."
 Strathcona was called in to Busang after Freeport-McMoRan Copper & Gold Inc. dropped a bomb by saying it had found "insignificant amounts of gold" in its preliminary tests of Busang -- reported to be one of the world's richest deposits.
 Farquharson said in the seven-page document that he confined himself to red flags that "could have been identified at some stage by the many others that preceded us to visit and report on in Busang."
 Analysts, many of them geologists and metallurgical engineers, visited the Indonesian site and wrote reseach reports on the company's operations following their trips. Specialists for investment banks J.P. Morgan & Co. Inc. and SNC-Lavalin Inc.'s Kilborn engineering group were also on the site.
 Farquharson said one thing that stood out was the absence of surface signs of a major deposit. Strathcona geologists noticed Bre-X staff didn't wait for the results of one drill hole before deciding where to drill next. The Strathcona people were also concerned that it appeared Bre-X geologists never went to the drill sites.
 "It became apparent that the Busang geologists were not really interested in watching what came out of the hole, as the core was stored for many weeks after drilling prior to going through the sampling process, etc.," Farquharson said.
 He said it was also curious there was no visible gold in the huge body of core samples, even though the nuggets were supposed to be coarse and easy to see.
 "One would have thought that in over 60,000 metres of drill cores some evidence of visible gold would have been reported in the drill logs, but when we asked the question we were told there were no reports of visible gold."
 He pointed out the absence of nuggets conflicted with a description in a technical paper by Bre-X's top geologists -- John Felderhof, Michael de Guzman, Cesar Puspos and Jonathan Nassey.
 He said Strathcona was astonished to learn Bre-X routinely opened sealed bags of core samples after they arrived at a warehouse in Samarinda, saying they were doing it to "check for bag breakage."
 "It is, of course, standard practice in the industry that once a sample bag has been closed it should never be opened again until in the assay laboratory."
 Farquharson said another red flag was the question of whether it was conceivable one deposit could contain as much as 8% of the world's gold resources.
 "This is, of course, a red flag that is easy to point out in hindsight, but with all the experienced observers that had been to Busang, perhaps someone should have asked: is that really possible?"
 "Why would nature be so generous as to endow Busang with such a large proportion of the world's gold resources?"