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Tuesday, September 8, 1998

'Aggressive' estimates pumped up Bre-X reserves: documents

By SANDRA RUBIN
The Financial Post

J.P. Morgan Securities Inc. insisted on using "highly aggressive" and unorthodox methods for estimating the size of Bre-X Minerals Ltd.'s Indonesian gold find, over the objections of the company's engineers, according to documents filed in a Texas lawsuit.
The Wall Street investment bank has said it was just a "financial adviser" and has moved to have itself excluded from the class action suit being brought by investors who lost money in the spectacular gold fraud.
But according to a new filing in Texarkana J.P. Morgan played a central role in October 1996 in determining what numbers were used in a key feasibility study designed to sell the project to prospective development partners.
The results of the study found their way into the hands of brokerage house analysts -- and ultimately investors across North America -- as the stock zeroed in on what would turn out to be its all-time high.
"What this confirms is what we've said all along," Houston lawyer Paul Yetter, who is leading the Texas action, said yesterday. "J.P. Morgan's hands-on role in this scandal at the most critical time directly affected what investors believed about the value of Bre-X.
"From what we are seeing, these so-called financial advisers helped run the company."
According to the minutes of meetings Oct. 21 and 22, 1996, executives from Bre-X, J.P. Morgan and SNC-Lavalin Inc.'s Kilborn Engineering Pacific Ltd. were studying two possible resource estimates and trying to decide which to use.
The first, based on traditional methods, put the Busang deposit at 23 million ounces.
The second was much more aggressive -- using a bigger area and "inferred" resources. It swelled the estimate by 149% and pegged the deposit at 57.3 million ounces.
The documents filed on Friday state J.P. Morgan "insisted" on the second model, even over Kilborn's objections that it would not be acceptable to any bank looking at financing development.
"Astonishingly, J.P. Morgan overruled the objections," said the court document. "In Kilborn's words, 'J.P. Morgan explained that the purpose of this report was not for presentation to the banks.'
"The plain implication of J.P Morgan's point was that the report, and the aggressive use of only the larger 57-million-ounce resource estimate, was calculated to influence the investing public and/or potential partners. This hyper-aggressive treatment by J.P. Morgan ... was a fundamental part of the overall market deception."
The New York-based firm has consistently refused to comment.
Kilborn eventually agreed to use the more speculative 57-million-ounce estimate, and the calculation was distributed to investors by Bre-X in early December.
It was not spelled out in either case that the estimate was based on inferred resources.
"Everybody in the mining business knows that inferred resources are the most speculative numbers there are," said Yetter. "You don't lump them with more concrete calculations. Never. Period.
"That would present a misleading picture to the outside world."