The Bre-X Gold Fraud: The Biggest Mining Scam in History

St. Paul, Alberta. A town of five thousand people in the Canadian prairies. The town’s only claim to fame is a UFO landing platform, built in 1967 for Canada’s centennial. A concrete pad with a sign inviting extraterrestrial visitors to land. Nothing ever landed. But in the mid-1990s, something stranger than aliens happened to this town. Chapter 18 of Torsten Dennin’s “From Tulips to Bitcoins” tells the story of Bre-X Minerals, the biggest mining fraud in Canadian history.

A Town Full of Shareholders

By the peak of the Bre-X mania, roughly every fiftieth resident of St. Paul owned shares in the company. One of them was John Kutyn, a local savings bank employee. Kutyn sold his car, his motorcycle, basically everything he could turn into cash, and put it all into Bre-X stock early on. The stock had started at 30 cents. It would eventually rise 500 times higher. Kutyn was one of the very few who got out before the whole thing collapsed. He moved to New Zealand with his profits. Most people in St. Paul were not that lucky.

David Walsh and the Borneo Jungle

Bre-X was founded by David Walsh, a former stockbroker from Montreal. The company was worthless for years. By 1993, shares had fallen to pennies.

Then Walsh and his geologist John Felderhof bought exploration rights for a site called Busang, deep in the jungle of Borneo, Indonesia. Felderhof had a colleague named Mike de Guzman, a Filipino geologist who had found small gold traces in the area earlier. In May 1993, Bre-X acquired the Busang license. The stock was around 50 cents.

And then the drill results started coming in.

Numbers That Were Too Good

The first samples showed more than 6 grams of gold per ton of rock. For context, 3 grams per ton is considered excellent in mining. Bre-X was reporting double that. Stock moved to $2.40 by March 1994.

After a year of testing, the estimated deposit was 3 to 6 million ounces. Impressive. But what happened next was beyond anything the mining industry had seen. The estimates kept getting bigger. November 1995: 30 million ounces. Stock above $50. May 1996: valued at $200 per share, then a 1-to-10 stock split.

The numbers after the split tell the same insane story. Estimated reserves: 39 million ounces in June 1996, 47 million in July, 57 million in December, 71 million by February 1997. Felderhof speculated about 100 million ounces. Rumors doubled that to 200 million ounces. Six thousand metric tons of gold. If true, Busang would be the richest gold deposit ever discovered.

In September 1996, Bre-X hit its peak. The stock was trading at $28, which after the split was equivalent to $280 on the original shares. Market capitalization exceeded 4 billion US dollars. For a company that had never produced a single ounce of gold. Not one. All it had were drill samples from a jungle in Borneo and a story that kept getting better every quarter.

Big Money Comes Knocking

When a gold deposit looks like it might be the biggest in history, the major mining companies show up. Placer Dome, Newmont Mining, Barrick Gold, Freeport-McMoRan. Everyone wanted in. Even the Indonesian government wanted a piece. President Suharto made it clear that Indonesia expected its share. By December 1996, an agreement was reached to divide the Busang site between Indonesia, Bre-X, and Barrick Gold.

This is the point where alarm bells should have been ringing. The biggest mining companies in the world were about to invest billions based on one company’s drill samples. Samples that had never been independently verified. Nobody had done their own drilling. Everyone trusted the numbers.

March 19, 1997

This is the date the whole thing fell apart.

Mike de Guzman, the geologist who had been running the drilling operations at Busang, was on a helicopter flight over the jungle. He jumped out. His body was found days later, mostly eaten by wildlife. The official ruling was suicide.

Shortly after, Freeport-McMoRan drilled its own independent test holes at Busang. The results were devastating. Negligible gold. Laboratory analysis confirmed what nobody wanted to believe. The drill samples had been manipulated. Someone had been adding gold to the samples, a practice called “salting.” The entire deposit was fake.

Bre-X stock was suspended from trading. The company declared bankruptcy. Shares became worthless. Four billion dollars in market value gone.

Who Got Away With It

The aftermath was ugly.

David Walsh, the founder, had sold approximately 35 million dollars worth of stock before the collapse. He moved to the Bahamas. He died there in 1998, officially of a brain aneurysm. He was never convicted.

John Felderhof, who had promoted the increasingly absurd reserve estimates, sold 3 million shares between April and September 1996 for roughly 85 million Canadian dollars. He moved to the Cayman Islands. He was charged with insider trading in Canada but acquitted in 2007 after years of legal proceedings.

Mike de Guzman, the man most likely responsible for salting the samples, was dead. He could not be questioned.

The people who paid the price were the regular investors. Pension funds that had bought Bre-X stock for their retirees. The 200 residents of St. Paul, Alberta, who had bet their savings on a gold mine in Borneo. A town built around a UFO landing pad lost its money to a fraud in the jungle.

What I Take From This

A few things stay with me from Dennin’s account.

First, the stock rose 500 times without the company ever producing anything. No gold was mined. No gold was sold. The entire valuation was based on drill samples and estimates. That is not investing. That is buying a story. And the story was literally made up.

Second, the insiders cashed out while the story was still growing. Walsh moved to the Bahamas with his millions. Felderhof went to the Cayman Islands. The geologist who knew the truth killed himself. The people who created the fraud escaped. The people who believed it got destroyed.

Third, the major mining companies failed at basic due diligence. Barrick Gold was ready to invest billions. Freeport-McMoRan eventually did its own drilling, but only after the deal was nearly done. For years, everyone accepted one company’s samples at face value. Nobody drilled their own holes. Nobody verified.

The Bre-X story is different from the other chapters in this book. The Hunt brothers manipulated a real commodity. Metallgesellschaft made a real bet that went wrong. Bre-X was pure fiction. There was no gold. There never was. The biggest mining scandal in Canadian history was built on salted samples and a stock price that nobody questioned until it was too late.

Previous: Chapter 17: Copper Mr Five Percent

Next: Chapter 19: Palladium

This is part of my From Tulips to Bitcoins book retelling series.