Gold standard - a GeoNews Feature
Sarah Day delves into the arcana of mineral reporting codes and finds a tale of scandal, fraud and suicide.
Geoscientist 19.6 June 2009
On March 19, 1997, a body was found in the Indonesian jungle. Investigators struggled to identify the remains, which were unrecognisable, but eventually used fingerprint s and molars to conclude that the body was that of Michael de Guzman, a Filipino geologist working for Bre-X, a Canadian mining company whose stock had soared in the preceding two years.
What followed was the unravelling of the largest mining scandal in history. Following the advice of geologist John Felderhof, Bre-X’s founder David Walsh had bought land in the middle of the jungle in Borneo, which his project manager Michael de Guzman estimated was sitting on around two million ounces of gold. The find came shortly after more than a dozen mining companies had dismissed the property as worthless. Estimates rose and rose, until in 1997 the figure was 70 million ounces, with Bre-X’s stock price rising to $280 per share.
Following the discovery of de Guzman, who had apparently jumped from a helicopter on his way to a meeting with US officials who had doubts about the site, the fraud was rapidly exposed. Freeport-McMoRan, the company he had been on his way to meet, had conducted their own core samples which showed “insignificant amounts of gold”. An independent analysis showed that Bre-X’s samples had been salted with gold dust, tests from one hole demonstrating that the gold had been shaved from jewellery.
The effects of the scam are still being felt on the Canadian stock exchange, and doubtlessly by many individual investors as well. Aside from the ramifications for the business world, the mine’s 400 workers were primarily recruited from the native Dayak people. Bre-X took over a village of around 2000 inhabitants during operations, providing electricity, new homes, kindergartens, sewing classes for local women, and even engineering scholarships. No doubt they believed they were participating in a historical undertaking. Today the area has been abandoned by investors. Buildings and clearings have been rapidly reclaimed by the jungle. Isolated from the complexities of stock markets and business deals, some locals are at a loss as to why the fraud was perpetrated. Others continue to ceaselessly search for gold, hoping one day to tempt the wealthy westerners back again.
Frauds on the scale of Bre-X are rare, but what happened in Borneo highlights how far things can be carried if the proper regulations are not put in place. Regulations for the reporting of exploration results, mineral resources and mineral reserves have become vital to the mining industry. They are necessary, not just for ensuring accurate reporting of what resources actually exist in the ground, but also for demonstrating that a site represents a viable extraction business opportunity. Before permits, licensing and supporting information about the extraction procedure and its impacts have been obtained, levels of confidence in a site cannot be considered high, and the minerals are referred to as resources, rather than reserves.
Codes for resources reporting set out a series of questions which need to be asked about a site, in order to satisfy one single overriding question: “Would you invest your money in this mineral operation?” There is a huge array of such codes, published by various professional bodies in order to meet the requirements of the appropriate Stock Exchanges. In Australia, the JORC code presides, while CIM and the 43-101 rules meet the needs of the Toronto Stock Exchange, and so on. In Europe, a code was drawn up in 1991 by the Institute of Mining and Metallurgy Reserve Committee (IMM). When IMM was replaced by the Pan-European Reserves and Resources Reporting Committee (PERC) in 2006, PERC took over responsibility for updating and managing the code. In June 2008, the PERC code was launched, setting out the minimum standards, recommendations and guidelines for the public reporting of exploration results, mineral resources and mineral reserves in the UK, Ireland and Europe.
The PERC code sets regulations for the reporting, not just of gold resources, but of all mineral reserves and resources. Among its many regulations, the code states that when reporting exploration results, all analytical results, along with their sample sizes or intervals, must be reported in full. Reporting of selected information, such as isolated drill holes, is not acceptable. Specific knowledge relating to the mineral in question is also required. Those who can be designated “competent persons” for the estimation of mineral reserves for alluvial gold deposits, for example, are required to have considerable experience in the evaluation and economic extraction of this type of mineral. Because of the particular characteristics of gold deposits, a more general mining experience is not considered to be sufficient. The code also recommends the independent testing of laboratory results, and the use of scientifically valid, tested and approved methods for such tests.
Codes for resources reporting set out a series of questions which need to be asked about a site, in order to satisfy one single overriding question: “Would you invest your money in this mineral operation?” There is a huge array of such codes, published by various professional bodies in order to meet the requirements of the appropriate Stock Exchanges. In Australia, the JORC code presides, while CIM and the 43-101 rules meet the needs of the Toronto Stock Exchange, and so on. In Europe, a code was drawn up in 1991 by the Institute of Mining and Metallurgy Reserve Committee (IMM). When IMM was replaced by the Pan-European Reserves and Resources Reporting Committee (PERC) in 2006, PERC took over responsibility for updating and managing the code. In June 2008, the PERC code was launched, setting out the minimum standards, recommendations and guidelines for the public reporting of exploration results, mineral resources and mineral reserves in the UK, Ireland and Europe.
The PERC code sets regulations for the reporting, not just of gold resources, but of all mineral reserves and resources. Among its many regulations, the code states that when reporting exploration results, all analytical results, along with their sample sizes or intervals, must be reported in full. Reporting of selected information, such as isolated drill holes, is not acceptable. Specific knowledge relating to the mineral in question is also required. Those who can be designated “competent persons” for the estimation of mineral reserves for alluvial gold deposits, for example, are required to have considerable experience in the evaluation and economic extraction of this type of mineral. Because of the particular characteristics of gold deposits, a more general mining experience is not considered to be sufficient. The code also recommends the independent testing of laboratory results, and the use of scientifically valid, tested and approved methods for such tests.
As for the Bre-X scandal, the mystery continues. The Royal Canadian Mounted Police ended their investigation in 1999 without laying criminal charges against anyone. Geologist John Felderhof, who first advised Walsh to buy the land in Borneo, was charged with insider trading in 1999, but was found not guilty in 2007, after a six-year trial. The fate Michael de Guzman is no more certain. His second wife claims to have received money from him since his disappearance, and the doctor who first performed the autopsy on the remains now admits he was far from sure about their identification. Could he still be alive somewhere, living off his Bre-X fortune? Or did he really jump from a helicopter to escape the consequences of a massive fraud? Whilst resources reporting codes like the PERC code cannot render a fraud impossible, it does become much more difficult to perpetuate, making them a vital tool in preventing such large scale deception happening in the future.
• This piece was commissioned for European Geologist, in whose May issue it first appeared.
• This piece was commissioned for European Geologist, in whose May issue it first appeared.