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Bre-X drops 83% as Indonesia halts development of gold site

Wall Street Journal - March 27, 1997

Jakarta, Indonesia – Indonesia's government Thursday halted development of the Busang gold deposit, once touted as the world's richest, one day after Freeport-McMoRan Copper & Gold Inc. said gold levels at the site apparently were "insignificant."

Freeport's finding severely undercut estimates provided by Busang's discoverer and Freeport's joint-venture partner in the mine, Bre-X Minerals Ltd. of Calgary, Alberta. Bre-X shares lost 83% Thursday in Nasdaq Stock Market trading.

Bre-X had said last month that Busang contained 71 million ounces of gold, valued at more than $24 billion. Company executives even suggested that gold reserves could be as high as 200 million ounces. But Wednesday, Bre-X said an independent mining consultant it hired concluded that potential gold resources at Busang "might have been overstated because of invalid samples and assaying of those samples."

The Busang field is located in East Kalimantan, on Indonesia's portion of the island of Borneo.

In composite trading Thursday on the New York Stock Exchange New Orleans-based Freeport-McMoRan Copper & Gold's actively traded class B shares fell $1.75 cents to $30.125, after dropping $2.25 Wednesday. Bre-X shares, which hadn't traded since Tuesday, plunged $9.406, or 83%, on Nasdaq to $1.969.

Kuntoro Mangkusubroto, Indonesia's Director General of General Mining, said Bre-X's contract for development of the mine had been placed on hold. Kuntoro said a letter would be sent Thursday to Bre-X, asking the company to provide an independent consultant to give an objective analysis of the size of the Busang field.

In Indonesia Thursday, Bre-X and Freeport offered no additional information. Even Bre-X's Indonesian partners, Askatindo and Amsya Lyna – both controlled by PT Nusantara Ampera Bakti, also known as Nusmaba, also remained quiet. Nusamba is directed by President Suharto's close ally Mohamad "Bob" Hasan and 80% controlled by foundations chaired by the president himself. Mining-industry analysts conceded that, if a hoax, the Busang saga could seriously damage Indonesia's mining industry. They say Indonesia's government, smarting from the fiasco, will grow much more cautious about offering licenses in the future.

Meanwhile, uncertainty remains over whether Busang was truly a hoax. Many in Indonesia admit to having been skeptical over the size of the Bre-X find, but few say they thought it was a scam. Others noted a total disbelief that such well-respected companies as Indoassay and Kilborn SNC Lavalin could have either overestimated Busang's gold amount or been tricked into doing so.

Indoassay is the laboratory that tests mining samples for a wide array of mining companies in Indonesia, while subsidiary P.T. Kilborn Pakar Rekayas has been in charge of calculating the resource levels at Bre-X's Busang find.

Kilborn's parent company, SNC Lavalin, said Kilborn's calculation for a potential 71 million ounces of gold is "believed to be prudent and reasonable," assuming that assaying of samples gathered by Bre-X was accurate.

Others in Indonesia, however, stood behind Freeport, saying that company most likely used more stringent assaying techniques than Bre-X and that securities laws in the U.S. forced the company to disclose its information.

Initial doubts about the field arose last week amid reports, adamantly denied by Bre-X, that tests on the field were disappointing. Bre-X stock fell sharply last Friday following the reports.

Investors in Bre-X also have been rattled by the apparent suicide last week of the company's chief geologist at Busang, Michael de Guzman, who fell 800 feet from a helicopter en route to Busang. Bre-X said Mr. de Guzman, who was central to the discovery of Busang, was distraught after being diagnosed with hepatitis B, following years of bouts with malaria.

Though Bre-X said Mr. de Guzman left a suicide note, some found the respected geologist's death – particularly coming just days before Freeport's report – mysterious. Mr. de Guzman had on occasion played up Busang's big potential, and was recently quoted as saying "we may have only the monster by the tail."