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Slide Show: Post Bre-X Regulatory Landscape

This presentations was first given at the Denver Mining Club,  January 2015

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Whirlwind Tour of post Bre-X Regulatory LandscapeRex Bryan, PhD, MBA, QP Denver Mining Club LuncheonJanuary 26, 2015

The Qualified Person (QP) was created after Bre-X The NI43-101Regulation defines who and how geologic resources and reserves are reported to prospective investors through their “disclosure rules” ~80% of the world’s exploration and junior mining companies are listed on Canadian Stock Exchanges (TSX and VSX)The 43-101 style of reports are now standard investment instrumentsAn interesting question:Will these (or any) regulations protect against a new fraud?

1993: Bre-X Minerals starts gold exploration in Busang, a remote area of rain forest on the island of Borneo.1995: Bre-X says Busang could contain more than 30 million ounces of gold.1996 April: Bre-X shares rocket from C$5 to C$192.50 within minutes of listing on Toronto stock exchange. Shares later split 10 for one.1997 Feb: Freeport McMoRan signs deal to help develop Busang. Bre-X John Felderhoff says deposit could contain up to 200m ounces.March: Freeport finds discrepancies in resource – demands explanation, Michael de Guzman travels back Indonesia from PDAC Toronto. He falls to his death out of helicopter enroute to site.April 23: Freeport McMoRan says testing has not found significant amounts of gold.May: Strathcona Mineral Services says gold find “was falsified on a scale without precedent in mining history.“Complete collapse of Bre-X Stock.

Short list of Bre-X Cast of Characters, Items and PlacesBusang Indonesia, Borneo, 1997David Walsh — Promoter (moved to the Bahamas)John Felderhof – Chief Geologist (Grand Cayman Islands)Michael DeGuzman (Field Geologist) & Cesar Puspos (Project Mgr)Suharto — Indonesian President & Muhammad ‘Bob’ Hansan (deal maker)Placer Dome & Barrick Gold Inc. vs. Freeport McMoRan (Jim Moffet CEO)Normet Pty, Hazen Research & PetraScience (Find Placer Gold)P.T. Kilborn Consultant Report vs. Strathcona Mineral Services Audit 20 Red Flags (Graham Farqharson)Toronto Stock Exchange’s TSE 300, NASDAQ, Ontario Securities CommissionLehman Brothers & Chase Manhattan Bank Pension Investment Association of Canada , Ontario Teachers Pension PlanQuebec Public Sector Pension Plan

BRE-X IN HINDSIGHT: WHAT WE KNOW ABOUT THE BUSANG GOLD FRAUD Robert E. Ankli and Sheila Varadan, Univ. of GuelphJust when David Walsh and John Felderhof would be honored as (Canadian) Prospectors of the Year at the Prospector and Developers Association Convention on March 10, 1997, the end approached. It should have been the highlight of their careers. However, that same evening, they received a phone call from Freeport McMoRan. Freeport’s first assay results showed insignificant amounts of gold. Freeport demanded an explanation. Walsh handed the phone to Felderhof, claiming he was only the “money guy.” Felderhof said that de Guzman would be the only one who could clear up the “misunderstanding.”  De Guzman was sent back to Busang to resolve the problem. No one could have predicted what was to happen next. Michael de Guzman killed himself nine days later by jumping out of a helicopter over the jungles of Borneo. http://www.sbaer.uca.edu/research/sribr/1999/18.pdfBeware of small companies with big numbers – NY analyst Ashoke VasvaniPaul J Irvine, Bre-X Minerals Ltd. : a case study, Journal of the Academy of Business Education : JABE.- Philadelphia, Pa : ABE, ISSN 1528-0721, ZDB-ID 25011777. – Vol. 1.2000, 1, p. 70-79

Red Flags Strathcona Mineral Services’ Bre-X Audit Critical Testimony by Graham FarquharsenThe whole core was assayed and no part was kept for a recorded No consultant visited the siteThere was no independent confirmation drilling or samplingThe gold grains were more consistent with an alluvial sources rather than a epithermal bedrock deposit.There was a lack of alluvial gold in the stream draining the Southeast zoneNo discernable management oversight of sampling program No sample security was in place — sampling bags opened during transit to assay labSuccessive drilling locations were unrelated to previous results No due diligence on the resource modelTouted gold resource equaled 8% of know gold resource in the world

 Graham Farquharson, president of Strathcona Mineral Services Ltd., told Bre-X chairman David Walsh in a letter: “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.”

Bre-X by the Numbers$286.50 — Peak value of a Bre-X share in 1996 (split-adjusted) $2.50 — Value of a Bre-X share March 27, 1997, after Busang proclaimed to contain “insignificant amounts of gold“$3 billion — Value of Bre-X stock wiped out that same day191.21 — TSE 300 composite index plummeted March 27, 1997– biggest single-day loss since 1987’s Black Monday40,000 — Estimated number of Bre-X shareholders200 million — Ounces of gold Bre-X vice-president John Felderhof claimed likely existed at Busang in 1997$250 million — Personal worth of Bre-X founder David Walsh, on paper, in 1996$7,500 US — Value of Walsh’s household possessions in 1998, according to his will$84 million — Value of Bre-X stock Felderhof allegedly sold based on information not disclosed to the publicEight — number of securities rules Felderhof is alleged to have violatedZero — number of people convicted of a crime in the decade since the Bre-X fraud came to light

Comparing Stock Prices for theBre-X Fraud (1997) and the South Seas Bubble (1720)Same time profile with different $$ scales – yet equivalent in impactGovernment EndorsedSuckered the rich and famousAccused promoters fled to the Caribbean with their moneyTouted Bre-X gold resource equaled all the gold mined in history by 1700!Stimulated new regulations

England in 1720. The South Sea Company was founded in 1711 by Robert Harley, who wished to create political allies. The leader of the Tory party and soon to be lord treasurer, Harley wanted an end to the unpopular War of the Spanish Succession. The South Sea Company, as set up by act of Parliament, had a monopoly to conduct England’s trade with Spain’s colonies in the West Indies and South America. Harley advanced the notion that permission to conduct such trade would be ceded by the Spanish king as part of the price of peace. Amazing Parallel in History

The company had the further splendid purpose of relieving the government of its burdensome unsecured public debt–obligations for which Parliament had assigned no funds–which then amounted to £9,000,000Scottish economist Adam Smith, born three years after the Bubble burst, would write of “the knavery and extravagance” of the South Sea Company and of “the negligence, profusion and malversation” of its staff. On January 24, 1720, the price of a share of South Sea stock £1,050. In September came the crash. Thousands declared themselves ruined. Banks could not collect loans on inflated stock and failed.

Sir Isaac Newton, scientist, master of the mint, and a certifiably rational man, fared poorly. He sold his £7,000 of stock in April for a profit of 100 percent. But something induced him to reenter the market at the top, and he lost £20,000. “I can calculate the motions of the heavenly bodies,” he said, “but not the madness of people.” “The next age,” writes Carswell, “was one of cautious conservatism, hardening social distinctions, ever more clearly formalized patronage, and hostility to change. The Bubble stifled economic development for a 50-year interval of conservatism till the start of the 1800’s and innovations of the Industrial Revolution. What if the lull had been shorter? Carswell imagines “Doctor Johnson holding forth in his compartment as the Edinburgh train puffs northwards.”

Similarities with Bre-X and South Sea scandals300 years apart!The 70 million ounces of gold resource touted by Bre-X happed to be the total world’s above ground gold stock in the 1700s*Time scale of bubble bursting is the amazingly the same!Shape of the “bubble curve” is the same!Frauds were endorsed by Government!Ordinary citizens invested and lost considerable sums!Both launched a firestorm with satire and then created a new landscape of regulations!Embarrassment of authority figures Perpetrators fled to the Caribbean!*http://www.goldmoney.com/images/media/Files/GMYF/theabovegroundgoldstock.pdfLucipher’s new Row-Barge, 1721. Devils convey Robert Knight, the South Sea Company’s former cashier to the West Indies.

A little economic theorey: The Rodrique Bubble Curve

Could the 1980 Gold Bubble set the stage of Bre-X? A lot of geologists and promoters are left high and dry. After the Bre-X collapse … Darn … Market bubbles again!

Bre-X is now a “poster child” of breathless topical books and weighty case studies

Producer Scott Rosenfelt in Kuala Karau, Malaysia (stand-in for Samarinda, Indonesia).Coming Soon, Hollywood’s Version

Bubble or Fraud Total Cost DateTulip $10-?? Million 1620South Sea Bubble $200 Million 1720Ponzi $225 Million 1920Bre-X Mining $6-10 Billion 1997Madoff $60 Billion 2008Enron +$300 Billion 2001Housing Bubble $3-?? Trillion 2006-???? …look at these famous frauds and bubbles

Ken LayJeff SkillingAlan GreenspanBernie Madoff

No matter how you look at it, a bubble finally bursts!

Qualified Person (QP) Reports, 45-days, SEDAR A QP can be young with advanced skills in computer modelingA QP can be older with critical geologic knowledgeA QP is required to signoff on all materially significant announcements (newsletters, emails, company web sites etc.) effecting the economics of a mining project written or spokenSuch announcements can trigger a 45-day requirement for a published report filed on SEDARThese reports gain detail and effort as a project goes from Technical Report (TR), Preliminary Economic Analysis (PE), Pre-Feasibility Studies (PFS) and Feasibility Studies (FS)

Have someone knowledgeable visit the mine site…an old idea!Georgius Agricola, in his 1556 De Re Metallica, the first book on everything related to mining, noted that: “A prudent owner, before he buys shares, ought to go to the mine and carefully examine the nature of the vein, for it is very important that he should be on his guard lest fraudulent sellers of shares should deceive him.”l

Rex at Sunshine as the Resource QP

Historical Stopes in 3D

GT Mined Out Stopes

Coeur d’Alene, Idaho 18841920 Named Sunshine Mining Company1925 Bonanza Ore Chinatown area1943 Bonanza Chester VeinSunshine Fire 1972 91 KilledHunt Brothers Gambit 19771992 Bonanza West Chance Vein1884-2001 360 million Ag_oz producedBDB 2007 M&I 31.51 million Ag_ozThomas Kaplan (2010)2012 Tetra Tech M&I 72 million Ag_oz

Echoes of Bre-X 16 years later Pretium Resource BruceJack Deposit. Strathcona Resigns … Is there fraud? … or just a difference in Professional Judgment of QPs?

Thank YouQuestions?