Providing coverage of Alaska and Northwest Canada's mineral industry
August 2006

Vol. 11, No. 35 Week of August 27, 2006

MINING NEWS: Bre-X trial enters final stages

Geologist in gold-salting hoax faces 8 charges of insider trading, misleading investors; proceedings stretched over 6 years

By Gary Park

For Mining News

A decade after more than C$6 billion in shareholders’ value evaporated and six years after a court trial began, what has been described as the world’s largest mining scandal has entered its final legal proceedings.

By early September final arguments in the trial of former Bre-X Minerals chief geologist John Felderhof are expected to wrap up before the Ontario Superior Court.

Felderhof faces eight criminal charges, accused by the Ontario Securities Commission of illegal insider trading and issuing press releases that misled investors about the size of a gold find in Indonesia, claimed to be about 200 million ounces or 8 percent of the world’s known gold.

Tens of thousands of investors from around the world flocked to Bre-X, which started out as a junior mining company based in Calgary trading penny stocks, climbed during two years to over C$286 and plunged back to its beginnings after an evaluation by U.S. miner Freeport McMoRan, a prospective operator of the mine, found the deposit was worthless.

Samples had been salted

It was disclosed that samples of the gold were salted. God dust was sprinkled into crushed ore from the Indonesia mine to enhance the mineral readings.

Some small investors had already pocketed fortunes, but many lost their life savings and were left to mount futile class action suits.

It wasn’t just individual investors who paid the price. Among the losers were three of Canada’s largest public sector pension plans, who wrote off a combined C$215 million.

Felderhof, who has moved to the Cayman Islands, is accused of selling C$84 million of Bre-X shares in 1996 while in possession of undisclosed information.

He is not expected to make an appearance at the trial, which is taking place before a largely empty court room.

To date Felderhof’s only court appearance was in October 2005, but he never testified in the current case.

Felderhof faces C$1 million fine, prison time

If convicted he faces a fine of C$1 million, two years in prison and other financial penalties.

Felderhof’s lawyer Joe Groia said Aug. 21 that his client should not be convicted unless the securities commission could prove he knew that Bre-X releases were false.

He said it had to be shown that Felderhof was involved in more than just the “innocent act of issuing press releases … he has to know the (gold) results have been tampered with and therefore the press releases are false and misleading.”

Commission lawyer Emily Cole rejected that claim, saying the prosecution’s case rests on the authorization of the releases, which created a market for Bre-X shares and enabled Felderhof to profit from the sale of his own shares.

She said Felderhof was an experienced geologist and the only Bre-X officer based in Indonesia.

As such he bore the responsibility for press releases that boosted the estimates of Bre-X’s gold reserves.

David Walsh founded Bre-X in 1989, but the company did not make a profit until 1993 after Walsh took the advice of Felderhof and bought the Indonesian property.

The initial results yielded estimates of 17 million ounces of gold, making it the richest find to that point.

Walsh moved to the Bahamas where he died in 1998 at the age of 52 of a reported brain aneurysm.

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