It could have been straight out of the latest crime bestseller. International intrigue, gold discoveries, lost fortunes, suicide... and suspected murder.
But it was for real. Meet Bre-X Minerals -- stock scam extraordinaire of the '90s.
The Fool's Randy Befumo (TMF Templr) reported at the time in the "Lunchtime News":
Bre-X Minerals vaulted to fame in 1993 after it claimed to have discovered the largest gold deposit ever deep in the jungles of Borneo. The stock exploded in early 1996 when natural resources giant FREEPORT-MCMORAN COPPER & GOLD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCX)") else Response.Write("(NYSE: FCX)") end if %> announced a joint venture with the company, validating Bre-X's claims of massive amounts of gold. Although Freeport's decision in mid-February not to give Bre-X an up-front cash payment dampened shareholder enthusiasm, the fact that Freeport was fronting $400 million to develop the site in return for a 15% take gave many investors a great deal of comfort. With Freeport already working a site in the eastern Indonesian province of Irian Jaya called Grasberg, the idea of a gold deposit in Busang was not outrageous at all.
Bre-X began unraveling on March 19th when the company's top geologist allegedly jumped to his death from a helicopter while en route to a meeting with Freeport officials. The suicide note left by Michael de Guzman caused shareholders to panic. A week later Freeport determined that its preliminary tests found "insignificant" amounts of gold at Busang, causing the Bre-X share price to collapse. Although initially a variety of conspiracy theories began to make the rounds on the Internet, too many investors recognized a classic Canadian natural resources fraud in the making. Reminiscent of ARAKIS ENERGY'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AKSEF)") else Response.Write("(Nasdaq: AKSEF)") end if %> collapse after talks of financing by a Saudi prince of dubious heritage dried up in 1996, Bre-X has now returned to the pennies from whence it came.
As a regular investor, could you have seen the Bre-X brouhaha beforehand? Well, to be honest, most people didn't. When all was said and done, investors lost almost $4.5 billion. With gold dust in their eyes, large and small buyers kept pouring money into the stock even after questions started hitting the papers.
As a Fool though, would you have invested in Bre-X? Nope. Fools always think "fundamentals."
For example, let's look at growth in earnings. Not only were its earnings not growing, but it didn't have any at all. From 1993-95 the company remained in the red. Admittedly, most gold and silver companies don't have earnings, but industry instability is just one more reason to have stayed away from Bre-X.
How about proven management? The principals of Bre-X had a long history of business hanky-panky. That didn't just go away when the more reputable Freeport-McMoran became involved.
What about new products and prospects for growth? Well, they might have had us there. It did appear that they had a hot new product. The trouble with mining companies is that "new finds" aren't always what they appear to be.
Remember to "invest in what you know." How many of us know about gold mining or can even point to Borneo on a map? The point here isn't to make fun of all of those investors who lost money or to play Monday morning quarterback with a "nanny-nanny-poo-poo" attitude. But part of the fun of investing is learning from other people's mistakes and knowing when not to make them yourself in the future.
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