Canadian Mining Scandals

THE MINING INDUSTRY in Canada has long been associated with shady business practices and dodgy stock-market deals. Gold mining in particular has always produced a frenzy of speculation. The promise of the “big find” has attracted a disproportionate number of unscrupulous individuals and companies with a get -rich-quick mentality.

Historically, it was individual prospectors who searched for precious metals such as gold. After the growth of mining investment companies in the post-World War II period, however, individuals invested in an exploration and mining company which financed operations by selling shares on the stock market.

Spectacular financial gains are often produced by speculation on the potential value of the mineral deposit before any metal is actually found. Mining companies thus have a great incentive to exaggerate, misrepresent, or lie about the quantity and value of the metal discovered in order to attract potential investors.

By the 1990s, Canada had become the mine finance capital of the world. Per capita, Canada also had the largest number of stock market scandals in the world, many of which involved the mining industry. It was with the Bre-X scandal of the 1990s, however, that the extent of the problem was truly revealed. Bre-X was founded in 1989 as a tiny mining exploration company.

In 1993, it purchased rights to a potential gold deposit in the Busang area of Indonesia for $80,000. Subsequently buoyed by the false reports of company geologists, John Felderhof and Michael de Gusman, that the area contained the largest gold deposit ever discovered, the company successfully raised tens of millions in investment dollars from eager investors.

Despite the lack of independent tests to confirm the size of the deposit, Bre-X managed to fool other reputable mining companies, the Northern Miner, the most respected trade paper in the industry, prominent investment banks, stock market analysts, and even security regulators for Canadian stock exchanges. As Douglas Goold and Andrew Willis write: “A sky's-the-limit tone would come to flavor any reports on the company right through to the stock's spectacular crash.” By 1996, Bre-X stock has risen to a value of $6 billion and was traded on the prestigious Toronto and NASDAQ stock exchanges.

In mid-1997, the speculative bubble burst. Guzman apparently committed suicide in strange circumstances, leading to a series of independent audits of Bre-X's claims. Soon after, it was confirmed that test samples had been tampered with and that Busang actually contained little gold. Brex's stock values dropped to pennies a share. Thousands of investors, many of them modest individuals who used the increasingly popular method of buying stocks from the internet, lost their life savings while numerous high-level company officials, such as company president David Walsh, made tens of millions.

Subsequent investigations of the Bre-X scandal have highlighted the sheer greed of mining industry officials and stock market traders; the lax regulation of stock exchanges; the weakness of national and regional laws against individuals and companies engaged in such fraudulent schemes; and the almost[Page 131] total lack of protection for consumers who chose to invest in the industry.