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Bre-X turned from being a penny stocks company to a billion dollar corporation in just four years, thanks to a hot tip that spread like wildfire among thousands of Canadian investors.

Fool’s gold
Bre-X Minerals Ltd., a member of the Bre-X group of companies, was a mining company based in Calgary. It did not make significant profit until 1993, when geologists John Felderhof and Michael de Guzman reported that a gold deposit with approximately 2 million ounces in resources was found in Busang, Indonesia.

To boost its credibility, Bre-X hired an independent consulting company, Kilborn Engineering. Kilborn estimated the Busang site to have gold resources of approximately 70 million ounces with potential of up to 200 million ounces, the largest in the world.

From penny stocks to NASDAQ
Bre-X announced it had struck gold in Indonesia in October 1995, sending its stock price to the roof. Thousands of investors came rushing in after rumors spread that these potentially lucrative penny stocks were creating millionaires out of early shareholders.

Originally a penny stocks company, Bre-X share prices soared to US$280 per share by 1997 with a market capitalization equal to US$4.4 billion.

The fraud unraveled
In March 1997, a Bre-X rival, Barrick Gold, reported that Bre-Xs laboratory test results were bogus and that Busang was merely a phantom gold resource.

American firm Freeport-McMoRan also tested the site and core samples showed “insignificant amounts of gold”.

A third-party independent company, Strathcona Minerals, revealed through its analysis that crushed core samples were manipulated by salting them with gold dust shaved off gold jewelry, the most elaborate fraud in the history of mining.

The fall of Bre-X
On March 26, 1997, mining officials confirmed that there was no gold in Busang. This triggered a massive sell-off of shares and trading of Bre-X stocks on the Toronto Stock Exchange was suspended.

Bre-X shares became worthless penny stocks. On May 2007, Bre-X voluntarily delisted its stock from NASDAQ and filed for bankruptcy protection. In 2002, Bre-X went bankrupt although some of its subsidiaries continued to operate until 2003.

Lessons learned
Bre-X founder David Walsh stashed $30 million from his Bre-X shares in the Bahamas, geologist John Felderhof made $35 million from the Bre-X scam, while investors lost more than $6 billion in one of the biggest stock market frauds in Canadian history.

Before investing in penny stocks, here’s what you should learn from the Bre-X gold scandal:

1) The hype was too good to be true. 200 million ounces of gold has a market value of $60 billion.

2) The claim to massive gold resources was based on estimates, not real numbers.

3) The reports were not confirmed by reliable and qualified independent sources. The Kilborn report was not truly independent as Kilborn analysts relied on data provided by Bre-X.

4) Penny stocks investors were duped by ghost writers who convinced them that this was a once-in-a-lifetime opportunity they shouldn’t miss.

5) Incredible growth forecasts and the rising stock price did not reflect the true value of the Bre-X company.

6) Bre-X was an extremely secretive company. It refused to disclose information on its exploration operations and barred independent surveyors from exploring its Busang site.

Nir Dotan is a writer and promoter of
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