Interesting read

A good read here, note not implying anything abt RDM, just a good reflection in speculative explorers

full credit to the author (not me)

There’s something about the mining industry, particularly in precious metals, that attracts crooks. On the one hand, the lure of a literal gold mine is often enough to make investors switch off their critical faculties. On the other side of the equation, even a basically honest miner is quite capable of deceiving himself that the mother lode is only a few more metres’ drilling away, and this can often shade into the telling of white lies to backers to raise the money for a few more holes. A popular joke on the Vancouver Stock Exchange* used to define a mine as ‘a hole in the ground with a liar at the top of it’.And mining is a sector of the economy in which standards of honesty are variable but the requirement for capital is large, and you can keep raising money for a long time before you have to show results. Unsurprisingly, it’s a magnet for people who, whether or not they started honest but deluded, end up as thieves. Digging a gold mine is much more difficult than pretending to have one and mining for gold in investors’ pockets.In the old days, what you used to do was to get a shotgun cartridge and remove all the shot. You then filled the cartridge with gold dust, took it down to the site of your mine, loaded it into a shotgun, pointed it at some rocks and pulled the trigger. Then you picked up the rocks you had shot at, and sent them off to be crushed and assayed. Lo and behold, the results would come back from the laboratory saying that the rock samples from your mine were shot through with flecks of metallic gold. You then took this assay report (signed by a reputable mining chemist at a well-regarded lab) and went to investors to start the real process of getting rich. It was known as ‘salting’ a mine.In the modern era, however … well, the process is really not all that much more sophisticated than it was in the Gold Rush of 1849. Now as then, the key input to the process of carrying out a mining fraud is the manipulation of assay reports and geologists’ studies, and the way that you do it is still to introduce gold from somewhere else into a sample taken from under the ground. Since a few micrograms in a sample will give you an assay report of five grams per tonne, which is eminently commercially exploitable, it can be as simple as taking a file to a wedding ring.There have been some improvements to the process since the nineteenth century. There are standard procedures for taking samples, and for logging the time and place at which they are sealed and placed into (hopefully) tamper-proof bags. It is considered good practice to ‘split’ a drill core down its length, allowing a second set of tests to be carried out at a later date. And geologists and assay labs have become professionalised and regulated. But it still remains the case that if you can find a crooked geologist, and if your fake mine is remote enough to make inspections unfeasible, you can get away with a lot. As recently as 1997, a more or less valueless hole in the ground in Indonesia was valued by Canadian investors at $12bn, on the basis of reports which seemed to suggest that it was the largest gold discovery in the history of the world.The Busang mine in Kalimantan, Borneo, and Bre-X, the company which claimed to have discovered it, was the largest mining fraud recorded to date, and it offers a classic case study in how this form of counterfeiting works. Miguel de Guzman, an ambitious geologist down on his luck, was hired by David Walsh, a nearly penniless stock promoter working out of the basement of his foreclosed house. Somehow, they managed to raise enough money to hire equipment and drill holes deep in the Borneo jungle. Under Guzman’s strict personal supervision, the drill cores were logged and sealed (but, controversially, not split) and then sent off for assay.There was gold in the ground – everybody agrees about that. The local villagers sometimes supplemented their income by panning for gold in the rivers. But every other mining firm to have staked a claim in Kalimantan ended up concluding that there was not enough gold in the rock to make a commercially viable mine and that the really valuable mineral rights were elsewhere. That’s why, of course, the rights to the Busang region were selling cheaply enough to have been picked up by a nearly bankrupt Canadian promoter.Miguel de Guzman had his own theories, though; among mining geologists he was known as an expert in ‘diatremes’ – quartz formations like inverted funnels which can go very deep into the ground and contain rich veins of gold. At some point shortly after his being hired by Walsh, he developed a strong belief that the Busang claim was exactly such a diatreme. He wrote academic-sounding papers on it and gave presentations at mining conferences. (This is normal behaviour, by the way, for the geological staff of small mining companies. It is part of the capital-raising process and by no means evidence of dishonesty in and of itself. Like the pool hall next to a saloon, however, geological presentations at investor conferences are often places where trouble starts.)The market for Bre-X stock* really heated up, however, when the assay data came back from de Guzman’s drill cores. They showed very high percentages of gold in the rock, once it was crushed and heated. The Bre-X investor presentations started to use a couple of new slides – microscope photographs taken of the crushed rock, clearly showing the smooth metallic gold micro-nuggets.Readers with a background in geology might note at this stage that when you find gold in rock, it doesn’t come in smooth nuggets. You find smooth gold nuggets if it has been acted on and eroded by running water (‘alluvial’ gold). For example, you might find smooth nuggets if you had bought your gold dust from the villagers panning for it downstream from the Busang claim, and added it to the drill cores manually.This was, however, pretty much the only slip-up that Bre-X made in what was otherwise a textbook mining scam. The key to any kind of certification fraud is to exploit the weakest link in the chain; in this case, the initial logging and sealing of the drill cores, which took place at a remote mining camp high up in the Indonesian jungle, where the only people present were either labourers, or very junior geologists hired by de Guzman personally and intimidated by him. Once the core samples had been tampered with, there was no further opportunity for the fraud to be detected, and the process leading to an objective, reputable third-party certification of utterly fraudulent gold reserves was as certain and inexorable as the path from the rock crusher to the forge itself. Analysts and investors back in Canada believed that the Bre-X data had been analysed by three separate independent consultants, without realising that none of the three had access to anything but the fraudulent data prepared by Bre-X.The weak link is nearly always there, unfortunately. The purpose of a certification system is to economise on time and effort spent in checking. This implies that the checking process itself is laborious and difficult. Ideally, you would want to have as few stages in the process as possible, and you would prefer to have all the checking carried out by the same person, or at least the same organisation. Sadly, this is often not possible. It would be unreasonably expensive for an assay company to send someone all the way out to the mining camp to supervise the drill cores from the moment that they came out of the ground. (Although, given the size of the Bre-X fraud, some might say that it would have been worth it.)And errors are easy to make. The question of why it took so long to notice that Bre-X was reporting alluvial gold in rock-drill cores is one that a lot of Canadian mining analysts prefer not to discuss. Later, after it had all fallen apart, people who had been on a trip to the Busang mining camp realised that it ought to have raised suspicions that the drilling samples were very carefully laid out in a specific pattern. If you’re just bagging the samples as they come out of the ground, you can do it any old how. But if you’re salting them, you need to take huge care to construct a consistent ‘model’ of the ore structure in the ground – it wouldn’t do to have huge concentrations of gold in one drill hole and nothing at all in one two metres away.Even in the process of handing out certifications which are meant to economise on trust, some trust is necessary in the process itself. It’s often a very good idea to make sure that one is absolutely clear about what a certification process is actually capable of certifying – the assay was able to establish that the core samples contained gold, but was not in a position to certify that this meant the rock in the ground did.Gaps like this – between the facts that a certification authority can actually make sure of, and those which it is generally assumed it can – are the making of a counterfeit fraud. Having got one set of facts certified, the crook immediately promotes his operation as if the whole thing had a seal of approval. And this is exactly what Bre-X did, with spectacular success; while they never made specific claims about ‘reserves’, which would be a specific technical claim that someone would want to audit, de Guzman and his boss John Felderhof were keen on making public ‘estimates’ of the size of the Busang deposit which, if true, would have implied it was the biggest gold mine in the world. For a while, it was the ultimate penny stock fairy story, as the share price* climbed from pennies to over $264 on a split-adjusted basis, and hundreds of Canadian stockbrokers and investors got rich.However, in the end, discovery was inevitable. The Indonesian government demanded that Bre-X develop the mine, rather than just drilling assay holes and issuing stock market press releases. They were totally incapable of this, and so were forced into a joint venture with an established mining company. This company (Freeport-McMoRan) wanted to drill its own holes to be sure of the ore body. On his way to a meeting called at Busang to discuss the fact that Freeport’s drill cores had come up gold-free, Michael de Guzman fell out of a helicopter, in circumstances which have never been satisfactorily explained. He later had to be identified by dental records; wild pigs discovered the body before investigators did. Bre-X stock certificates can still be bought in novelty shops in Toronto as souvenirs, having largely got there from middle-class Canadian households who got caught up in the mania and lost a proportion of their savings.