Saturday, 19 June 2010

Book Review: Fools' Gold, by Brian Hutchinson (1998)

Bre-X was a small Canadian mining exploration company that, in the mid-1990's, appeared to hit the all-time biggest jackpot in mankind's history of searching for gold. Bre-X claimed to have found the biggest gold deposits on earth in the remote Busang region of Indonesia.

As word of Bre-X's ever expanding and increasingly incredible gold discoveries spread, Bre-X went from a penny stock to $250 a share with billions in market capitalization. Market analysts, gold experts, stock promoters, mutual fund managers, other mining companies, high-level politicians and the media fell all over themselves to grab a piece of the dream. Investors large and small staked their future on the company's stock, and many individuals sold all they had to buy a piece of the company.

It was all a fraud. The gold never existed. The core samples extracted from Busang were salted by Bre-X to create the illusion of a massive gold discovery. By the time the fraud was uncovered, lives were destroyed, reputations irrevocably damaged, fortunes vaporized, and several people lay dead; some in the jungles of Busang, others in the urban jungles of the investment world after committing suicide.

In Fools' Gold, Canadian business reporter Brian Hutchinson admirably pulls together all the strings of the Bre-X story. He shines the spotlight on several relevant contextual sub-plots: the pervasive and long-standing history of fraud in mining stocks; the incompetence of so-called analysts; the conflict of interest of stock promoters; the impotence of regulators; and the dirty business of mining when it comes to operating actual mines in countries like Indonesia.

This latter emphasis on stories of corruption and environmental destruction by large corporations in the mining sector drags the book down, and should have been more tightly edited. Bre-X, after all, was a junior company that never properly mined anything other than investors' pockets.

Fools' Gold is at its best when Hutchinson focuses tightly on Bre-X, and the three fascinating central characters at the heart of the fraud: Promoter David Walsh; Chief Geologist John Felderhof; and Exploration Manager Michael de Guzman. Hutchinson brings to life these three deeply flawed men who had no history of success; indeed, they all had a history of abject failure. That the world was so ready to believe that these three could all of a sudden be responsible for the most remarkable success story in the history of gold exploration speaks volumes about investors gullibility and the aching need to believe in feel-good miracles.

Fools' Gold is both entertaining and informative, and proof again that if an investment sounds too good to be true, then it is, unfortunately, just that.

Subtitled: The Making Of A Global Market Fraud.
254 pages, plus Bibliography and Index.
Published in hardcover by Knopf Canada.

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