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November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

The mine, The man, And the scam

Busang has gone from the century's biggest gold find to mining's greatest scandal. How on earth did it happen?

By Manuela Saragosa

ON MARCH 18, Michael de Guzman, a top geologist at Canadian exploration company Bre-X Minerals, phoned his wife for a date. The man, who was almost always on the road, asked Lilis to book a table at a local restaurant in the East Kalimantan capital of Samarinda. De Guzman was going to arrive in town that night and he wanted to celebrate their first wedding anniversary and his wife's 22nd birthday.

It was the last time Lilis de Guzman was to hear from her 41-year old Filipino husband. The next day, she read in a local newspaper that he had fallen 265 meters out of a helicopter taking him to a gold mine at Busang, deep in the Borneo jungle. A few days later, reports said police had established that de Guzman had actually committed suicide, leaving a seven-page letter in which he had written he was giving up on life because he suffered from an incurable illness.

For Lilis, the surprises did not end there. Following de Guzman's death, newspapers informed her that Mike had a wife, and children, in the Philippines; he had told her he was divorced. Reporters also discovered more wives scattered across the Indonesian archipelago. One is said to live south of Jakarta in Bogor; another resides in the north Sulawesi resort of Manado. The latter, Susani Mawengkang, told the Indonesian newspaper Jawa Pos that she and the bespectacled de Guzman married in 1995 after he converted to Islam and changed his name to Ismail Daud. If Lilis began to feel that the story of her husband's life was looking increasingly like a Hollywood epic, then she was hardly alone. At the beginning of April, a Canadian company announced it acquired rights to turn a book on the de Guzman-Busang mine mystery into a feature-length film.

Sitting in her whitewashed $120,000 house -- a gift her husband gave her a month before his death -- Lilis fingers a cross hanging on her neck. A black Suzuki jeep, another present from her husband, is parked in the garage. Her short neat bob brushes the nape of her slender neck, her red lipstick is immaculately applied and despite the oppressive afternoon humidity, she is not sweating. She spreads out the love letters and cards her husband sent her in the months before his death. "Mike Loves Lilis," says one. "Kisses, kisses, kisses, love always," says another. "I don't know if he committed suicide," Lilis says, shrugging off a nervous giggle. "But I'm not angry, it has happened now anyway."

The rest of the world has been less forgiving. Since de Guzman's death, the mine at Busang has gone from being synonymous with one of the century's biggest gold finds to one of its greatest scams. Last week, Busang's independent auditors, Strathcona Mineral Services, dropped a bombshell. In an interim report on the Bre-X operation, the Toronto-based consultancy stated what many had been suspecting since de Guzman's mysterious death: the gold find was a huge lie. "The magnitude of the tampering with core samples," Strathcona said, "is of a scale and over a period of time and with a precision that, to our knowledge, is without precedent in the history of mining."

The fallout has extended well beyond the jungle surrounding the remote Busang site. Small companies, especially those in Indonesia, expect that their mining operations will be much more tightly regulated and that the foreign funds they depend on will be harder to obtain. "It is criminal," says Widartoio, executive secretary of the Indonesian Mining Association. "This was not expected."

More tragically, many small investors, who constitute the bulk of Bre-X's shareholders, have lost their life savings. Shareholders have already filed at least eight class-action lawsuits in the past six weeks -- another is understood to be pending in Texas -- in an attempt to recoup more than $4 billion, the approximate value of Bre-X Mineral's market capitalization at its peak price of C$26.80 ($20.75) a share last year.

"This has just been so disastrous for so many people," says a Toronto fund manager who lost her clients' as well as her own savings in the affair. "People have been wiped out." When trading in Bre-X shares resumed on May 6 after a one-day suspension on the Toronto exchange, the price plunged from C$3.30 to about 8 Canadian cents. Over 50 million shares changed hands, a one-day record.

The size of the losses and the damages being sought rank the Busang affair among the biggest financial fraud cases in history. How was such a scam possible? The Strathcona report highlights some of the suspect practices that were used in providing core samples from Busang for testing, but it does not say who was responsible. And many other questions remain unanswered. Is it possible that no one within Bre-X management was aware of what was going on those three long years in Kalimantan? Why didn't any of the other independent companies involved in the testing of samples find evidence of what was happening? Then there is the question of de Guzman's sudden death and his role in the scandal. Did he actually commit suicide or was he murdered, perhaps for threatening to blow the whistle on the shady business taking place at or near Busang? Or, most intriguingly, is it possible de Guzman is still alive and in hiding?

The story's beginnings are as inauspicious as its ending. Bre-X was founded in 1989 by businessman David Walsh (the "Bre" is for Brett, his son; the X for exploration). But by 1993, Walsh and his wife Jeannette declared personal bankruptcy, owing some $10,000 on their credit cards. Prospects were bleak: the flashy stock promoter from Montreal had only a string of failed business deals to look back on.

Then, tipped off by a friend, Walsh took off on a trip to Indonesia to nose about a remote mine called Busang. Rights to it belonged to an Australian company, which had found no deposits worth extracting. But Walsh, who had virtually no training in the field, had a different view. Soon after returning to Calgary, he raised money to buy the rights to the Busang site.

Next to enter the picture was John Felderhof, a chain-smoking Canadian geologist of Dutch origin already familiar with the Busang area. His resume credited him with having a hand in finding the Ok Tedi copper and gold mine in Papua New Guinea. Felderhof hired de Guzman to explore Busang further under Bre-X -- and not long afterward estimates of the size of the reserve started a steady ascent.

By mid-1996, Calgary-based Bre-X had Canadian investors on a frenzied buying spree of its stock, and Indonesians began to take notice. Analysts visited the site. One from J.P. Morgan, the U.S. investment bank, came back from a trip in July and was quoted as saying the deposit may be at least three times larger than the 47 million ounces Bre-X was touting. That September, J.P. Morgan became Bre-X's financial adviser. At a Toronto mining conference, Felderhof was named "Prospector of the Year" for his work at Busang. De Guzman received praise for his theories about gold formation along intersecting fault lines.

By February, the Bre-X estimate at Busang grew to 71 million ounces of gold. Then Walsh told the investment community his company's Indonesian claim may contain as much as 200 million ounces, which would have made it perhaps the biggest gold discovery of the century.

All the talk led to a scramble for control of Busang. Canada's Barrick Gold Corp. hooked up with the eldest daughter of President Suharto, Siti Hardiyanti Rukmana, in a bid for a slice of the action. Not to be outdone, Bre-X hired as a consultant a trading company linked to the president's eldest son, Sigit Harjojudanto. But by February, it was Mohamad "Bob" Hasan, a close confidant of Suharto, who intervened to force a final deal. That included a 30% stake in the mine for himself through two private companies he controls, PT Askatindo Karya Mineral and PT Amsya Lyna; 15% for Freeport-McMoRan Copper & Gold of the U.S., which was to kick in $400 million and take operational control of the project; 45% for Bre-X; and 10% for the Indonesian government.

But the entire deal began to fall apart a month later when de Guzman reportedly jumped from a helicopter en route to Busang, where he was to meet auditors from Freeport to talk about its preliminary findings. What they probably would have discussed was revealed to the world a week later on March 26: Freeport's studies indicated that the amount of gold at Busang was "overstated." After the announcement, Bre-X share prices in Toronto collapsed under such ferocious trading that the stock exchange's computers repeatedly shut down.

At the time, investors, government officials and journalists wondered why de Guzman would kill himself? The official reason was that he had contracted an incurable disease. Susani, his wife in Manado, was reported to have said he had suffered terribly from malaria and chronic hepatitis. Yet, the jungle-hardened geologist's brother, his wife in Samarinda, and former colleagues and associates paint a picture of a man who was anything but suicidal in the months before his death.

"We can never accept that he was involved in a scam like this," declares de Guzman's younger brother and confidant, Simplicio "Jojo" de Guzman Jr. He says Mike -- a man who likened himself to the Indiana Jones character in the Raiders of the Lost Ark films and wore cowboy hats, rugged jackets, boots and belts with big buckles -- was healthy and active. Simplicio adds that the suicide claim is suspect because of a series of letters found in Mike's bag on the day he died. "He wrote of the things he would do the next day, the next week," says the brother. He also sees the suicide note as suspect. "If everybody is basing the suicide theory simply on this note, there's more to it than that." Simplicio says he saw the note when he, sister Diane and Mike's Manila wife Teresa de Guzman went to Jakarta to retrieve the body. In it, Simplicio says Teresa's name is shortened to "Thess." That was very strange, he says, since Mike usually referred to her either as Tess or mahal (beloved).

Filipino compatriots who knew de Guzman are also suspicious. "[In the months] before they say he committed suicide, he was playing basketball; he looked healthy," says a former colleague, now in Samarinda, who worked with de Guzman in the Philippines years ago. De Guzman was popular among locals, often handing out presents -- he once gave a security officer cash to buy a new pair of shoes. When de Guzman's body was brought to the local hospital in Samarinda, people queued up to pay their last respects. Says the former colleague: "There was an attempt to fool investors, but Mike [de Guzman] was not the guy to do it."

The testimony of the helicopter pilot who was taking de Guzman to Busang on March 19 only added more mystery to the death. Lt.-Col. Edi Tursono, a pilot with PT Indonesia Air Transport, had been flying the geologist to the site for over two years. During intense police questioning after de Guzman's fall, he told police that he felt a gust of wind in the French Alouette III helicopter, looked round and saw the door was open and his passenger gone. But in a detail added later, police said Tursono indicated he had seen de Guzman jumping just after scribbling notes and removing his Rolex watch. Tursono is currently staying in army barracks in Jakarta and has not clarified the sequence of events.

The pilot's attempts to find de Guzman's body in the swampy terrain were unsuccessful. Search parties from Samarinda went out and four days later, police said they had recovered de Guzman's remains. Sources say the body was badly decomposed, wild boars had chewed at his exposed innards and his jaw was smashed. An autopsy in Manila confirmed the findings of an earlier one done in Indonesia: the body was de Guzman's. But many remain unconvinced since dental and fingerprint records were slow to come forth and the autopsy took several weeks to be completed.

Some people have started to wonder whether de Guzman may have staged his own death and gone into hiding rather than face Freeport's auditors at the site. The geologist is known to have cashed in more than 150,000 of his 400,000 Bre-X options in 1996, perhaps worth a few million dollars in Bre-X shares. Others wonder whether he was killed. Either way, there is one thing on which mining experts concur: the operation would have required the collaboration and detailed organization of a large group of individuals to carry out a fraud of this scale. De Guzman was known to have been very secretive about his work at Busang and to have trusted only a small group of colleagues, possibly all of them Filipinos.

There were signs early on that Bre-X geologists were up to funny business. There are standard procedures used to avoid "salting," industry jargon for adding gold to the collected rock samples before they are tested. Normally, exploration companies split samples and send half to an independent laboratory for assaying. The remainder is locked away for cross-checking. But Bre-X geologists chose to crush the bulk of each sample before sending it to Indo Assay -- an independent laboratory in Kalimantan -- saving only a small flat piece of the sample's core. The system ensured that little was left against which to correlate the laboratories' results.

What's more, some of the crushing of samples took place on site at the Busang deposit rather than at Indo Assay. "A video taken by an analyst at Busang showed that Bre-X had all the preparatory facilities on site, giving them the opportunity to add whatever they wanted," says Geoff Davis, director of Golden Valley Mines, an Australian firm. Golden Valley advises Kreung Gasui, a local exploration company that questioned Bre-X's right to Busang and has taken its case to court in Canada. A second Golden Valley geologist notes that it would not have taken much to lace samples with gold from another source before sending them to the lab. Warren Beckwith estimates 1 kg of gold (worth about $11,000) is needed for every batch of 10,000 samples. "You're not looking at a huge amount of gold," he says.

In its report, Strathcona said the salting process was relatively simple and obvious. That is why many observers are surprised that no one detected anything unusual was going on for so long. Just as puzzling: there was no public questioning after a fire at the Busang site destroyed de Guzman's records and other files on Jan. 23. Jakarta-based geologists unrelated to Bre-X, however, say that the lack of scrutiny was not that strange because of the mine's remote location. It was also normal practice for Bre-X to use mostly unskilled workers. "They just follow instructions," says one geologist.

It is unclear how high up the scam went. To date, there is little evidence to show that Bre-X management pocketed astronomical profits from the affair. Officials made $59 million by selling Bre-X stock last year, but the company is adamant that executives lost more than anyone when the size of its Indonesian gold deposit was called into question. Last year, the Walshes and Felderhof sold a total of $83.5 million worth of shares in Bre-X and its parent company Bresea Resources, documents by the Ontario Securities Commission show. On the other hand, they did not make trades during the first few months of this year, when the shares were at or near their highest and estimates about the size of the deposit were the most bullish. They seemed to have resumed trading in March, the month of de Guzman's death. Those transactions are under investigation by the Ontario Securities Commission.

Regulatory documents from provincial authorities in Ontario and Alberta further indicate that the Walshes and Felderhof were actively trading stock in August 1996 when the Indonesian authorities withdrew Bre-X's exploration license for Busang and presidential family members started to become involved. The company's failure to disclose the difficulties it was facing with the Indonesian government at the time is another point of concern.

Last week, Felderhof said from the Cayman Islands, where he now lives in a seaside home with his wife: "I personally still believe there are significant amounts of gold [at Busang]." He was one of the very few optimists. Following Strathcona's report, both Freeport and Hasan announced that they will withdraw from the venture. Hasan, a seasoned timber tycoon, shrugged off the affair: "It is all business, and in business sometimes you make money, sometimes you don't." But the Indonesian government was not so happy to just walk away. It has banned Bre-X from operating in the country pending an investigation into the company's testing procedures. It has also placed all operations at the Busang site under the control of PT Aneka Tambang, a state-owned company. What's more, the government indicated that future mining ventures will have to give Jakarta a 10% share of the action.

How will it end? On the Internet, a bulletin board allows Bre-X shareholders and interested parties to send in their thoughts about the tawdry affair and test their theories on a confused investment community. The chat group has recently been bombarded with messages. Astonishingly, there are still those who believe the affair is a conspiracy by the Indonesian government to undermine the size of the deposit and take it out of foreign hands. There are even those who claim that the gold will still be found in other parts of the deposit that independent auditors have not surveyed. But the wisest words yet were written by a skeptical financial analyst months ago. He predicted that the movie rights to the bizarre story would raise more money than the Busang gold mine ever will.

-- Manuela Saragosa is a contributor based in Jakarta. Additional reporting was provided by Antonio Lopez/Manila

This edition's table of contents | Asiaweek home



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Philippine government denies Estrada's claim to presidency

Faith, madness, magic mix at sacred Hindu festival

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Thai party announces first coalition partner


COVER: President Joseph Estrada gives in to the chanting crowds on the streets of Manila and agrees to make room for his Vice President

THAILAND: Twin teenage warriors turn themselves in to Bangkok officials

CHINA: Despite official vilification, hip Chinese dig Lamaist culture

PHOTO ESSAY: Estrada Calls Snap Election

WEB-ONLY INTERVIEW: Jimmy Lai on feeling lucky -- and why he's committed to the island state


COVER: The DoCoMo generation - Japan's leading mobile phone company goes global

Bandwidth Boom: Racing to wire - how underseas cable systems may yet fall short

TAIWAN: Party intrigues add to Chen Shui-bian's woes

JAPAN: Japan's ruling party crushes a rebel at a cost

SINGAPORE: Singaporeans need to have more babies. But success breeds selfishness

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