By Myra P. Saefong, MarketWatch
Weinstein Company/Courtesy Everett Collection
A Hollywood movie set for release this week, loosely based on the real life story about how the world’s biggest gold discovery turned out to be the largest fraud in mining history, has investors recounting lessons learned two decades ago.
The film “Gold,” starring Matthew McConaughey as a prospector on a journey to find gold , opens Friday in the U.S.
Movie posters for the film say its “based on a too good to be true story.” While some may believe it’s based on the Bre-X Minerals scandal of the 1990s, the film’s writer and producer John Zinman told the Financial Post that it was “inspired” by the events surrounding the company. MarketWatch hasn't seen the movie.
The true story behind Calgary-based Bre-X Minerals Ltd. marked a watershed in the mining industry and helped inspire Canadian stock market regulations designed to prevent a recurrence of the incident.
Jeb Handwerger, editor of goldstocktrades.com, which focuses on mining exploration companies, said he hopes the movie “increases the awareness of the junior gold mining sector and the ability to generate massive amounts of wealth.” Junior gold miners are exploration companies in search of new gold deposits.
But he warned that investing in the mining sector “is not for the faint of heart.”
Back in the mid-1990s, Bre-X claimed that its Busang property in Indonesia was possibly the largest gold mine ever found, with its geologist even suggesting that the deposit could turn out to be as large as 200 million ounces.
That would’ve been almost double the world’s biggest gold deposit , at the Grasberg mine in Papua, Indonesia, which has an estimated 106.2 million ounces of gold, according to Mining.com.
The company’s shares went from a penny stock to trade at more than $200 a share in Canada. But by 1997, a mining consultant for Bre-X said it only found trace amounts of gold at Busang and that someone had tampered with the rock samples Bre-X used to claim its find. The Wall Street Journal referred to the case as the “$4 billion swindle” of thousands of Bre-X investors. Some news reports say investors lost about $6 billion.
“The Bre-X affair was not the first time, nor the last time this type of fraud has happened, but it was the biggest, and the one that spiraled the furthest out of control before it collapsed,” said Colin Cieszynski, Toronto-based chief market strategist at CMC Markets.
Bre-X had become so big it was added to the S&P/TSX Composite Index /zigman2/quotes/210598478/delayed CA:GSPTSE -1.29% ], which drew in institutional money before its big nosedive into oblivion, so it’s impact hit far wider and into the mainstream, not just the junior resource community,” said Cieszynski, who was a junior analyst and retail broker at the time.
Of course, regulations were put into place to improve the standards for reporting exploration activities in Canada, including the requirement that samples be delivered in sealed bags to the lab, according to the American Geological Institute.
“Subsequent to Bre-X, they came out with sampling and chain of custody rules for samples that would have prevented a similar fraud from being foisted again,” said Brien Lundin, editor of Gold Newsletter.