A Hollywood film slated for release this week, loosely based on the real-life story of how the world’s greatest gold discovery turned out to be the biggest fraud in mining history, prompts investors to recount the lessons learned two decades ago.
The film “Gold” starring Matthew McConaughey as a prospector in search of gold US: GCG7,
opens Friday in the United States
Posters for the film say it is “based on a story too good to be true.” While some may believe it is based on the Bre-X Minerals scandal of the 1990s, film writer and producer John Zinman told the Financial Post that he was “inspired” by the events surrounding the company. MarketWatch hasn’t seen the movie.
The real story behind Calgary-based Bre-X Minerals Ltd. was a turning point in the mining industry and helped inspire Canadian stock market regulations designed to prevent the incident from happening again.
Jeb Handwerger, editor-in-chief of goldstocktrades.com, which focuses on mining exploration companies, said he hopes the film “will raise more awareness of the junior gold mining industry and the ability to generate massive amounts of money. of wealth “. Gold miners are exploration companies looking for new gold deposits.
But he warned that investing in the mining sector “is not for the faint of heart”.
In the mid-1990s, Bre-X claimed his Busang property in Indonesia was possibly the largest gold mine ever discovered, with his geologist even suggesting the deposit could reach 200 million ounces.
It would have been almost double the world biggest gold deposit, at the Grasberg mine in Papua, Indonesia, which contains about 106.2 million ounces of gold, according to Mining.com.
The company’s shares have gone from a penny stock to over $ 200 a share in Canada. But in 1997, a mining consultant for Bre-X said he only found traces of gold in Busang and that someone had tampered with the rock samples used by Bre-X to claim his find. The Wall Street Journal called the case the “$ 4 billion scam” of thousands of Bre-X investors. Some reports indicate that investors lost around $ 6 billion.
“The Bre-X case was not the first, nor the last time that this type of fraud had occurred, but it was the most important and the one that escaped all control before collapsing”, said Colin Cieszynski of Toronto. Chief Market Strategist based at CMC Markets.
Bre-X had grown so big that it was added to the S & P / TSX CA Composite Index: GSPTSE
]which attracted institutional money before fading into oblivion, so its impact has reached much wider and in the general public, not just the junior resource community, ”said Cieszynski, who was a junior analyst and broker. retail at the time.
Of course, regulations have been put in place to improve reporting standards for exploration activity in Canada, including the requirement that samples be delivered to the lab in sealed bags, according to the American Geological Institute.
“Following Bre-X, they came up with sampling and chain-of-custody rules for samples that would have prevented a similar fraud from being re-imposed,” said Brien Lundin, editor-in-chief of Gold. Newsletter.
The result is that the Toronto Stock Exchange and the Toronto Venture Exchange “are now the safest places to invest in small-cap mining exploration and development companies,” he said.
The new regulations were not the only result. Investors have also learned a lot.
Handwerger said he got interested in precious metals and junior mining companies to a point of “extreme pessimism – when most young investors were chasing the latest dot coms and everyone was turning their backs on the resource companies.” following the scandal.
“Before you invest in any mining stock, remember this story of Bre-X and the myriad boom and bust cycles that correspond to greed and panic.”
“The lesson I learned as a junior mining investor is to be careful with sentiment in mining markets, which constantly goes from boom to bust,” he said. “Before you invest in any mining stock, remember this story of Bre-X and the countless boom and bust cycles that correspond to greed and panic.”
“Stay away from swollen markets in nosebleed territory and stick with cheap assets traded at a discount,” he said. “It’s worth going against the crowds and avoiding the latest fads with the moniker this time around, it’s different.”
Cieszynski, meanwhile, said Bre-X pointed to the “risk of trying to use individual resource stocks as a vehicle for exposure to commodity prices and volatility.”
He believes this ultimately contributed to the increased demand for exchange-traded funds such as the SPDR Gold Trust US: GLD
“There is a time to listen to the fundamentals and a time to listen to the techniques,” he said. “Through all the speculation and conspiracy theories, one thing remains clear: the stock had peaked several weeks before the house of cards collapsed and… by the time the scandal really did erupt, the technical signals were flickering. red for a while.
“Even if one had been caught in the Bre-X hype, the use of trade management, stop losses and technical signals would have mitigated much of the damage,” Cieszynski said.